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

The Fitch Ratings credit rating agency has affirmed Bulgaria's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB' with a positive outlook, the Finance Ministry said.

Bulgaria'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.

The Positive Outlook reflects the prospect of euro adoption, which would lead to further improvements in external metrics. Despite renewed political instability, the credit rating agency believes the authorities remain committed to euro adoption by 2024, with risks around the timeline mainly tied to meeting convergence criteria. Given high uncertainty about the inflation trajectory over the next two years, the risks of a delay in euro adoption beyond 2025 have increased. This is balanced against a clear commitment at the local and EU level to expedite the process, Bulgaria's Finance Ministry said, quoting the credit rating agency.

Fitch Ratings expects this year's GDP growth to be 3.5% (previous review: 3.0%) due to better-than-expected performance in the first half of 2022. In the second half, solid performance of energy sectors and strong export growth should partially offset the negative impact of reduction in real disposable income and drop in investments. Unfavourable carry-over effects, and slowing private and public consumption will push next year's growth down to 1.4% (vs. 3.8% expected at the June review). Investments growth should pick up in line with the increased inflow of EU funds. Fitch Ratings expects growth to normalize in 2024 and return to about 3%.

The credit rating agency has raised its average Harmonised Index of Consumer Prices (HICP) inflation forecast to 13.1% in 2022 and 9.2% in 2023 from 11.8% and 6.0%, respectively, in June. HICP inflation is expected to remain in double digits throughout the first quarter of 2023 and to decelerate toward 5.5% year on year by end-2023. Food, energy and transport prices are the key inflation drivers. However, price pressures are also increasing in other subsectors, especially services. The spill-over of high energy prices into non-energy components could limit the positive impact of the base effects next year and will likely push core inflation up.

Fitch forecasts the deficit to remain broadly unchanged in 2022-2023 at around 3.8% of GDP, in line with the current 'BBB' median. The caretaker government decided to extend the 2022 budget into 2023, keeping the expenditure and introduced measures unchanged. Slower economic growth will result in lower tax revenues, while expected dividend payments from state-owned energy companies should keep total revenues broadly unchanged in 2023.

Despite wider deficits expected in the medium term, Bulgaria's public debt rate will remain very low compared with EU countries and 'BBB' peers. The rating agency expects the public debt/GDP ratio to remain below 30% during the forecast horizon. General government interest payments are expected to increase to 2.2% of revenues in 2023 (vs. 1.3% of revenues in 2021), well below the current 'BBB' median of 7.2% and the lowest in the category, the Finance Ministry said, quoting Fitch.

Factors that could, individually or collectively, lead to positive rating action/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, for example via the implementation of structural and governance reforms to improve the business environment and/or effective use of EU funds.

Factors that could, individually or collectively, lead to negative rating action/downgrade are a significant delay in the timeline of eurozone accession due, for example, to a failure in meeting convergence criteria or adverse policy developments; and a period of energy shortages in Bulgaria or in key trading partners, or increased risk of such a scenario that materially lowers growth prospects compared with Fitch's current expectation.