S&P Global Ratings reaffirmed its long-term and short-term sovereign credit ratings in foreign and local currencies on Bulgaria at ‘BBB/A-2’, and maintained a stable outlook, saying it believed the “external balance sheets Bulgaria’s strong public and public sector will help mitigate” the economic shocks caused by Russia’s invasion of Ukraine.
The rating agency said it expected a “stagflationary shock” to Bulgaria and lowered its real gross domestic product growth estimate for 2022 to 1.6% from 4.3%, and also said doubled its public deficit forecast to 5% of GDP.
“We expect the Bulgarian economy to be affected by the conflict in Ukraine due to high inflation reducing disposable income; decline in domestic business and consumer confidence; and secondary effects via a decline in economic activity of its main trading partners within the EU,” S&P Global said.
On the issue of Russia’s decision to cut gas supply to Bulgaria, the rating agency said it believed the situation was manageable due to continued efforts to diversify supply and reserves remaining gases, which were “weak but still sufficient”.
Imports of liquefied natural gas (LNG), existing alternative suppliers such as Azerbaijan and interconnection with a new LNG terminal in northern Greece will enable the country to achieve sufficient gas supply, including through through joint purchases with other EU member states in the future, S&P says Global.
Apart from gas supplies, the other reason why the war would have a “significant” impact on the Bulgarian economy was the fact that the country has a higher direct trade exposure to Russia and Ukraine than many others. central and eastern European countries.
In the medium term, however, investments using EU funds, both under the EU’s multiannual budget and the NextGenerationEU recovery plan, are expected to boost economic growth.
NextGenerationEU funds alone will increase Bulgaria’s GDP by 2.5-6% by 2026, S&P Global said.
Regarding Bulgaria’s adoption of the euro, the rating agency said that “the political environment is unlikely to hinder progress towards eurozone membership”, with the current government maintaining the objective from January 2024.
This date has been hotly debated. debate in recent weeks within the country’s ruling coalition, but S&P Global said “the most critical factor [for Bulgaria’s euro adoption] will be the political will of the current Member States of the euro area to accept new members.
“Some EU institutions might continue to stress the need for structural reforms linked to specific shortcomings regarding the rule of law in Bulgaria, especially since such assessments may be linked to the transfer of EU funds” , the rating agency said.
“However, we do not expect such obstacles in the next few years, given Bulgaria’s record of adhering to EU recommendations in the past and its non-controversial relationship with the EC.”
Going forward, S&P Global said it may upgrade Bulgaria’s credit rating “in the context of future eurozone membership.” A significant improvement in current account balances could also put upward pressure on ratings.
On the other hand, the ratings could be lowered if the impact on Bulgaria of the war in Ukraine were to lead to a “significant reduction in medium-term growth rates, for example if Bulgaria’s efforts to diversify its energy imports into outside of Russia were failing”. as such a scenario could increase fiscal deficits and debt levels beyond S&P Global’s current expectations.
(Photo: Haydn Blackey/flickr.com)
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