22.02.2021

The international rating agency Fitch Ratings has upgraded the Outlook on Bulgaria's Long-Term Foreign- and Local-Currency Issuer Default Rating (IDR) to Positive from Stable The “BBB” rating is affirmed.

The Positive Outlook reflects the dissipation of macroeconomic risks stemming from the Covid-19 pandemic, underpinned by a more resilient economy and a sound policy framework, as well as continued gradual progress towards euro adoption. According to the rating agency, short-term downside risks tied to the pandemic and an uncertain electoral outcome are largely offset by prospects of substantial funding for investment from the EU and commitment to macro and fiscal stability (anchored by the inclusion of the Bulgarian lev into Exchange Rate Mechanism II; ERMII).

Bulgaria is set to be one of the main beneficiaries of EU transfers in the coming years, including EUR 16.6 billion (27% of 2020 GDP) in next 2021-27 Multi Annual Financial Framework and EUR 7.5 billion (12% of GDP) in grants from Next Generation EU (NGEU). Despite the challenge to absorb such a large amount of funds, Fitch believes this could lift growth from a projected 3% in 2021 to 4%–5% in 2022-25.

Bulgaria's ratings are supported by its strong external and fiscal balance sheets and credible policy framework, underpinned by EU membership and a long-standing currency-board arrangement. The ratings are constrained by slightly lower income levels compared with the current “BBB” median and unfavourable demographics, which could hinder growth and weigh on government finances over the long term. Governance indicators are slightly above peers.

Despite the negative consequences from the pandemic, Bulgaria's public finance metrics have remained strong compared with “BBB” peers and EU member states, thanks to a long track record of fiscal prudence. The rating agency estimates the fiscal deficit at 4% of GDP in accrual terms in 2020 (compared with the 6.9% peer median), driven mostly by Covid-19-related expenditure measures of around 3% of GDP. Revenue outperformed the revised budget targets, thanks in part to improvements in tax collection and a less pronounced economic contraction than previously expected.

The main factors that could lead to rating upgrade are: progress toward eurozone accession, an improvement in growth potential that leads towards faster convergence with income levels of higher rated peers. The factors that could lead to rating 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.