The aging population, emigration and indebtedness remain challenging
The international rating agencies Fitch and Standard & Poor’s have raised their ratings on the prospect of the Bulgarian economy from stable to positive. This is clear from the announcements on the website of the Ministry of Finance, where both reports of the agencies can be found. The higher expectations of the country reflect the improved fiscal and external indicators, such as the lower level of external debt and an increase in exports in the year. However, there remain challenges for the economy in terms of demographic trends and indebtedness.
However, there are no revisions in Bulgaria’s credit rating by the two agencies, Fitch retaining is BBB (investment level) and S & P – BB + (under-investment). But improvement in perspective means that it is likely (at least 33%) to improve the credit rating next year, according to S & P.
S & P expects further improvement
Standard & Poor’s expects fiscal and external indicators to continue improving in 2017, as well as the government’s efforts to reduce the significant level of non-performing loans in the financial sector. The agency predicts a stable political environment, but underlines the frequent need for pre-term elections in recent years. Positive is the increase in income and consumption as a result of labor market trends, and the expectations are that investments will also move this year with the beginning of the new programming period for European projects.
The credit rating of the country remains unchanged mainly due to the relatively low levels of income of the population. Another factor, however, is the limited ability of the government and the BNB to pursue a monetary policy on the one hand, due to the euro-denominated national currency and on the other hand the high level of foreign currency loans. The poor judicial institutions and demographic challenges of the country in terms of an aging population and the emigration of skilled workers further pull downward the trend.
An increase in the country’s rating over the next 12 months is possible if the economic growth stays stable and the decline in non-performing loans in the banking sector continues. An additional positive factor would be permission for entry into ERM II by the European Central Bank (ECB), which is the first step towards adopting the euro, although such a decision could take several years.
Higher growth – higher rating
For its part, Fitch highlights as positive the long period of decline in the country’s indebtedness, the growth of exports and the improved competitiveness. These factors, combined with the rise in fiscal reserves, lead to better external indicators of the country than other countries in the same group.
Fitch Ratings may further raise Bulgaria’s rating, provided the country registers higher GDP growth this year, fiscal stability and higher incomes of the population. On the other hand, the challenges the country is facing are higher than the planned budget deficits, which would increase the indebtedness and conditional liabilities of the country through state-owned enterprises.