Fitch Ratings affirmed Bulgaria's long-term foreign-currency issuer default rating (IDR) at BBB with a stable outlook on August 21.

The country’s strong external and fiscal balance sheets and credible policy framework support the rating. On the other hand, it is constrained by slightly lower income levels than the current BBB median and unfavourable demographics, which could hinder growth and weigh on government finances over the long term, the report says. 

“The stable outlook reflects a degree of economic resilience to the coronavirus pandemic owing to a long track record of fiscal prudence, large foreign reserve assets and the prospects of very substantial EU transfers over the forecast period,” Fitch said. 

It also noted pointed to the inclusion of the Bulgarian lev in the Exchange Rate Mechanism (ERM II) July 2020 as an important milestone for Bulgaria. The gradual process towards euro membership will help anchor macro and fiscal stability despite downside risks to growth and rising political uncertainty, according to the rating agency. 

Moving forward, it said, “the focus will now turn to meeting the convergence criteria for joining the euro area, as well as non-quantitative commitments specific for Bulgaria, including improving the anti-money laundering framework”.

Fitch considers euro adoption is net positive for the sovereign's creditworthiness, though it is not clear when Bulgaria will meet all the membership criteria. 

Fitch’s forecast is for a 5.7% GDP contraction in Bulgaria in 2020, followed by positive growth of 4.4% in 2021, and a more modest 3.2% in 2022. “The improving outlook is largely premised on a recovery in external demand (trade openness stood at around 124%% of GDP in 2019) and limited hysteresis on the labour market, thanks in part to the authorities' support measures,” according to the rating agency. 

With regard to the ongoing mass protests, Fitch notes that the policy outlook has clouded as the government has come under pressure following a number of protests. 

Fitch believes it is “highly uncertain” whether the Grand National Assembly and constitutional amendments announced by the government will take place. 

Looking ahead to the next general election, which must take place by March 2021, Fitch writes: “Weak support for traditional parties (including GERB) and the emergence of populist figures is likely to fragment the vote at the next elections, complicating coalition building at a time when the authorities need to tackle the social and economic fallout from the pandemic.” On the other hand, the rating agency believes there are few risks to economic policy continuity, including euro adoption.