Fitch Ratings has re-affirmed Bulgaria’s sovereign long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BBB’, but downgraded the outlook from positive to stable, as it expects gross domestic product in the country to shrink by 5.1 per cent in 2020, down from 3.2 per cent growth in its previous forecast.
The decline was due to the ongoing lockdown in response to Covid-19 pandemic, Fitch said, which prompted the agency to bring forward its review of Bulgaria’s credit rating.
The travel and tourism sectors in particular were likely to record sharply negative growth in the first half of the year. “While the situation is likely to improve in 2H20, our forecasts are subject to significant downside risks, given the evolving situation,” the credit rating agency said.
Fitch said that it expected growth to rebound to 4.2 per cent in 2021, mainly due to consumption and investment.
The agency said that the pandemic would have a negative impact on Bulgaria’s budgetary performance, due to the expected economic contraction and ongoing fiscal easing. “Following four years of primary and headline surpluses, Bulgaria is likely to post primary and headline deficits of 2.8 per cent and 3.6 per cent of GDP, respectively,” it said.
Fitch also noted the increased 2020 borrowing limit in the revised Budget. “Bulgaria is expected to announce a eurobond issuance in May, although details are unavailable at present. Fitch assumes that two billion euro will be issued in 2020 with a further one billion euro in 2021 (cumulatively amounting to 4.9 per cent of GDP). However, these assumptions are subject to inherent uncertainty, given the evolving economic outlook,” the agency said.
As regards Bulgaria’s efforts to join the euro zone Exchange Rate Mechanism (ERM2) and the Banking Union, Fitch said that the pandemic “has increased uncertainty over the timeline”, but the agency did not believe that the process has been derailed.
“Fitch believes Bulgaria is unlikely to meet the end of April deadline for completion of the capital buffer increase of Fibank, a requirement under the European Central Bank’s (ECB) Comprehensive Assessment. This in turn is a mandatory precursor for accession to ERM2 by 3Q20,” the agency said.
Any delays in the process were unlikely to jeopardise Bulgaria’s simultaneous entry into the Banking Union and ERM2, according to Fitch, which also noted that the government “appears to be more decisively favouring the euro accession process, compared with earlier this year when Prime Minister Boiko Borissov expressed a willingness to slow the process, citing public opinion.”
“At the same time, given that the Covid-19 pandemic response is taking up significant resources with regard to political engagement at the EU-wide level, facilitating the Bulgarian lev’s ERM2 accession may decline as a relative priority for European institutions. If concerns about risks ease and the process resumes, this would be supportive of the rating, as underlined by our view that all things being equal, we would upgrade Bulgaria’s Long-Term Foreign-Currency IDR by two notches between admission to the ERM2 and joining the euro,” the agency said.
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