June 9 (SeeNews) - Bulgaria's general government deficit is expected to increase to 3.4% of the planned gross domestic product (GDP) in 2023 from 2.8% last year, before shrinking to 2.5% in 2024, Fitch Ratings said.
Near-term forecasts are subject to change depending on potential adjustments to spending and revenue plans in the 2023 budget, which the newly-elected government is yet to put to a parliamentary vote, Fitch Ratings said in a statement on Thursday.
Nevertheless, Bulgaria's medium-term fiscal trajectory seems secure in light of the country's fiscal prudence and a broad political commitment to fiscal consolidation, the global ratings agency said.
The formation of an elected cabinet in Bulgaria, following two years of political instability boosts the country's chances of implementing reforms needed to absorb EU funds under the national Recovery and Resilience Plan (RRP) and achieve its eurozone accession goal, Fitch said. Despite risks to the longevity of the rotation government of parliamentary coalitions WCC-DB and GERB-UDF, its election by parliament signals a stronger drive for political stability in the country.
According to Fitch, Bulgaria is expected to receive this year the second tranche of EU grants under the RRP, with the third installment set to be delayed until 2024. The country has fulfilled only half of the 66 milestones that the EU requires prior to disbursing the second tranche of the total funding amount of 5.69 billion euro ($6.12 billion). So far, Bulgaria has received one installment, a payment of 1.37 billion euro made in late 2022.
"A broad-based judicial reform, which has been advocated by DB [Democratic Bulgaria], requires a two-thirds constitutional majority but we think that the government could receive the required support from opposition parties," Fitch opined.
The ratings agency deems high inflation to be the main risk to Bulgaria's eurozone accession, which was delayed by a year to January 1, 2025 by the last caretaker government. The passing of legislation to ensure adoption of the euro is not seen to be a challenge for the new government.
Even though inflation under the Harmonised Index of Consumer Prices (HICP) used for comparison among EU member states has eased in recent months, Fitch said it remains uncertain whether Bulgaria will meet the price stability criterion by the key deadline of mid-2024 needed to ensure accession from 2025. The country could benefit from the exclusion of outliers similarly to Croatia in 2022, prior to that country's adoption of the euro as of January 1, Fitch noted.
Bulgaria's HICP inflation abated to 10.3% year-on-year in April from 12.1% in March, according to most recent statistical office data.
"The positive outlook on Bulgaria’s "BBB" sovereign rating, which we affirmed in May, balances the risks of a possible delay in euro adoption mainly tied to meeting of price stability criterion against the clear commitment at the local and EU level to expedite the process of euro adoption," Fitch concluded.
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