The Fitch BBB Rating of Bulgaria with a Positive Outlook has been Confirmed
The international rating agency Fitch Ratings confirmed the long-term credit rating of Bulgaria in foreign and local currency BBB with a positive outlook, said the press center of the Ministry of Finance.
The country's rating reflects the balance between a stable external and fiscal position, a sound political framework for EU membership and the long-standing functioning of the currency board arrangement, on the one hand, and relatively weaker potential growth compared to countries with similar ratings due to partly of adverse demographic developments that could hamper public finances in the long run, the statement said. Fitch Ratings analysts also report a decline in median governance indicators for countries with similar ratings, due to deteriorating government efficiency and control of corruption before 2021.
The positive outlook reflects our country's plans for Eurozone membership. According to Fitch Ratings, the short-term negative risks associated with the pandemic have weakened and are offset by the expected significant EU financial resources and commitment to macroeconomic and fiscal stability (further supported by the inclusion of the Bulgarian lev /BGN/ in Monetary Mechanism II).
Fitch Ratings believes that the formation of the coalition government in December 2021 has significantly reduced political uncertainty, after a series of unconvincing elections last year. Analysts say coalition parties have set out a comprehensive program to fight corruption and improve the rule of law while promising increased investment and more efficient public spending. The government has reaffirmed its goal of adopting the euro by 2024, continuing long-standing prudent fiscal policy and good macroeconomic governance.
Fitch Ratings' expectations for Bulgaria's economic growth remain favorable in the coming years, supported by significant EU funds (which in the period 2022-2027 are estimated at 36 percent of GDP in 2021). Real GDP growth is projected to reach 3.7 percent in 2022 and accelerate to 4.5 percent in 2023.
The National Recovery and Sustainability Plan (NRSP) is expected to be approved in the coming months, and the first funds will be received by probably mid-2022. Fitch Ratings notes the country's challenge in implementing the Plan effectively, but in any case estimate that the NRSP funds, in combination with other government investment programs, will contribute to increasing the long-term growth prospects and the potential slowdown in population decline.
The agency predicts that average annual inflation will rise to 5.2 percent in 2022, the highest rate since 2008 driven by higher commodity prices and to a lesser extent due to pressure from domestic demand.
With the authorities' willingness to join the Eurozone, the focus is on fulfilling the follow-up commitments following accession to ERM II and meeting the convergence criteria. In general, Fitch estimates that the membership in the Eurozone will support the long-term rating of Bulgaria and estimates that it can be increased by two steps in the period between the accession to ERM II and the introduction of the euro.
The rating agency estimates the budget deficit at 3.8 percent of GDP in 2021, which is more favorable than their previous expectations due to high revenue growth. The deficit is expected to narrow to 3 percent in 2023, from 4.6 percent in 2022. Accordingly, the debt / GDP ratio will rise to 30 percent but will remain well below the median for countries with similar ratings (60, 3 percent). The banking sector of the country is assessed as liquid and well-capitalized.
The main factors that could lead to an upgrade are progress towards joining the Eurozone and increasing the potential for economic growth. Factors that could lead to a downgrade are significant delays in the process of joining the euro area; sustained increase in public debt; materialization of contingent liabilities in the state budget balance or weaker growth prospects, according to the Ministry of Finance.
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