April 29 (SeeNews) - Fitch Ratings said it has maintained Bulgaria's long-term foreign-currency issuer default rating (IDR) at 'BBB' with a positive outlook.
Although the country has strong external and public balance sheets and a credible policy framework, its ratings are affected by low labour productivity and unfavourable demographics, which impact potential growth and government finances in the long term, Fitch said in a statement on Friday.
The positive outlook is backed by the prospects for euro adoption, despite the process being delayed beyond January 2025 and a renewed presence of political uncertainty.
While Bulgaria's inflation under the Harmonised Index of Consumer Prices (HICP) has slowed significantly, it is higher than that of the three best-performing EU member states and Fitch projects that the country will not comply with the price stability criterion in mid-2024. The country plans to request a reassessment of its progress on convergence criteria in the second half of this year, which should allow for eurozone accession later in 2025.
The country could comply with the price stability criterion in the last quarter of 2024 at the earliest, dependent on EU-wide inflation trends, Fitch said. The ratings agency projects the average HICP inflation to ease to 3.3% in 2024 and 2.9% in 2025, compared to 8.6% in 2023.
Bulgaria is on track to meet all other nominal criteria for euro adoption, but a lack of a stable government and lengthy coalition negotiations could delay entry beyond 2025, Fitch noted.
Fitch Ratings also said:
"Renewed Political Uncertainty: Bulgaria is heading for its sixth parliamentary vote in just over three years, with a snap election scheduled for June 2024. This follows a failed government rotation between the two largest parties WCC-DB and GERB, due to clashes over administrative positions and the reform agenda. The upcoming snap vote will likely produce another fragmented legislature, similar to the last ballots, with pro-European parties holding a majority.
Gradual Growth Recovery: The Bulgarian economy grew by 1.8% in 2023, supported by robust household spending, positive net export and solid investment growth. Weak external demand, renewed political uncertainty and slow absorption of EU funds will impede economic activity in 1H24, while positive real wage growth and strong credit growth will support private consumption. Fitch expects real GDP growth to accelerate to 2.4% in 2024 and further to 3.1% in 2025.
Medium-Term Growth Challenges: While Bulgaria could receive up to EUR17 billion (2.4% of GDP annually) of funds under various EU programmes by 2030, we see risks of under-execution due to institutional capacity and delays in programme implementation. In Fitch's view, unfavourable demographics and persistent labour shortages will weigh on Bulgaria's medium-term growth potential, unless labour productivity increases. Labour productivity stood at 56.8% of EU27 average at end-2023 and was the lowest in the EU.
Disinflation Dynamics to Ease: Harmonised inflation (HICP) was 3.1% in March 2024, above the EU27 rate of 2.6%, but down from a peak of 15.6% in September 2022. The decline was mainly due to the base effects, lower prices of energy and slower food price inflation. We expect HICP inflation to continue to ease, albeit more slowly. In our view, the government's measures and tax changes should be broadly neutral for inflation. We expect the average HICP to be 3.3% in 2024 and 2.9% in 2025, down from 8.6% in 2023.
Wider Medium-Term Fiscal Deficits: The general government budget deficit stood at 1.9% of GDP in 2023. A robust labour market boosted revenue from personal income tax and social contributions, while higher social and capital spending weighed on expenditure. We forecast a budget deficit of 2.9% in 2024 and 3% in 2025. Rising social needs, delays in reform implementation and a lack of credible medium-term fiscal planning, due to the instability of recent cabinets, has weakened Bulgaria's fiscal position in recent years.
Low Public Debt: Despite wider fiscal deficits, Bulgaria's public debt ratio will remain very low compared with EU countries and 'BBB' peers. We project a gradual increase of public debt/GDP ratio to 24.9% in 2024, from 23.1% in 2023, and further to 30.7% by 2028. Almost all government debt is fixed rate, with a long average maturity, which reduces Bulgaria's exposure to interest rate changes abroad. General government interest payments will rise to 1.9% of revenue in 2025, up from 1.2% in 2023, but well below the current 'BBB' median of 8.8% in 2025.
Strong External Finances: The current account deficit (CAD) narrowed to 0.2% of GDP in 2023, as wider trade and services surplus was offset by larger primary income deficit. Fitch expects the CAD to average 0.6% in 2024-2025, as goods export recovery lags and solid domestic demand boosts goods imports. Given the delays in the implementation of the National Recovery Plan, we expect the capital account surplus to average 1.1% in 2024-2025, down from 1.6% in 2023. Bulgaria's net external position should remain stable in 2024-2025 (surplus of 33.3% of GDP in 2023).
Stable Banking Sector: The Bulgarian banking sector remains stable, with solid capitalisation (total capital ratio at 21.7% at end-2023) and improving asset quality. The ratio of gross impaired loans decreased to 4.0% at end-2023 from 6.5% at end-2021, according to Fitch's estimates. Loan growth remained strong across the major segments, with a strong contribution from retail mortgages and resilient demand among corporates.
In October 2023, the Financial Action Task Force (FATF) placed Bulgaria on the 'Grey List' of countries under special scrutiny due to deficiencies in the prevention of money laundering. The Bulgarian authorities have stated that they are committed to implementing all the necessary reforms outlined by the FATF's action plan, and the country has already reported progress on some of the reforms.
ESG - Governance: Bulgaria has an ESG Relevance Score (RS) of '5[+]' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the WBGI have in our proprietary Sovereign Rating Model. Bulgaria has a medium WBGI ranking at 52nd percentile reflecting a history of unstable coalitions, relatively high perception of corruption and moderate institutional capacity versus a track record of peaceful transitions and above average regulatory quality.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-External Finances/ Structural: Lack of progress in eurozone accession due to persistent political instability or a failure in meeting convergence criteria.
-Macro/Structural: Weaker economic growth prospects, for example, as a result of adverse political developments that weigh on reform implementation.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
-External Finances: Further progress towards euro adoption, for example, through confirmation that Bulgaria has met convergence criteria and greater certainty regarding the likely timing of euro adoption.
-Macro: An improvement in growth potential, for example, via the implementation of structural and governance reforms to improve the business environment and/or effective use of EU funds."