Bulgaria's real economy is expected to expand 3.0% in 2022, almost double the agency's May projection of 1.6% growth, but GDP will increase by a mere 0.8% in 2024, S&P Global Ratings said in a statement published by the Bulgarian finance ministry on Saturday.
Bulgaria's 2021 GDP was recently revised upwards to 7.6% by the country's statistical office.
"The stable outlook balances Bulgaria's weaker economic growth prospects in the near term and elevated domestic political uncertainty against Bulgaria's low net general government debt and contained interest expenditures. In our view, this affords Bulgaria a policy buffer and leaves its public finances less susceptible to a swift increase in interest rates globally," the ratings agency noted.
Domestic political uncertainty arising from the October general elections which produced a fragmented parliament is seen as a major obstacle to Bulgaria's timeline for euro adoption, which is essential in granting the country access to euro capital markets.
In global comparison terms, Bulgaria's net general government debt is low at under 20% of GDP and interest expenditures also remain low, providing a policy buffer against significantly weaker economic conditions worldwide.
Bulgaria's net debt to GDP ratio is forecast to rise to 18.2% in 2023 from 16.1% in the current year, further edging up to 19.0% in 2024.
S&P Global also said in its statement:
We could lower the ratings if Bulgaria's economic prospects deteriorated significantly compared to our current expectations. This could occur, for example, due to stronger second-round effects from a slowdown in global growth, the regional security situation significantly worsening, or disruptions of energy imports from Russia threatening the availability of sufficient energy supplies for Bulgaria's economy.
We could raise the ratings on Bulgaria over the next two years, potentially by several notches, if it became a eurozone member. Improvements in Bulgaria's balance of payments position could also support an upgrade.
We expect Bulgaria's growth to weaken notably in the coming months. Although its economy has remained more resilient in 2022 against fallout from the Russia-Ukraine conflict than we initially expected, several challenges lie ahead. In particular, we expect external demand from Bulgaria's main trading partners in the EU will reduce and domestic consumption will lose steam as continuously high inflation, which we estimate at close to 10% on average in 2023, weighs on real wages. Positively, additional EU-funded projects will provide some support. We project real growth of less than 1% in 2023--a substantial slowdown from the 3% we anticipate for 2022. Bulgaria is gradually progressing in its efforts to enter the eurozone, but it remains unclear whether it will be granted membership in 2024 due to several remaining obstacles. In our view, Bulgaria's successful accession to the eurozone would eliminate residual euro exchange rate risks in its economy, improve the country's access to euro capital markets, and grant domestic banks direct access to the ECB. However, Bulgaria is currently experiencing one of the highest inflation levels in the EU (at close to 15%), which, in our view, could complicate the task of meeting the inflation convergence criterion next year. Domestic political uncertainty also persists with a caretaker government still in office following the most recent snap election in October 2022, hampering the process of preparing for accession. Bulgaria's previous governing coalition fell apart in June, and it remains uncertain whether a government can ultimately be formed after the October elections.
We consider that another snap election could take place in early 2023, which would then represent the fifth general election in less than two years, an unprecedented outcome. Although political instability is clouding the fiscal outlook, we believe future governments will remain broadly committed to fiscal discipline. We expect narrowing deficits over 2023-2025, which will keep general government debt below a modest 30% of GDP and interest expenditures at under 2% of government revenue. The ratings on Bulgaria are still constrained by the country's moderate GDP per capita in a global comparison and remaining structural institutional impediments."
