The international credit rating agency S&P Global Ratings affirmed its long-term and short-term foreign and local currency sovereign credit ratings on Bulgaria at “BBB/A-2”. The outlook remains stable.
According to the credit rating agency, the economic effects of the pandemic have been manageable, despite a significant health impact. Domestic demand, particularly private consumption, has recovered strongly and the increased absorption of EU funds will lift the medium term growth outlook. The funds under the previous and current EU Multiannual Financial Framework (EU MFF) and the additional funds under the new Next Generation EU (NGEU) instrument available to the country are estimated at about 40% of the expected 2021 GDP.
S&P forecasts the fiscal deficit to remain significant in 2021, too, as a result of the support measures during the pandemic. Although some measures are projected to continue into 2022, the credit rating agency expects the deficits to start narrowing from 2022 and notes Bulgaria’s established record of fiscal prudence under several governments. Despite the fiscal loosening and the increased public leverage, Bulgaria’s net government debt levels remain low at around 20% of GDP, whereas sovereign funding costs have reduced to record-lows.
According to S&P, in line with global trends, inflation in Bulgaria has increased in 2021, due to a combination of rising food and energy prices, as well as strengthening domestic demand weighing on core inflation. Price increases should reduce in the second half of 2022.
External risks are manageable after several years of external net deleveraging, thanks to recurring current and capital account surpluses, which the credit rating agency expects to continue.
The credit rating agency also considers positive that the lev was included in the ERM II and Bulgaria joined the Banking Union in 2020. The ratings are constrained by the country's GDP per capita, which is moderate by global standards and the remaining structural and institutional impediments.
The stable outlook indicates the expectation that Bulgaria's economic recovery will progress over the next two years, backed by further absorption of additional EU funds. Although several fiscal support measures will extend into 2022, the credit rating agency expects fiscal balances to narrow over the next two years, which will keep public debt low. The stable rating outlook also reflects the expectations that the economy will not incur any external or financial sector imbalances.
The credit rating agency could raise the ratings if Bulgaria's economic recovery coincides with quicker fiscal consolidation or stronger external performance than it currently projects. In the long term, the ratings on Bulgaria could be raised in the course of its accession to the eurozone. The ratings could be lowered if the economic recovery is delayed, for example, because the pandemic's direct effects prove more long-lasting than currently expected. This would likely result in protracted fiscal consolidation and continuously rising net public debt over the next few years. Although unlikely over the medium term, S&P could take negative rating actions in case of emergence of imbalances in Bulgaria's financial sector.
You can read the full text of the press release of S&P Global Ratings here.