February 9 (SeeNews) - A lack of a stable government and high inflation could delay Bulgaria's accession to the euro area beyond the target year 2024 despite broad political support for adopting the EU's single currency, Scope Ratings said in a commentary published on Thursday.
Bulgaria is due to hold general election, its fifth in two years, on April 2.
"A government with a working parliamentary majority is vital for implementing growth-enhancing structural reforms to underpin the country’s smooth adoption of the euro," Levon Kameryan, associate director, sovereign and public sector at Scope Ratings, commented, adding that a series of short-lived administrations has long constrained Bulgaria’s BBB+/Stable credit rating.
"Acceleration in institutional reforms and reforms of the labour market and infrastructure are key to boost investment and generate the economic growth needed to raise living standards closer to EU levels, particularly given today’s double-digit inflation, tight financial conditions and Bulgaria’s demographic weaknesses," Kameryan said.
Adopting the euro would enhance Bulgaria’s credit outlook through the country’s adoption of a global reserve currency, the associated strengthening of institutions and governance, and assurance of more robust monetary policy flexibility, he noted.
Political instability has held back reforms needed to unlock 5.7 billion euro ($6.14 billion) of EU grants under the country's Recovery and Resilience Plan. Bulgaria received the first 1.37 billion euro tranche of grants only in December.
"The emergence of a functioning coalition in April’s elections, and one prepared to act on popular demands for institutional reform, would boost the confidence of euro-area authorities that Bulgaria remains on course for joining the currency union and potentially provide a degree of flexibility around their future evaluation of convergence criteria," Kameryan said. "Such a government would capitalise on progress made by Bulgaria’s previous short-lived government in 2022 led by prime minister Kiril Petkov and his We Continue the Change party that got the ball rolling with improvements to economic planning and institutional quality, which were positive for the rating outlook."
High inflation poses another risk to the country's eurozone accession plan, according to Kameryan.
"Bulgaria’s inflation, at 13% as a 12 month-average in December 2022, is running at much more than 1.5 percentage points above the rates in the EU’s three lowest-inflation economies," he said. "Inflation is likely to slow down in the coming months – we forecast an average HICP inflation in Bulgaria at 7.3% in 2023 – but the rate might still be too high to benefit from the European Commission and the ECB’s exclusion of outlier countries as benchmarks in their 2023 convergence assessment."
According to Scope Ratings, Bulgaria’s economy is on course to grow 1% this year after an estimated growth of 3.4% last year. In 2024, the economy should rebound 3%, which is close to its medium-run growth potential, as inflation eases and investment recovers.