Bulgaria’s Euro Transition: Opportunity for Growth Shadowed by Debt and Spending Concerns

Bulgaria is poised for a likely credit rating upgrade in the coming weeks, driven by its impending adoption of the euro, experts said at the annual conference of the Council for Economic Analysis. This upgrade, expected around July 8, follows a common pattern observed in other countries where the rating improves shortly after the official decision to join the eurozone, "Capital" reports.

Already, Bulgaria is beginning to feel the financial benefits of this transition. Desislava Nikolova, senior economist at the World Bank’s Bulgaria office, pointed to the Ministry of Finance’s recent bond issuance, which yielded 3.06%, down from 3.47% earlier this year for similar debt. This lower yield also narrows the gap between Bulgarian bonds and their German counterparts, signaling increased investor confidence.

The improved sovereign credit rating will not only help the government borrow more cheaply but will also benefit private businesses, since the country’s rating sets the ceiling for private entities. Atanas Pekanov, former Deputy Prime Minister and economist, emphasized that reduced interest costs could free up resources for productive investments. He also underscored the importance of boosting Bulgarian incomes and living standards, viewing eurozone membership as a chance to shift the economy towards higher value-added production and enhanced labor productivity, moving away from the traditional model based on low wages.

However, the transition brings challenges. Deputy Prime Minister Tomislav Donchev highlighted two key risks: a temporary surge in prices during the initial euro adoption phase, which he deemed minor in a functioning market, and the more serious threat of careless fiscal policies leading to rapid debt accumulation due to easier credit access. The latter risk depends heavily on the political will to maintain fiscal discipline.

Nikolova pointed out that Bulgaria has a timely opportunity to improve public finances without raising taxes. She cited a World Bank analysis suggesting better VAT collection and more competitive public procurement processes as ways to increase revenue and reduce unnecessary spending.

Meanwhile, Lyubomir Datsov from the Fiscal Council stressed that Bulgaria currently lacks fiscal space for investment, with investments lingering around 18-20% of GDP - insufficient for sustainable growth above 4%. For stronger economic expansion, investment levels need to rise to roughly 27-28% of GDP.

Plamen Nenov, Secretary of the Council for Economic Analysis, added that joining the eurozone goes beyond technical integration - it also reduces currency, interest rate, and some political risks. He anticipates the euro’s adoption will stimulate investment and overall economic activity. However, Nenov cautioned that Bulgaria must curb its recent expansionary fiscal stance to make room for these benefits.

He singled out soaring housing prices as a growing concern, suggesting that increasing transaction costs, such as revising tax assessments, could help stabilize the market. Nenov also recommended efforts to develop capital markets, including the Bulgarian Stock Exchange and long-term government debt markets, which could redirect investment from real estate to financial assets.

Lastly, fiscal consolidation is crucial, Nenov emphasized, warning that Bulgaria’s current deficit of around 3% is too high and tends to overheat the economy. Reducing this deficit would help prevent speculative bubbles and ensure long-term stability as Bulgaria embarks on its eurozone journey.

Source: "Capital"