Finance Ministry: S&P Global Ratings raises Bulgaria's outlook to positive from stable

International rating agency S&P Global Ratings raised Bulgaria's rating outlook to positive from stable and affirmed Bulgaria's long-term and short-term foreign and local currency sovereign credit ratings at 'BBB/A-2'. The positive outlook reflects the rating agency's view that there is at least a one-in-three likelihood that Bulgaria will join the euro area in the next 24 months, the Finance Ministry said in a press release on Saturday.

The ruling coalition, formed in June, represents Bulgaria's first stable government in the past two years, after five parliamentary elections. One of the government's main policy objectives is the country's accession to the euro area, which is planned to be achieved by January 1, 2025. Even if Bulgaria does not join the euro area in 2025, the rating agency expects that accession is likely to be postponed until January 1, 2026.

Despite an ageing workforce, Bulgaria's economy has strong prospects for real growth, with an average rate of 3% over the period 2024-2026, driven mainly by domestic demand. Consumption will remain strong due to the good performance of the labour market, which supports real wage growth. Sufficient EU funding for Bulgaria, which S&P Global Ratings estimates at over 30% of GDP in 2023, will support investment activity in the coming years. Obtaining and using all available funds will be challenging as deadlines approach for the main funding programmes - the EU Multiannual Financial Framework 2014-2020 and the Recovery and Resilience Mechanism, under the Next Generation EU (NGEU) programme.

S&P Global Ratings assess Bulgaria's fiscal performance as one of the best among Central and Eastern European countries and expect that the current fiscal plans will lead to deficits below 3% of GDP in the period to 2026, keeping net government debt below 20% of GDP. They expect the current account deficit to remain low and over-financed by EU funds and foreign direct investment flows, limiting the need for external financing and maintaining a stable external position.

S&P Global Ratings would upgrade the credit rating over the next two years potentially by several notches if Bulgaria becomes a euro area member. S&P notes that it would revise the rating outlook back to stable if expectations of Bulgaria joining the euro area become less likely.