Fitch Ratings has re-affirmed Bulgaria’s long-term foreign and local currency ratings at ‘BBB’, with a positive rating outlook, despite continued political uncertainty in the country and the likely delay of euro zone entry later than Sofia’s official January 1 2025 target.
Fitch has rated Bulgaria at BBB since December 2017 and raised the outlook to positive in March 2019, maintaining both unchanged through the coronavirus pandemic, more than three years of political instability and the spike in inflation in 2022, caused by high energy prices as a result of Russia’s invasion of Ukraine.
But in its latest ratings decision, the global ratings agency said that “Fitch considers that there is broad political commitment at the national and EU level to euro adoption,” despite the continued delays.
Bulgaria met all the euro area convergence criteria apart from price stability in the EU convergence report issued earlier this year and inflation has continued to decline in recent months.
“In Fitch’s view, Bulgaria could meet the price stability criterion at the beginning of 2025, depending on inflation developments across the EU,” the ratings agency said.
“In our baseline scenario, this would allow Bulgaria to request the reassessment of its progress on convergence criteria in [the first half of 2025] and would allow for eurozone entry as of January 2026.”
A possible obstacle could be a lack of stable government and potentially lengthy coalition negotiations – Bulgaria heads to the polls for the seventh time since April 2021 on October 27 – which could delay euro zone entry, Fitch said.
The political instability and delays in implementing its recovery and resilience plan, needed to unlock post-pandemic EU funds meant to boost the economy, were expected to have an impact on economic growth, which Fitch projected at two per cent in 2024, down from 2.4 per cent in its previous rating report in April. Fitch also cut its growth estimate for 2025 to 2.5 per cent from 3.1 per cent.
The ratings agency said that further progress towards joining the euro area, such as confirmation that Bulgaria has met convergence criteria and greater certainty regarding the likely timing of euro adoption, as well as an “improvement in growth potential” through reforms or effective use of EU funds could lead to upgrading Bulgaria’s credit rating.
On the downside, negative action could be prompted by “lack of progress in euro zone accession due to persistent political instability or a failure in meeting convergence criteria” or weaker economic growth prospects as a result of those adverse political developments.
(Photo: kavitakapoor/flickr.com)
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