By Levon Kameryan, Associate Director, Sovereign and Public Sector

Improved economic planning under Bulgaria (BBB+/Stable)’s government led by prime minister Kiril Petkov and his ‘We Continue the Change’ party has supported Bulgaria’s credit outlook, including an advanced January 2024 euro-area accession date, as well as enhancements of public-sector transparency and the rule of law.

However, Petkov’s recent loss of parliamentary majority (now holding 109 seats in the 240-seat legislature) raises questions over the continuity of reform as well as the country’s political stability that could impact the timetable for euro-area accession. The “There is Such a People” party quit the government over disagreements around budget expenditure and whether Bulgaria should back North Macedonia's EU accession.

The absence of a stable government has long constrained Bulgaria’s credit rating, hence the concern over the coming no-confidence vote on 22 June. Even if Petkov’s administration survives this vote, a lack of a working parliamentary majority will make passage of crucial reforms, such as those required to make the most of EU financing, more difficult.

Should the government fall, reforms will likely take a backseat as political parties will negotiate to form a new government, with the possibility that only another election can break the deadlock, extending political instability into next year.

The current political turmoil indicates the danger of rising political fragmentation in Bulgaria. Contentious issues include North Macedonia’s possible EU membership and Russia’s war in Ukraine, which has stoked civil support for far-right and pro-Russian opposition groups, according to recent opinion polls. However, we still expect broad-based political commitment to continue for pro-EU policies and adoption of the euro.

Bulgaria’s authorities face the immediate task of tackling the knock-on effects of the war in Ukraine and securing energy supplies after Russia’s halting of gas supplies, which will exacerbate inflationary pressures.

In the near term, the economic impact of Russia’s war in Ukraine and Western sanctions imposed on Russia will mostly be felt through higher commodity prices – energy and agricultural – as well as shortages of some imports, which will weigh down on corporate profitability and squeeze household budgets. We forecast Bulgaria’s real GDP to grow 1.8% and inflation to rise above 10% in 2022.

In the medium run, institutional reforms are vital to boosting economic growth potential above our estimate of 2.75% a year in addition to meeting common EU objectives such as addressing environmental risk, ensuring greater take-up of digital technology and raising infrastructure investment through EU funding.