Fitch Confirms Bulgaria’s BBB Rating, Boosting Eurozone Hopes

Fitch Ratings has confirmed Bulgaria's long-term credit rating at BBB with a positive outlook. The agency highlighted that the rating is bolstered by the country’s robust external and fiscal position when compared to similarly rated nations, as well as the stable political framework provided by EU membership and the enduring currency board regime.

However, Fitch pointed out that low labor productivity and adverse demographic trends negatively impact potential growth and the long-term stability of government finances. The positive outlook is indicative of Bulgaria’s prospects for joining the eurozone, which is expected to enhance the country’s external position indicators further. According to Fitch, there exists a strong political commitment at both national and European levels to adopting the euro.

Bulgaria meets nearly all the nominal convergence criteria for euro adoption, except for price stability. The country has seen a continuous decline in inflation, narrowing the gap between its average annual inflation and that of the three best-performing EU member states, thereby moving closer to satisfying the price stability requirement. Fitch forecasts average annual inflation rates of 3% for 2024, 3.5% for 2025, and 3.1% for 2026.

In terms of economic growth, Fitch anticipates a 2.0% GDP growth in 2024, an increase from the revised projection of 1.9% for 2023 by the National Statistical Institute. This growth is expected to be fueled by stable private consumption and ongoing investment activities, despite heightened political uncertainties and delays in implementing the National Recovery Plan.

The agency projects GDP growth to rise to 2.5% in 2025 and 2.7% in 2026. It also expects the general government deficit to increase to 2.8% of GDP in 2024, up from 1.9% in 2023, attributed to rising compensation and welfare expenses.

Factors that may result in an upgrade of Bulgaria's rating include progress toward eurozone membership, such as confirmation of meeting the criteria and increased clarity on the timeline for euro adoption. Additionally, implementing structural and management reforms to enhance the business environment and optimize the use of EU funds could improve growth potential.

Conversely, a failure to join the eurozone due to unmet convergence criteria or diminished economic growth prospects could lead to a downgrade of the rating.