Fitch affirmed Bulgaria’s ‘BBB’ credit rating, with positive outlook

Fitch Ratings has affirmed Bulgaria's Long-Term Foreign-Currency Issuer Default Rating (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, as well as by slightly weaker governance indicators than peers, the credit ratings agency said.

The Positive Outlook reflects the prospect of euro adoption, which would lead to further improvements in external metrics. Despite renewed political instability, we believe the authorities remain committed to euro adoption by 2024, with risks around the timeline mainly tied to exogenous shocks. At present, we do not expect a delay of more than one year in euro accession if the country fails to meet convergence criteria in 2023, as we consider that there is a clear commitment at EU level to expedite the process.

Fitch Ratings forecast GDP growth to slow to 3% in 2022 from 4.2% in 2021 (versus the current 'BBB' median of 3.4%) as higher inflation and weaker external demand affect domestic consumption and trade, respectively.

Economic performance in 1Q22 (up 0.8% qoq) held up surprisingly well as private consumption remained resilient, but we expect activity to weaken as inflationary pressures accentuate throughout 2022, the agency said.

The credit ratings agency 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, given renewed prospects of new elections that could delay absorption of funds linked to the Recovery and Resilience Plan (RRP), which was finally approved in April, Fitch said.

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 challenges, it says.

Fitch forecasts the deficit to widen to 4.9% of GDP in 2022, from 4.1% of GDP in 2021, driven predominantly by support measures. In our view, the government deficit will narrow to 2.9% of GDP in 2023 as expenditure pressures recede. Despite wider deficits expected in the medium term and the post-pandemic increase in debt, Bulgaria's public debt ratio will remain very low compared with EU countries and 'BBB' peers, Fitch said.

The full text of Fitch Ratings press release is available here: