site.btaFitch Affirms Bulgaria at 'BBB'; Outlook Positive

Fitch Ratings has affirmed Bulgaria's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB' with a Positive Outlook, the rating agency said on its website on Saturday.

Bulgaria's ratings are supported by its strong external and public finance balance sheets versus 'BBB' peers and credible policy framework, underpinned by EU membership and a long-standing currency board. This is balanced against low labour productivity and unfavourable demographics, which weigh on potential growth and government finances over the long term. There is a recent record of unstable coalition governments, which has affected reform implementation, and the perception of corruption is high. The Positive Outlook reflects the prospects for euro adoption, which would lead to further improvement in external metrics.

Fitch highlighted Bulgaria's euro adoption bid as another key rating driver. In February 2025, Bulgaria submitted a request to the European Commission and the ECB for an extraordinary convergence assessment after meeting all nominal Maastricht criteria, including the price stability criterion. The reports will likely be released in early June and, if the assessment is positive, allow the adoption of the euro from January 2026. Fitch does not expect significant difficulties with the formal approval, given strong political commitment at the EU level. Overall, we consider euro adoption as supportive of the rating.

The formation of a regular government is also underlined as positive. Political forces GERB-UDF, BSP - United Left and There Is Such a People formed a minority government in January 2025, following the October 2024 snap elections (the seventh since 2021). The Government's key objectives are euro adoption and implementation of necessary reforms under the Recovery and Resilience Facility (RRF), the Fitch report states. Longevity and stability of the coalition will be tested in the near term but successful eurozone entry and progress on RRF-linked reforms could support the Government beyond end-2025.

Fitch has revised its 2025 growth forecast up to 3.1%, from 2.5% expected in October 2024, due to the stronger carry-over effect and improved domestic political situation. Strong nominal wage growth will continue to support private consumption. "We remain cautious about the capacity and pace of reform implementation, but EU funds flows should increase and will support investment activity," the report reads.

"Planned maintenance works at oil and copper refineries will affect export performance, but we expect some positive spillovers from full Schengen entry as of January 2025. We forecast GDP growth at 2.8% in 2026, with upside risks related to euro adoption. Elevated trade uncertainty and global slowdown are the key downside risks to our forecast, mainly due to second-round effects, as direct trade exposure to the US is low," it adds.

As another key factor for the rating, Fitch notes the broadly stable inflation in the country. HICP inflation inched up towards 4% at the beginning of 2025, following a low of 1.5% in September 2024, driven by changes in administered prices and withdrawal of lower VAT rates for certain products and services. "We expect HICP inflation to average 3.9% in 2025, up from 2.6% in 2024, above the current peer median of 3%. The expected increase in inflation should not derail Bulgaria's eurozone entry. We expect inflation to ease to 3% in 2026. However, eurozone entry may accelerate price convergence to the EU average over the medium term," the report says.

Fitch estimates that the fiscal deficit widened to 2.8% of GDP in 2024, from 2% in 2023, on higher wage bill and social spending. "We forecast the deficit at 2.7% in 2025 (versus 'BBB' median of 3.3%), reflecting further increase in public sector wages, deliveries of military equipment (0.5% of GDP) and some revenue-enhancing measures. We expect the deficit to narrow to 2.4% in 2026, above the government's target of 2.2%, due to our assumptions of higher defence spending and lower expected EU fund inflows," the Fitch team noted. 

Bulgaria's fiscal position has weakened in recent years due to increased social spending, delays in reform implementation and a lack of credible medium-term fiscal planning, the report reads. The new Government adopted the updated medium-term budget forecast for 2025-2028, with a cash deficit of 3% of GDP planned in 2025-2026. Under the EU fiscal framework, the country is not obliged to implement any meaningful fiscal consolidation in 2025-2028, given its very low public debt level. The Government is analysing the possibility of applying for the national escape clause under the Stability and Growth Pact to allow higher defence spending, further weakening the EU fiscal anchor.

Bulgaria's public debt ratio will remain very low compared with EU countries, and among the lowest in the 'BBB' category, despite the expected increase. "We estimate public debt/GDP rose to 24.1% of GDP in 2024 and project it will reach 33.9% in 2029 due to plans to recapitalise certain state-owned enterprises in 2025 (3.3% of GDP), payment for military equipment in 2026 and Fitch's higher defence spending assumption over the medium term. General government interest payments will rise to 1.8% of revenue in 2026, from an estimated 1.2% in 2024, well below the 'BBB' median of 9.0% in 2026," the report reads.

As factors that could lead to rating downgrade, Fitch highlighted lack of progress in eurozone accession due to renewed political instability/failure in meeting convergence criteria or weaker economic growth prospects - for example, as a result of adverse political developments that weigh on reform implementation.

As factors that could lead to rating upgrade, the Agency lists further progress towards euro adoption and an improvement in growth potential.