October 10 (SeeNews) - Bulgaria risks a prolonged period of political instability, which could jeopardise its eurozone accession timetable and slow down EU funds absorption, putting its economic recovery priorities on the back burner, Scope Ratings said on Monday.
The inconclusive outcome of the October 2 election is as much a test for the country’s leading political parties as it is for the EU in confronting the impact of Russia’s divisive energy policies for the region, the Berlin-based agency said in an analysis.
Bulgaria, rated BBB+/Stable by Scope, is not only a stark example of the energy-related political and economic challenges facing Europe but also a special case because of the country’s historical ties with Russia and scale of its reliance on Russian energy, according to the ratings agency.
The country’s particular relationship with Russia was highlighted in the vote on 2 October – the fourth in under two years – with a rise of support for far-right and pro-Russian political groups.
Against the backdrop of political instability, much-needed institutional reforms could take a backseat, putting into question Bulgaria's medium-term ability to fulfill eurozone criteria, according to Scope.
Such reforms are needed to unlock a grant package of about 6 billion euro ($5.8 billion) in EU funds approved under Bulgaria's National Recovery and Resilience Plan (RRP).
Political precariousness, in this context, will also threaten the rate of absorption of EU financing, one of the key drivers for the economy of the Southeast European country.
As of June, Bulgaria had absorbed just 65% of the structural and investment funds made available to it under the previous operational programme period of 2014-2020, according to the Scope report. That was below the 70% average rate of absorption demonstrated by the EU member states from Central and Eastern Europe (CEE).
"Joining the euro area would enhance several rating-relevant areas for Bulgaria [...] by enabling Bulgaria to issue debt in a reserve
currency that is also its national currency, curtailing foreign-currency risk and bolstering institutional capacities," Scope said.
Bulgaria is on track to shake off its historical dependence on Russian gas imports, with the catch being that parties could become divided over whether such a break in ties should remain for good. Gazprom's decision to freeze natural gas supply in late April has so far been in part offset by the commissioning of the Greece-Bulgaria gas link which now imports a third of the country's gas quantities at much more competitive prices from Azerbaijan. The gas interconnector paves the way for future imports of liquefied natural gas (LNG) and for the crucial diversification of suppliers.
"Helping Bulgaria wean itself off Russian energy exports is far from an insurmountable problem for the EU given the country’s modest energy needs (annual gas consumption of only 3 billion cubic metrеs per year) compared with those of bigger economies in CEE," Scope said.
Scope also lifted Bulgaria's economic growth forecast to 2.9% in 2022 from 1.8% projected in June. Medium-term potential gross domestic product (GDP) growth is estimated at between 2.5% and 3%, mainly due to supply constraints including a decline of 1% per year in Bulgaria's working population size within the decade Inflation in the country is seen to exceed 11% in 2022.
"The challenge now is to form a stable new government with a clear mandate to act on those commitments and to meet common EU objectives including reform of the judiciary, tackling of corruption, diversification of energy sources and advancement of green transition," Levon Kameryan, Associate Director, Sovereign and Public Sector Ratings at Scope, commented.
"Failure to do so could materially delay the relevant timetable for euro-area accession with potential negative repercussions for Bulgaria’s macroeconomic outlook," he concluded.
($ = 1.031 euro)