Fitch Ratings has affirmed Bulgaria’s sovereign long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BBB’, with a positive outlook.
The agency said that the country’s ratings were based on “sound external and public finances, credible policy framework aimed towards gradual accession to euro membership and stable growth prospects”, but were “constrained by slightly lower income levels compared with the current ‘BBB’ median and unfavourable demographics.”
Fitch forecast Bulgaria’s average real GDP growth at 3.3 per cent in 2019-2021, noting that the country’s economy did better than expected in the first half of this year, due to a stronger-than-projected recovery of exports and resilient private consumption.
But the agency cautioned that growth momentum was expected to slow in the near term due to a “more challenging” external environment, namely the weak economic outlook for key trading partners such as Germany and Turkey.
“On the upside, continued large inflows of EU funds (including over the next EU budget cycle) will serve as a cushion against adverse economic developments,” Fitch said.
For now, adverse global trade conditions did not affect Bulgaria’s strong external finance metrics, with the current account surplus reaching a record 6.9 per cent of gross domestic product in May on a 12-month rolling basis, according to the agency.
Although export growth was expected to slow down, the agency said that it still expected Bulgaria to post current account surpluses averaging 3.3 per cent of GDP in 2019-2021.
On Bulgaria’s formal application to join the euro waiting room, the Exchange Rate Mechanism (ERM2), Fitch said that it believed that the country’s authorities and European partners “remain commited to finalising the process by end-2019, with euro adoption in January 2023 at the earliest.”
“All else being equal, Fitch would likely upgrade the Long-Term Foreign-Currency IDR by two notches between admission to the ERM2 and joining the euro,” the agency said.
Going forward, progress towards euro zone accession was one of the factors that could prompt Fitch to raise Bulgaria’s credit ratings, as would any improvement in growth potential that leads towards faster convergence with income levels “of higher rate peers without creating imbalances.”
On the negative side, a downgrade could be the outcome of a re-emergence of external imbalances or a sharp rise in public debt driven by fiscal easing.