Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Republic of Bulgaria (long-term local- and foreign-currency issuer and senior unsecured debt ratings: BBB+/Stable; short-term local- and foreign-currency issuer ratings: S-2/Stable) on 30 January 2023.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Bulgaria’s long-term ratings at BBB+/Stable are underpinned by: i) successful entry to the Exchange Rate Mechanism II (ERM II) on 10 July 2020, which supports a reduction of external-sector risks, anchored as well by enhancements made to foreign-currency reserve coverage; ii) reductions in financial-system risk and significant reforms made in banking-sector governance, underscored by successful entry to the EU’s Banking Union; iii) the country’s low level of government debt and prudent fiscal policy framework of recent years; and iv) a commitment to continued structural reform.

Challenges relate to: i) the economy’s vulnerability to shocks as a small, open economy as observed with the moderate economic and fiscal deterioration during the Covid-19 and energy crises; ii) non-performing loans above the EU average and restrictions on the Bulgarian National Bank in serving as the lender of last resort to banks; and iii) institutional and demographic weaknesses.

Despite the prolonged political instability, Scope believes that Bulgaria will be able to meet the criteria on public finances, interest rates and exchange-rate stability in the upcoming European Commission assessment in May 2023 of its progress on convergence. The price stability criterion, however, remains a key risk factor for the planned euro adoption by 2024, given Bulgaria’s still-elevated inflation rate. Adopting the euro would support Bulgaria’s ratings as it would provide the sovereign with the ability to issue debt in a reserve currency.

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the coming 12 to 18 months.

The ratings/Outlooks could be upgraded if: i) further progress is made under euro-area convergence, advancing euro accession; ii) Bulgaria sustainably raises its economic growth potential, ensuring continued convergence with EU average incomes; and/or iii) progress is made in addressing institutional challenges, such as the rule of law and the fight against corruption.

Alternatively, the ratings/Outlooks could be downgraded if: i) institutional challenges and/or political instability escalate and weaken the macroeconomic outlook; ii) the economic prospects deteriorate considerably compared to our current projections; iii) fiscal discipline deteriorates and Bulgaria’s debt-to-GDP ratio increases above current expectations; and/or iv) there is stress in the banking system or measures of external-sector resilience weaken.

For the updated scorecards accompanying this review, click here.

The methodology applicable for the reviewed rating(s) and/or rating Outlook(s) (Sovereign Rating Methodology, 27 September 2022) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Levon Kameryan, Associate Director.

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