Bulgaria’s prospective admission into the euro area remains the main reason Fitch Ratings continues to maintain the country’s long-term foreign and local currency ratings at ‘BBB’, with a positive rating outlook, the global ratings agency said late on October 27.
Fitch has rated Bulgaria at BBB since December 2017 and raised the outlook to positive in March 2019, maintaining both unchanged through the coronavirus pandemic, two years of political instability and last year’s spike in inflation, caused by high energy prices as a result of Russia’s invasion of Ukraine.
In its latest ratings decision, the agency re-iterated that the positive outlook reflected the prospects of Bulgaria joining the euro area, saying that “despite a delay in the euro zone accession process, there is broad political commitment to euro adoption in 2025.”
Fitch noted that the country’s Parliament passed a number of bills in recent months to meet the commitments made in 2020, when Bulgaria was accepted into the Exchange Rate Mechanism (ERM2), the euro zone’s “waiting room”.
The last of legislative changes, amendments to the central bank law, should be approved by the end of this year, the ratings agency said.
Fitch also re-iterated its misgivings about Bulgaria’s inflation, which has been on the decline this year, but remains “significantly above that of the three best performing EU member states,” Fitch said.
The price stability criterion for joining the euro area requires the country to have inflation no higher than 1.5 percentage points above the average in the three euro zone member state with lowest inflation.
“Given considerable uncertainty about the inflation trajectory, it remains questionable whether Bulgaria will meet the price stability criterion in mid-2024 (the key date for 2025 euro adoption).
The criterion allows a degree of flexibility as price developments in a country can be judged an outlier if its inflation rate is significantly lower than that of the other member states owing to country-specific factors,” Fitch said.
“Exclusion of two outliers from the calculation allowed Croatia to meet this criterion in 2022. However, it remains unclear how flexibility could be applied in Bulgaria’s case,” the credit ratings agency said.
Fitch acknowledged existing “risks to the longevity of the current government,” but said that “its formation enhances political stability and supports reform implementation.”
Despite slowing external demand, high inflation and elevated uncertainty, Bulgaria’s economy expanded in the first half of the year, prompting Fitch to raise its 2023 growth forecast from 1.3 per cent to 1.9 per cent. It forecast 2.8 per cent growth in 2024 and three per cent in 2025.
Fitch said that progress towards joining the euro area and “an improvement in growth potential”, either through structural reforms to improve the business environment or effective use of EU funds, could lead to upgrading Bulgaria’s credit rating.
On the downside, negative action could be prompted by “lack of progress in euro zone accession due to persistent political instability or a failure in meeting convergence criteria” or lower economic growth in the medium term, due to either a large adverse macroeconomic shock or inflation entrenched at high levels.
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