The international rating agency Fitch Ratings confirmed the long-term credit rating of Bulgaria in foreign and local currency 'BBB' with a positive outlook, the Ministry of Finance announced.
Bulgaria's rating is supported by the country's strong external and fiscal position compared to countries with the same rating, the reliable political framework of EU membership and the long-term functioning of the currency board regime. On the other hand, the low share of investment relative to GDP and unfavourable demographic factors weigh on potential economic growth and public finances in the long term.
The positive outlook reflects the country's plans for eurozone membership, which could lead to further improvements in the country's external position indicators. Despite the delay in the process of joining the euro area, the analysts of the rating agency believe that there is a broad political commitment to adopt the euro in 2025. After the formation of the new government, the parliament accepted all remaining commitments after the country's entry into ERM II, and the amendment of the central bank law is expected to be approved by the end of 2023.
Adoption of the euro: The rate of inflation (HICP) in Bulgaria follows a downward trend, but remains significantly above that of the three EU member states with the lowest inflation and currently does not meet the price stability criterion. Given the significant uncertainty regarding inflationary processes, for Fitch Ratings the fulfilment of the price stability criterion in mid-2024 (the key date for adoption into the euro area in 2025) remains questionable. Bulgaria is likely to meet all other nominal criteria for adopting the euro (public finances, interest rate and exchange rate). Analysts from the agency believe that the adoption of the euro is in support of the rating, since, other things being equal, it would improve the assessment of the country's rating by about two notches.
Accelerating growth: After reporting growth in the first half of 2023, despite slowing external demand, high inflation and heightened uncertainty, Fitch raised its forecast for GDP growth this year to 1.9% (from 1.3% expected in May) . Household consumption is expected to be supported by higher budget spending, a stable labor market, reduced propensity to save and strong credit growth. Investment growth is expected to gradually improve in the second half of 2023 as transfers from the EU pick up. GDP growth will accelerate to 2.8% in 2024 and 3% in 2025, with weaker private consumption balanced by stronger investment supported by EU transfers. The rating agency also reports the government's commitment to implementing reforms related to the Recovery and Resilience Mechanism, after the submission of the second payment request in the amount of 724 million euros (0.8% of GDP for 2023).
Gradual decline in inflation: Fitch forecasts that headline HICP inflation will continue to gradually decelerate, while core inflation will decline more slowly due to strong private consumption, tight labor market conditions and spillover effects. The agency expects average annual inflation of 9.1% in 2023, 4.6% in 2024 and 2.9% in 2025. The inflation forecast remains subject to significant uncertainty arising mainly from the dynamics of commodity prices and the manifestation of spillover effects.
Growing medium-term budget deficit and low debt: A budget deficit of 2.6% of GDP is forecast in 2023, as a result of lower-than-planned spending on energy support measures, higher social and capital spending, and public sector wage increases. Despite achieving fiscal prudence, the current government is expected to maintain slightly higher deficits in the medium term to boost public investment and social transfers to reduce inequality. A budget deficit of 2.8% of GDP in 2024 and 3.5% of GDP in 2025 is expected.
Despite larger fiscal deficits, Bulgaria's public debt level will remain much lower compared to EU countries, as well as countries with the same rating. The ratio of total government debt to GDP is forecast to remain below 30% until 2027.
The main factors that could lead to positive action on the rating are progress towards joining the eurozone, including confidence that Bulgaria meets the membership criteria and the deadline for adopting the euro; improving the growth potential of the economy, for example by introducing structural and management reforms to improve the business environment and/or efficient use of EU funds.
Factors that could lead to negative rating actions are lack of progress in joining the Eurozone due to continued political instability or failure to meet convergence criteria; lower medium-term growth prospects, caused for example by a significant adverse macroeconomic shock or inflation that has persisted at high levels. /BGNES
