S&P Global maintains Bulgaria’s BBB rating, uncertain about euro area accession

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’ with a stable outlook, but said that was uncertain whether the country will be able to join the euro zone in 2024.

The credit ratings agency said that the “prolonged period of political instability […] could delay Bulgaria’s preparation of eurozone accession, should no viable government emerge over the next few months.”

S&P noted that four elections since the start of 2021 “produced either no viable or only short-lived government coalitions” and said that another snap election “remains a possibility, in our view.”

“Nevertheless, recent parliamentary decisions have provided a mandate to the current caretaker government to progress on a legislative reform program ahead of eurozone accession. This includes strengthening insolvency proceedings, state-owned enterprise management, nonbanking supervision, and anti-money-laundering processes,” S&P Global said.

Bulgaria could find it “challenging to achieve” the euro area convergence criteria, in particular the one on inflation.

S&P Global said that Bulgaria’s harmonised consumer price index inflation, which was 14.8 per cent on an annual basis in October, was similar to the price increase of regional and European peers.

But the ratings agency forecast that inflation will remain high throughout 2023, “at close to 10 per cent on average”, which would complicate meeting the inflation criterion for euro area accession.

“It remains uncertain whether the current extraordinary circumstances will represent a viable exception in the assessment of the fulfillment of the convergence criteria. In addition, political considerations outside Bulgaria’s control could have an influence,” the credit ratings agency said.

S&P Global said that Bulgaria’s economic performance in 2022 exceeded its earlier expectations and projected economic growth this year at three per cent.

“Nevertheless, we consider that Bulgaria’s economic performance is set to weaken. We believe continuously high price increases […] will outpace wage growth and start weighing on consumption. In addition, we expect external demand from Bulgaria’s main trading partners in the EU will reduce, exemplified by our expectations of a recession in Germany over the next quarters,” the credit ratings agency said.

Going forward, S&P Global said it could raise Bulgaria’s credit ratings “potentially by several notches, if it became a euro zone member” or if the country improved its balance of payments position.

On the downside, ratings could be cut if “Bulgaria’s economic prospects deteriorated significantly compared to our current expectations,” as a results of either “the regional security situation significantly worsening, or disruptions of energy imports from Russia.”

(Photo: Haydn Blackey/flickr.com)

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