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

Scope performs monitoring reviews to determine whether material changes and/or changes in macro-economic 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 rating’s 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 on the Republic of Bulgaria (long-term local- and foreign-currency issuer and senior unsecured debt ratings of BBB+ and Positive Outlook; short-term local- and foreign-currency issuer ratings: S-2 and Positive Outlook) on 22 January 2025.

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 ratings history can be found on www.scoperatings.com.

Key rating factors

For the updated rating report accompanying this review, please see here.

Bulgaria’s BBB+ long-term credit ratings are anchored by: i) the nation’s entry to the Exchange Rate Mechanism II since July 2020, reinforcing an outstanding roadmap since for the adoption of the euro and furthermore providing certainty for the nation’s external sector – curtailing associated risk from exposures to the global economy – furthermore anchored by the strengthened levels of foreign-currency reserves; ii) reductions of financial-system risks and significant reforms made within the space of banking-system governance, underscored by successful entrance to EU Banking Union since 2020; iii) the sovereign’s low level of government debt and a prudent budgetary policy over the recent years; and iv) the continued commitment to structural reform.

The Positive Outlook assigned July 2023 has represented the Agency’s expectation of Bulgaria’s accession to the euro area. The nation should be able to meet the core euro convergence criteria in the very near term. The price-stability criterion remains the core hurdle; nevertheless, the gap between Bulgaria’s inflation and the reference rate is seen closing early this year although the rises of prices of certain goods such as on electricity and bread presents a moderate challenge. The opposition of specific political groups within the ruling coalition to fast accession to the euro has presented risk – as has parliamentary rejection of a law ensuring the independence of the Bulgarian National Bank (BNB) and some risks surrounding performance of the budget. Once it meets the criteria, the government plans to request a special convergence assessment from the European Commission and the European Central Bank on whether Bulgaria meets the requirements for formally joining monetary union. Adoption of the euro would support multiple credit rating-relevant areas, such as the elimination of foreign-exchange risks within an euroised economy, bolstering monetary policy flexibility and strengthening sovereign market access.

Conversely, the credit challenges associate with: i) the institutional weaknesses and recently repeated instances of political instability; ii) the economy’s vulnerabilities to external crises as a small, open economy; iii) the limited lender-of-last-resort functionalities of the BNB given the fixed exchange rate ahead of presumed euro adoption, alongside past financial-stability challenges; and iv) the demographic challenges.

Output growth picked up slightly to an estimate of 2.3% last year (up 0.3pps from the previous year), as muted investment dynamics were compensated for by stronger private consumption, amid decelerating inflation, wage growth and rises of employment. Scope sees economic growth of 2.7% this year before 3.0% next year, underpinned by improving EU fund absorption after the completion of government formation and the continued strength of household demand.

The general government deficit is estimated at 3.0% of GDP last year (roughly unchanged from the previous year), driven higher by the re-valuation of public-sector wages and social transfers, but offset by strong tax revenue growth. The medium-run budgetary outlook remains uncertain after the protracted phase of political uncertainties. The newly-formed governing coalition announced a budget deficit of above BGN 3.6bn for Q1 of this year and is seen presenting a revised budget bill by 14 February incorporating necessary consolidation. The government remains committed to the compliance with the EU 3% of GDP budget deficit threshold this year, in line with euro-area convergence requirements. The general government debt-to-GDP ratio is nevertheless seen remaining on an increasing path over the forthcoming years and reaching 31.4% by end-2029, from the estimate of 24.0% as of the end of last year, all the while remaining among the lowest such debt ratios of the European Union.

The Positive Outlook represents the opinion of risks for the ratings remaining skewed on the upside.

The ratings could be upgraded if, individually or collectively, Bulgaria’s: i) euro-area accession were formalised; ii) authorities achieved progress in addressing institutional challenges such as the rule of law and corruption, and/or risks for political stability decrease; and/or iii) economic trend growth were increased in a sustainable fashion, ensuring the continued convergence with EU average per-capita incomes.

Conversely, the Outlooks could be revised back to Stable if, individually or collectively: i) there is cancellation or the significant postponement of euro-area accession; ii) institutional challenges and/or political instability re-escalated meaningfully; iii) the fiscal outlook worsened materially beyond the current projections; and/or iv) a severe economic or banking crisis unfolded and/or there is a meaningful weakening of external-sector resilience.

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: Dennis Shen, Senior Director

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