S&P Global re-affirms Bulgaria’s BBB credit rating, stable outlook

S&P Global Ratings has re-affirmed its long- and short-term foreign and local currency sovereign credit ratings on Bulgaria at ‘BBB/A-2’, and kept a stable outlook, saying that it believed Bulgaria’s “strong external and public balance sheets will help mitigate” the economic shocks caused by Russia’s invasion of Ukraine.

The credit ratings agency said that it expected a “stagflationary shock” on Bulgaria and lowered its real gross domestic product growth estimate for 2022 to 1.6 per cent from 4.3 per cent, and also doubled its government deficit forecast to five per cent of GDP.

“We expect Bulgaria’s economy will be affected by the conflict in Ukraine due to high inflation cutting into disposable income; lower business and consumer confidence domestically; and secondary effects through lower economic activity of its most important trading partners within the EU,” S&P Global said.

On the issue of Russia’s decision to cut off gas supplies to Bulgaria, the credit ratings agency said that it believed the situation to be manageable due to ongoing supply diversification efforts and remaining gas reserves, which were “low but still sufficient.”

Imports of liquified natural gas (LNG), existing alternative suppliers such as Azerbaijan and the interconnector to a new LNG terminal in northern Greece will enable the country to attain sufficient gas supply, including through joint purchasing with other EU member states in the future, S&P Global said.

In addition to gas supplies, the other reason why the war would have a “significant” impact on Bulgaria’s economy was the fact that the country has higher direct trade exposure to Russia and Ukraine than many of the other countries in Central and Eastern Europe.

In the medium term, however, investment using EU funds, both under the bloc’s multiannual budget and the NextGenerationEU recovery package, is expected to boost economic growth.

NextGenerationEU funds alone will raise Bulgaria’s GDP by between 2.5 per cent and six per cent by 2026, S&P Global said.

Regarding Bulgaria adopting the euro, the credit ratings agency said that “the political environment is unlikely to impede progress on euro zone accession,” with the current government maintaining the January 2024 target.

That date has been the subject of heated debate in recent weeks within the country’s ruling coalition, but S&P Global said that “the most critical factor [for Bulgaria’s euro adoption] will be the political willingness of existing euro zone member states to accept new members.”

“Some EU institutions could continue to highlight the necessity for structural reforms related to specific deficiencies regarding the rule of law in Bulgaria, particularly since such assessments can be tied to the transfer of EU funds,” the credit ratings agency said.

“However, we do not expect such obstacles over the next few years, given Bulgaria’s record of adhering to the EU’s recommendations in the past and its uncontentious relations with the EC.”

Going forward, S&P Global said it could raise Bulgaria’s credit ratings “in the course of a future accession to the euro zone.” A significant improvement in current account balances could also provide upward pressure on the ratings.

On the downside, ratings could be cut if the impact on Bulgaria of the war in Ukraine were to result in a “significant reduction of medium-term growth rates, for example if Bulgaria’s efforts to diversify its energy imports away from Russia were unsuccessful,” as such a scenario could raise fiscal deficits and debt levels beyond S&P Global’s current expectations.

(Photo: Haydn Blackey/flickr.com)

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