May 15 (SeeNews) - Fitch Ratings said that it affirmed Bulgaria's long-term foreign-currency Issuer Default Rating (IDR) at 'BBB' with a positive outlook.
The country's ratings are backed by its strong external and fiscal balance sheets in comparison to 'BBB' ratings peers, as well as by a credible policy framework supported by its EU membership and enduring currency-board arrangement, the ratings agency said in a statement on Friday.
On the flip side, the country's ageing population and low level of investments and real economic output affect long-term potential growth and government finances. Fitch said it projects Bulgaria's growth to slow down to 1.3% this year from 3.4% in 2022.
Bulgaria's performance has declined in recent years in terms of the six World Bank governance indicators, namely voice and accountability, political Stability and absence of violence/terrorism, government effectiveness, regulatory quality, rule of law, and control of corruption, Fitch noted. A series of short-lived governing coalitions and relatively high levels of perceived corruption have been the main factors for this decline in recent years.
Bulgaria has been ruled by a caretaker government appointed by the president since August 2022. The country last month elected another parliament without a clear ruling majority, with political negotiations having yielded no stable government as yet.
Fitch Ratings also said in its statement:
"Positive Outlook: The Positive Outlook reflects the prospects of euro adoption, which would lead to further improvement in external metrics. Despite a series of inconclusive snap elections over the past two years, Fitch believes the key political parties remain committed to euro adoption. We think that required legislative amendments should be adopted once the political environment stabilises, with risks around the timeline for eurozone entry mainly tied to meeting price stability criterion.
Euro Adoption Process: The government postponed the target date for euro adoption into 2025 due to elevated inflation and a delay in adoption of necessary legislation. While HICP inflation in Bulgaria has begun to ease in recent months, it remains significantly above the rate of three best performing EU member states, and Bulgaria does not currently comply with price stability criterion. Given considerable uncertainty about the trajectory of inflation, it remains questionable whether Bulgaria will meet the price stability criterion in mid-2024 (the key date for 2025 euro adoption). Croatia was able to meet this criterion after the exclusion of two outliers from the calculation.
Meeting all other criteria (public finances, interest rate and exchange rate) is less challenging. Overall, we consider euro adoption as supportive of the rating, as underlined by our view that all things being equal, we would upgrade Bulgaria's Long-Term Foreign-Currency IDR by two notches between the inclusion of the Bulgarian lev into ERM II to joining the eurozone.
Prolonged Political Instability: Political instability extended into 2023 as another early election, the fifth in two years, took place in April. The latest snap vote followed inconclusive coalition negotiations after the October 2022 election, and once again resulted in a highly fragmented legislature. Although there is a broad political consensus on the reform agenda and policy direction, the coalition negotiations remain difficult, despite the absence of substantive policy differences between the two main parties. In Fitch's view, the prolonged political instability has begun to weigh on Bulgaria's real economy as it has slowed EU funds absorption and progress on Recovery and Resilience Facility (RRF) reforms.
Inflation to Moderate Slowly: Fitch projects average HICP inflation of 9.6% in 2023 (vs. current 'BBB' median at 6.4%), down from 13% in 2022. While lower global commodity prices and strong base effects should bring headline inflation down this year, solid domestic demand will keep core pressures elevated, resulting in average HICP inflation of 4% in 2024. Wage dynamics have been broadly in line with inflation, with gross nominal wage growth at 12.8% in 2022, predominantly driven by private sector increases. Our inflation forecast remains subject to substantial uncertainty, mainly stemming from the potential duration of second-round effects.
Weakening Growth Outlook: Fitch expects growth to decelerate to 1.3% in 2023, from 3.4% in 2022. We expect a sharp decrease in inventories, as companies lower their stocks, and moderation of private and public consumption. Private consumption will nonetheless continue to benefit from the solid labour market, with minimum wage and social payment increases supporting lower-income households. We expect investment growth to start to pick up as EU funds flows increase. In 2024, growth should accelerate to 2.6%. The delay in implementation of RRF reforms is the key negative risk factor.
