site.btaFitch Ratings 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 Ministry of Finance said on Saturday.  The country's ratings are supported by its strong external and public balance sheets versus BBB peers and a credible policy framework, underpinned by EU membership and a long-standing currency-board. This is balanced by unfavourable demographics, which weigh on potential growth and government finances over the long term, as well as by slightly weaker governance indicators than peers, the international credit rating agency said.

The positive outlook reflects the prospect of euro adoption, which would lead to further improvements in external metrics. Despite renewed political instability, Fitch believes the authorities remain committed to euro adoption by 2024, with risks around the timeline mainly tied to exogenous shocks. At present, the rating agency does not expect a delay of more than one year in euro accession if the country fails to meet convergence criteria in 2023, as there is a clear commitment at EU level to expedite the process.

Fitch forecasts Bulgaria's GDP growth to slow to 3% in 2022 from 4.2% in 2021 (versus the current BBB median of 3.4%) as higher inflation and weaker external demand affect domestic consumption and trade, respectively. Economic performance in the first quarter of 2022 (up 0.8% quarter-on-quarter) held up surprisingly well as private consumption remained resilient, but the rating agency expects activity to weaken as inflationary pressures accentuate throughout 2022.

A modest acceleration of growth is expected in 2023 (to 3.8%) largely due to stronger investment linked to EU Funds. Political uncertainty remains an important downside risk, given renewed prospects of new elections that could delay absorption of funds linked to the National Recovery and Resilience Plan. However, the risks around a more substantive slowdown appear contained at present, highlighting the economy's resilience in the last couple of years to both domestic and external challenges, Fitch said.

Fitch projects that harmonised inflation (HICP) will average 11.8% in 2022, the highest in 15 years, as high energy and food prices feed through all price categories. Although the agency expects inflation to gradually moderate in the second half of 2022 as base effects kick in, risks are clearly tilted to the upside, given uncertain external developments and rising inflation expectations that will augment wage demands (beyond the close to 10% increase in wages seen in 2021). Government measures to support households could add further demand pressures. In Fitch's baseline scenario, inflation will average 6% in 2023, remaining above the Fitch eurozone and BBB median forecast.

Fitch forecasts the deficit to widen to 4.9% of GDP in 2022, from 4.1% of GDP in 2021, driven predominantly by support measures. In the agency's view, the government deficit will narrow to 2.9% of GDP in 2023 as expenditure pressures recede. Despite wider deficits expected in the medium term and the post-pandemic increase in debt, Bulgaria's public debt ratio will remain very low compared with EU countries and BBB peers (current BBB median: 55.9%). 

Fitch lists as factors that could, individually or collectively, lead to Bulgaria's downgrade a significant delay in the timeline of eurozone accession (due, for example, to adverse policy developments or a deterioration in macroeconomic conditions) and a  large adverse macroeconomic shock (due, for example, to energy rationing in Europe), which would materially lower medium-term growth prospects compared with Fitch's current expectation.

Factors that could, individually or collectively, lead to an upgrade are progress toward eurozone accession (including greater confidence in Bulgaria meeting membership criteria and the likely timing of euro adoption) and an improvement in growth potential (via, for example, the implementation of structural and governance reforms to improve the business environment and/or effective use of EU funds).