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 positive outlook reflects the reduction in macroeconomic risks under COVID-19 and higher economic resilience, as well as continued progress towards the euro area. According to the rating agency, the short-term negative risks associated with the pandemic and election uncertainty are largely offset by the prospect of significant EU financial resources and a commitment to macroeconomic and fiscal stability.
The country’s rating is supported by a good external and fiscal position, a sound political framework for EU membership, and the long-standing functioning of the currency board arrangement. The assessment is limited by potential growth due to adverse demographic developments that may affect public finances in the long run. Governance and income level indicators slightly exceed the median of countries with similar ratings.
Fitch expects Bulgaria’s economic growth to accelerate to 4.7% in 2021 from a estimate of 3% in February. The upward revision reflects the better-than-expected GDP recovery in the first quarter of 2021 and the expected strengthening of domestic demand and exports in the second half of the year. The low vaccination rate in Bulgaria compared to the EU average poses some negative risks related to the pandemic, but according to the agency it is unlikely that the authorities will introduce stricter restrictive measures that would significantly affect economic activity in the country.
In the medium term, investment is expected to be a leading factor for growth, as Bulgaria will be one of the main beneficiaries of the EU budget in the coming years. Fitch analysts believe that the significant amount of funds under the Mechanism for Recovery and Sustainability (MFF) will support economic growth, which is estimated at 3.9% in 2022-2023.
The rating agency estimates the budget deficit (on an accrual basis) at 5% of GDP in 2021 (compared to a median of 5.5% for countries with similar ratings), mainly affected by COVID-19-related expenditure. The deficit is expected to shrink to 2% in 2023, which will keep the debt / GDP ratio below 30% (compared to 57% in countries with similar ratings). Fitch defines the plan for the introduction of the euro in 2024 as realistic. The country’s banking sector is assessed as liquid and well capitalized.
The main factors that could lead to an upgrade are: progress towards joining the euro area and improving the growth potential of the economy, leading to a faster convergence of income levels with that of higher-rated countries. Factors that could lead to a downgrade are: adverse policy developments that reduce confidence in the economic recovery; continuous increase in public debt; materialization of contingent liabilities in the state budget balance or weaker growth prospects.