Uncertain Budget Outlook: This year's fiscal performance is uncertain as the caretaker government operates under provisions of the 2022 budget law. We expect the general government deficit to widen to 3.4% of GDP in 2023, from 2.8% in 2022, in line with current 'BBB' median. Strong nominal GDP growth will support tax revenues, while increases of pensions and public sector wages, and a pick-up in capex will push expenditures up. A record of fiscal prudence and the commitment of key political parties to fiscal consolidation supports our view that the medium-term fiscal trajectory should not be threatened. We expect the budget deficit to narrow toward 2.5% of GDP in 2024.
Low Public Debt: Despite wider deficits expected in the medium term, Bulgaria's public debt ratio will remain very low compared with EU countries and 'BBB' peers. We expect the public debt/GDP ratio to remain below 30% during the forecast horizon. Almost all public debt is at a fixed rate, with a long average maturity. This leaves Bulgaria less exposed to monetary tightening abroad. We see general government interest payments increasing only marginally to 1.6% of revenues in 2023, well below the current 'BBB' median of 7.2%.
Strong External Finances: We expect the current account deficit to remain broadly unchanged at 0.5% of GDP in 2023-2024 as weaker external demand should be offset by an improvement in terms of trade. The current account deficit will continue to be offset by steady inflows of FDI and higher EU transfers. Bulgaria's external position is supported by sizeable foreign reserves and private-sector deleveraging. As a result, we expect Bulgaria's net external position to further improve in 2023-2024 (surplus of 34% of GDP in 2022, compared with the 'BBB' median of 2.1% of GDP deficit).
Stable Banking Sector: The Bulgarian banking sector remains stable, with solid capitalisation (at 20.9% at end-2022) and improving asset quality. The ratio of non-performing loans decreased to 5.2% at end-2022 from 6.5% at end-2021, according to Fitch's estimates. Loans to non-financial corporates increased by 10.4% at end-2022, reflecting strong demand for short-term financing, mainly for working capital. Growth of loans to households was 14.6% at end-2022, with housing loans rising by 17.9%. Although the majority of loans are floating rate, the pass-through of rising interest rates in the euro area to interest rates in Bulgaria is slow at present due to significant liquidity and competition in the banking sector.
ESG - Governance: Bulgaria has an ESG Relevance Score (RS) of '5[+]' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the WBGI have in our proprietary Sovereign Rating Model. Bulgaria has a medium WBGI ranking at 55th percentile, reflecting a history of unstable coalitions, relatively high perception of corruption and moderate institutional capacity versus track record of peaceful transitions and above average regulatory quality.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-External Finances/ Structural: Lack of progress in eurozone accession due to persistent political instability or a failure in meeting convergence criteria.
-Macro: Lower medium-term growth prospects driven by, for example, a large adverse macroeconomic shock or inflation entrenched at high levels.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
-External Finances: Progress toward eurozone accession, including greater confidence in Bulgaria meeting membership criteria and the likely timing of euro adoption.
-Macro: An improvement in growth potential, for example via the implementation of structural and governance reforms to improve the business environment and/or effective use of EU funds."
In terms of ESG considerations, here is how Bulgaria rates according to Fitch:
"ESG CONSIDERATIONS
Bulgaria has an ESG Relevance Score of '5[+]' for Political Stability and Rights as WBGI have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Bulgaria has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.
Bulgaria has an ESG Relevance Score of '5[+]' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as WBGI have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Bulgaria has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.
Bulgaria has an ESG Relevance Score of '4[+]'for Human Rights and Political Freedoms as the Voice and Accountability pillar of the WBGI is relevant to the rating and a rating driver. As Bulgaria has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.
Bulgaria has an ESG Relevance Score of '4[+]' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Bulgaria, as for all sovereigns. As Bulgaria has a track record of 20+ years without a restructuring of public debt and captured in our SRM variable, this has a positive impact on the credit profile."