Fitch Ratings said on July 17 that Bulgaria’s admission to the Exchange Rate Mechanism (ERM2), the euro zone’s “waiting room”, was a positive development for the country’s credit rating, but any potential benefit was currently offset by risks from the coronavirus pandemic.
Bulgaria joined ERM2 on July 13, having applied in June 2018, after a meeting of euro zone countries’ finance ministers and central bankers. Croatia, which applied a year later, was admitted alongside Bulgaria, the ECB said last week.
The earliest date the two countries could adopt the euro is seen as sometime in 2023, after at least two years in ERM2, followed by an assessment and preparation period. But Fitch said that it was “unlikely” that Bulgaria and Croatia would join the euro area before 2024.
The risk that disruption from the coronavirus would delay the two countries’ ERM2 entry had not materialised, which showed the euro zone’s commitment to Bulgaria and Croatia’s single-currency membership, but it was unclear when the two countries would fulfil the euro convergence criteria, Fitch said.
This was partly because the pandemic and related containment measures have weakened the macroeconomic outlook, the credit ratings agency said. It forecasts Bulgaria’s gross domestic product (GDP) contracting by 5.7 per cent this year, revised from 5.1 per cent in April, when it re-affirmed Bulgaria’s BBB credit rating and downgraded the outlook from positive to stable.
“Shrinking GDP and fiscal policy responses mean we forecast that 2019 budget surpluses will swing to deficits of four per cent of GDP in Bulgaria in 2020” and the country may also struggle to meet the inflation requirement, the credit ratings agency said.
“Both countries have also committed themselves to structural measures to reform state-owned enterprises and the business environment. For Bulgaria this includes tackling corruption and organised crime. Implementation would aid convergence and reduce macroeconomic and fiscal risks, but may prove challenging,” according to Fitch.
Going forward, Fitch re-iterated its expectation to raise Bulgaria’s credit rating by two notches in the period between joining ERM2 and adopting the euro, but said that it would “need greater confidence in the likely timing of euro adoption and how far it would offset risks arising from the pandemic” before taking positive rating action.
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