Fitch has affirmed Bulgaria's long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-'and 'BBB', respectively, with stable outlook.

According to the global rating agency, the affirmation and stable outlook reflect Bulgaria's government plans to target expenditure-driven fiscal consolidation, with the aim of reducing the headline fiscal deficit by 0.5 percentage points a year in 2015-2017.

“However, based on our expectation of weaker economic growth relative to the government's forecasts, we expect an average reduction of 0.3pp annually,” Fitch said in a statement late on Friday.

Another factor behind the affirmation and the stable rating outlook is that Bulgaria’s public finances compare favourably with rating peers despite the negative impact they suffered in the second half of 2014.

Looking at Bulgaria’s banking sector, Fitch said it has stabilized following “substantial bank runs in June 2014”.

According to the rating agency, the start of releasing depositors’ assets in Corporate Commercial Bank, or KTB, in December 2014 and the extension of liquidity support to First Investment Bank until May 2016 “will support banking sector stability at least in the near term.”

Fitch said that geopolitical risks from Russia and Ukraine and a still fragile eurozone recovery, have led it to significantly cut Bulgaria's 2015 real GDP growth forecast to 0.7% from July's 2.5%, after growth of 1.5% in 2014.

“Bulgaria's economic growth remains subdued compared with 'BBB' peers,” Fitch said.

”Fitch does not expect Bulgaria to enter a prolonged period of deflation, although it is a material risk and could potentially hurt fiscal dynamics. Instead, we expect lower prices to support consumption activity in 2015, which should provide some inflationary stimulus, albeit at a very low level given the impact of weaker imported prices of global commodities.”

Although political uncertainty has eased somewhat with the formation of a new cabinet in November 2014, the minority status of the government coalition of GERB and the Reformist Bloc means the coalition has to rely on outside support from the Patriotic Front and ABV party,

“Policy mandates between all political parties are quite diversified, which risks creating an uncertain policy environment,” Fitch commented.