S&P Global ups Bulgaria’s rating outlook to positive due to improved euro area prospects

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’, but raised its outlook to positive, citing improved prospects for euro zone accession.

The credit ratings agency’s statement late on November 24 said that “there is at least a one-in-three likelihood that Bulgaria will accede to the euro zone over the next 24 months.”

S&P said that the country’s government, formed earlier this year, “represents Bulgaria’s first stable government over the past two years after five general elections” and noted that euro zone accession was one of its main political goals.

Although Bulgaria might not meet all convergence criteria – particularly the inflation criterion – by January 2025, the accession date targeted by Sofia, “we believe there could be scope for political compromise on the matter, similar to the Eurogroup’s decision on Croatia’s eurozone accession in 2022,” S&P said.

“Even if Bulgaria were not to accede to the euro zone in 2025, we think that ultimate accession would likely be delayed only until Jan. 1, 2026,” the credit ratings agency said.

S&P said that Bulgaria’s economy “has strong growth prospects over the next few years”, projecting an average of three per cent growth between 2024 and 2026, mainly due to domestic demand, but also assisted by investment using EU funds, even if Bulgaria does not succeed in using all it EU funds allocation.

Between Bulgaria’s strong fiscal track records, with government deficits expected to below three per cent of gross domestic product until 2026, and a narrow current account deficit, more than covered by both EU funds and foreign direct investment inflows, S&P projected that Bulgaria’s net external liabilities were likely to remain a low 11 per cent over the next few years.

Going forward, S&P Global re-iterated that it could raise Bulgaria’s credit ratings “potentially by several notches, if it became a euro zone member,” as that would both improve monetary policy effectiveness and reduce risks to external liquidity.

On the downside, the outlook could be downgraded if “the prospect of Bulgaria joining the euro zone became less likely,” either as a result of renewed domestic political instability, external factors in the Eurogroup of euro zone member countries or if high inflation persisted.

(Photo: Haydn Blackey/flickr.com)

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