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Fitch Ratings Affirmed Bulgaria’s “BBB” Ratings; Outlook Positive

20.06.2022

The international credit rating agency Fitch Ratings has affirmed Bulgaria’s long-term foreign and local currency Issuer Default Ratings (IDR) at “BBB” with a Positive Outlook.

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 could lead to further improvements in external metrics. The authorities remain committed to euro adoption by 2024, with risks around the timeline mainly tied to exogenous factors. 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 it considers that there is a clear commitment at EU level to expedite the process.

Fitch Ratings forecasts GDP growth to slow to 3% in 2022 from 4.2% in 2021 as higher inflation and weaker external demand affect consumption and external trade, respectively. Economic performance in 1Q22 held up surprisingly well as private consumption remained resilient, but the rating agency expects activity to weaken as inflationary pressures accentuate throughout 2022. Fitch Ratings continues to expect a modest acceleration of growth in 2023 (to 3.8%) largely due to stronger investment linked to EU Funds. Political uncertainty remains an important downside risk. The renewed prospects of new elections could delay absorption of funds linked to the Recovery and Resilience Plan (RRP), which was finally approved in April. 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 shocks.

In response to inflation and energy price shock, the government proposed a 2022 budget law revision. It foresees a set of support measures worth around BGN 2.1 billion (2.0% of GDP). Next to VAT rate cuts on some products, increase of tax relief for families with children and fixed compensation for liquid fuel prices, the plan envisages a two-stage pension hike in July and October.

Fitch Ratings forecasts the budget deficit to widen to 4.9% of GDP in 2022, from 4.1% of GDP in 2021, driven predominantly by support measures. In its view, the deficit will narrow to 2.9% of GDP in 2023 as expenditure pressures recede. Despite wider deficits, Bulgaria's public debt ratio will remain very low compared with EU countries and 'BBB' peers.

The key factors that could lead to positive rating action/upgrade include progress toward eurozone accession, including greater confidence in Bulgaria meeting membership criteria and an improvement in economic growth potential, Factors that could lead to negative rating action/downgrade include a significant delay in the timeline of eurozone accession or a large adverse macroeconomic shock, which would materially lower medium-term growth prospects compared with Fitch's current expectation.

You can find the full text of the press release here.

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