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

24.07.2021

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.

The Positive Outlook reflects the dissipation of macroeconomic risks stemming from the Covid-19 pandemic and a more resilient economy, as well as continued progress towards the euro adoption. According to the credit rating agency, short-term downside risks tied to the pandemic and electoral uncertainty are more than offset by prospects of substantial funding from the EU and a commitment to macro and fiscal stability.

Bulgaria's ratings are supported by its strong external and fiscal position, the credible policy framework, underpinned by EU membership and a long-standing currency-board arrangement. The ratings are constrained by the potential growth due to unfavourable demographics, which could weigh on government finances over the long term. Governance indicators and income levels are slightly above the median for peers.

Fitch expects Bulgaria’s economic growth to accelerate to 4.7% in 2021, compared to the estimate for 3% from February. The upward revision reflects better-than-expected 1Q21 GDP and the expected strengthening of domestic demand and exports in the second half of the year. Bulgaria´s low vaccination rate compared to the EU average raises some downside pandemic-related risks; however, according to the agency, authorities are unlikely to put in place more severe containment measures that would significantly affect economic activity in the country.

Investment is expected to be a key driver of growth over the medium-term, as Bulgaria will be one of the main beneficiaries of EU transfers in the coming years. The analysts of Fitch believe that the significant amount of funds under the Recovery and Resilience Facility (RRF) would support the growth of the economy which is estimated at 3.9% in 2022-23.

The credit rating agency projects the fiscal deficit (on accrual basis) at 5% of GDP in 2021, versus 5.5% for the BBB median, reflecting mostly the Covid-19 related expenditure. It expects the deficit to narrow to 2% in 2023, keeping public debt/GDP at below 30% (versus 57% for BBB peers). Fitch considers the plan for euro adoption in 2024 realistic. The country's banking sector is estimated as liquid and well capitalised.

The main factors that could lead to positive rating action/upgrade are: progress toward euro area accession and improvement in the economy’s growth potential that leads to faster convergence with income levels of higher rated peers. The factors that could lead to negative rating action/downgrade are: adverse policy developments that reduce confidence in economic recovery; a prolonged rise in public debt; the materialisation of contingent liabilities on the sovereign's balance sheet or weaker growth prospects.

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

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