November 30 (SeeNews) - Increased domestic demand will push Bulgaria's real gross domestic product (GDP) growth to almost 4% this year, despite several resurgences of the pandemic, Standard & Poor's (S&P) Global Ratings said.
In the medium term, EU fund inflows, including from the Next Generation EU (NGEU) instrument, will support Bulgaria's economic growth, the global ratings agency said in a research paper on Monday published by the finance ministry.
"The economic effects of the pandemic appear to have been manageable in Bulgaria, despite a significant health impact. Domestic demand, particularly private consumption, has recovered strongly and the increased absorption of EU funds will lift the medium-term growth outlook. Under the previous and current EU Multiannual Financing Framework (EU MFF) and the NGEU instrument, we estimate that Bulgaria is eligible for EU grants equivalent to about 40% of 2021 GDP," S&P said.
In June, S&P said it affirmed its long- and short-term foreign and local currency sovereign credit ratings on Bulgaria at 'BBB/A-2' with a stable outlook.
The stable outlook indicates that S&P expects Bulgaria's economic recovery to progress over the next two years, backed by further absorption of additional EU funds, the ratings agency noted in its research paper. Although several fiscal support measures will extend into 2022, the agency expects fiscal balances to narrow over the next years, which will keep public debt low, it noted.
"The stable outlook also signifies that we anticipate that the economy will not incur any external or financial sector imbalances," S&P added.
In line with global trends, inflation in Bulgaria has increased recently, due to a combination of rising food and energy prices, as well as strengthening domestic demand weighing on core inflation. S&P believes price increases will reduce in the second half of 2022.
"External risks appear manageable after several years of external net deleveraging, thanks to recurring current and capital account surpluses, which we expect to continue. The lev was included in the ERM II and Bulgaria joined the Banking Union in 2020. Although the current currency board provides an important anchor of economic stability, our ratings also factor in the country's limited monetary policy flexibility under this arrangement," S&P said.
S&P could lower the ratings if Bulgaria's economic recovery is significantly delayed, for example, because the pandemic's direct effects prove more long-lasting than currently expected. This would likely result in protracted fiscal consolidation and continuously rising net public debt over the next few years, according to the research paper. Although unlikely over the medium term, S&P could also lower the ratings over the emergence of imbalances in Bulgaria's financial sector, it noted.
The agency could raise the ratings if Bulgaria's economic recovery coincides with quicker fiscal consolidation or stronger external performance than currently projected. In the long term, S&P could raise the ratings on Bulgaria in the course of its accession to the eurozone, it said.