site.btaAllianz Trade Revises Up Bulgaria's Rating for Second Time in a Year

Allianz Trade has raised Bulgaria's rating from BB2 to BB1, reflecting a reduction in the short-term risk of late payments and bad debts in transactions with companies operating in the country, the trade credit insurance company said. This is the second upward revision of Bulgaria's rating in a year. In November 2023, its Medium-Term Rating was raised from B to BB.

The Country Risk Rating is made of two elements: Country Grade, a medium-term assessment on a six-level scale running from AA to D (highest risk), and Country Risk Level, a short-term rating from one to four (highest risk level).

The analysts say that despite government instability and its attendant challenges, the short-term risks of delayed payments and bad debts is very limited due to the steady growth of the economy, which is expected to continue in 2025. There is also Bulgaria's history of prudent fiscal policies and relatively adequate business environment.

Manfred Stamer, Senior Economist for Emerging Europe and Central Asia, said Bulgaria's GDP growth accelerated from 1.8% in 2023 to 2.1% y/y in the first half of 2024, driven by all components of domestic demand - consumer, public and capital spending. The forecast is that 2024 will end with GDP growth of 2.2%, rising to as much as 2.7% in 2025. The risk to foreign financial flows is low in the short term thanks to moderate annual fiscal deficits of around 3% of GDP, a very favourable public debt-to-GDP ratio of 23%, low current account deficits, foreign direct investment inflows and strong foreign exchange reserves which cover more than seven months of imports, and the guaranteed stability of Bulgaria's currency board.

The moderate levels of the country's total external debt to GDP (around 45%) and to total exports (75%) are other arguments for the upward revision of the short-term rating.

The analysts expect growth to exceed 2.5% in the next two years, driven exclusively by consumer spending and real wage growth. There is a positive outlook for investment activity, conditional on the expected decline in interest rates and increase in public spending, including on projects with EU financing.

Bulgaria's business environment is adequate, though international reports identify weaknesses in the areas of judicial effectiveness, corruption and government integrity. Overall systemic political risk is moderate as Bulgaria is a member of the EU and NATO and an OECD accession candidate. However, government instability has become a concern, the analysis says. Six parliamentary elections since 2021 have failed to produce a stable government, and a seventh election has been scheduled for October 27 but it is uncertain whether it will be more successful. "The absence of a stable government threatens to delay several policies, including Bulgaria's aim of joining the Eurozone in 2025, even though the main political parties are all committed to this goal," the experts say.

The analysts note that Bulgaria's currency board should remain stable since foreign exchange reserves continue to cover the monetary base. However, the currency board largely neutralizes monetary policy, preventing its use to counter upward price pressures since 2021. Following an average 15.3% in 2022 and 9.6% in 2023, consumer price inflation has fallen to an average 2.7% y/y in the first eight months of 2024. The analysts forecast it to remain above 2% over the next two years owing to continued strong wage pressures and accelerating credit growth.