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+/Positive; short-term local- and foreign-currency issuer ratings: S-2/Positive) on 4 March 2024.

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

For the updated report accompanying this review, click here.

Bulgaria’s BBB+ rating is underpinned by: i) participation in the Exchange Rate Mechanism II (ERM II) since July 2020, reinforcing the roadmap to adopting the euro in the medium-term and reducing external-sector risks, which are further mitigated by strengthened 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.

The Positive Outlook assigned in July 2023 reflects Scope’s expectation of Bulgaria’s euro area accession by 2025, latest 2026, acknowledging uncertainties around the specific timetable. The adoption of the euro is a key policy target for the current coalition government, which has governed under a power-sharing arrangement since mid-2023, with the rotation of the premiership expected for early March. Adoption of the euro would improve multiple rating-relevant areas, including by eliminating foreign-exchange risk in an euroised economy, increasing monetary policy flexibility and strengthening market access. The next Convergence Reports by the European Commission and the ECB, due in mid-2024, will assess whether Bulgaria meets the requirements to join the euro area.

Bulgaria’s economy has been resilient to the cost-of-living crisis, with estimated real GDP growth of 1.9% in 2023. Scope expects growth to improve to 2.6% in 2024 and 2.9% in 2025. The medium-term growth outlook will benefit from significant EU fund inflows which will support robust public sector investment.

Scope expects the general government debt-to-GDP ratio to increase slightly to 23.1% in 2024 from an expected 21.5% in 2023, and thereafter remain on a gradual increasing trend, all the while remaining among the lowest in the EU at below 30% by 2028. This is driven by persistent general government fiscal deficits over the coming years, which Scope expects to average 2.9% over 2024-28, given the government’s commitment to maintain high public investment but also sustained personnel, social and pension expenditures. Still, Scope expects the Bulgarian government to remain committed to compliance with euro-area convergence fiscal criteria.

Rating challenges include: 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) institutional weaknesses and political instability; iii) limited lender of last resort function of the Bulgarian National Bank; and iv) adverse demographic trends.

The Positive Outlook reflects Scope’s view that risks to the ratings are skewed to the upside.

The ratings could be upgraded if: i) euro area accession were formalised; ii) Bulgaria sustainably raised its economic growth potential, ensuring continued convergence with EU average per-capita income; and/or iii) progress were made in addressing institutional challenges, including the rule of law and the fight against corruption.

Alternatively, the ratings/Outlooks could be downgraded if: i) institutional challenges and/or political instability reoccurred, weakening the macroeconomic outlook and/or delaying Bulgaria’s euro area entry significantly; ii) economic prospects deteriorated considerably; iii) the fiscal outlook worsened significantly; and/or iv) the banking system’s or external-sector resilience weakened.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 29 January 2024) 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 Julian Zimmermann, Associate Director.

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