(DF) Fitch Ratings Revises Outlook on Bulgaria’s BBB Long-term Rating to Positive from Stable

February 20 (BTA) – Fitch Ratings has revised the Outlook on Bulgaria’s long-term foreign-currency issuer default rating (IDR) to Positive from Stable and affirmed the IDR at BBB. The rating action was published on the the Fitch website Friday. The agency says that the new Positive Outlook reflects the weakening of macroeconomic risks related to the coronavirus pandemic, a more resilient economy, sound policies and gradual progress towards euro adoption. According to Fitch’s analysts, short-term risks tied to the coronavirus pandemic and an uncertain electoral outcome are largely offset by prospects of substantial funding for investment from the EU and broad commitment to macro and fiscal stability. Private consumption proved much more resilient in 2020 thanks in part to fiscal support measures, while key sectors such as manufacturing were less affected due partly to lighter restrictions than in other EU countries. Economic activity will remain weak in the first half of 2021 due to ongoing challenges from the health crisis, including the slow pace of vaccination, but growth is expected to accelerate from the second half, as the effects of the pandemic wane, and consumption and investment are driven by higher external demand and EU Fund absorption. Fitch points out that Bulgaria is set to be one of the main beneficiaries of EU transfers in the coming years, including 16.6 billion euro (27 per cent of 2020 GDP) in next 2021-27 Multi Annual Framework and 7.5 billion euro (12 per cent of GDP) in grants from Next Generation EU (NGEU). Although there are questions surrounding the capacity of Bulgaria to absorb such a large amount of funds, Fitch believes this could lift growth from a projected 3 per cent in 2021 to 4-5 per cent in 2022-25. Fitch also points out that Bulgaria meets all quantitative ERMII convergence criteria except for price stability, that inflation has been trending downwards and is expected to remain low. It says further that Bulgaria will have to show progress on meeting structural commitments and that there is commitment across the political spectrum on euro adoption. Fitch says it would upgrade Bulgaria’s Long-Term Foreign-Currency IDR by two notches between admission to the ERM II to joining the euro. The ratings are constrained by slightly lower income levels compared with the current ‘BBB’ median and unfavourable demographics, which could hinder growth and weigh on government finances over the long term, says the agency. It expects the April 4 elections to result in a fragmented parliament as polls show relatively weak support for the two main parties, centre-right GERB and centre-left BSP. “There is high uncertainty at present about the shape of the next government, but issues around rule of law, institutional quality and corruption have taken centre stage. Although government formation could take time and a multi-party coalition could prove highly unstable, at present Fitch does not see major risks to economic policy or to Bulgaria’s commitment to the EU. That said, the next government will likely face pressures to implement political/institutional reforms in order to avoid social protests similar to those in summer 2020,” Fitch writes. LN/