Formation of stable government critical for Bulgaria's credit outlook - Scope Ratings

Formation of stable government critical for Bulgaria's credit outlook - Scope Ratings

The formation of a stable and reform-driven Bulgarian government is unclear despite its critical importance for the country's credit outlook, Berlin-based Scope Ratings said on Wednesday.

"After Bulgaria’s repeat elections in July, it remains unclear if anti-corruption parties can coalesce to form a stable government even though one remains vital for addressing institutional weaknesses and ensuring sustained economic recovery," Scope said in an article on the current government formation process in Bulgaria.

“Bulgaria’s historical political instability has been a credit ratings constraint – restricting the continuity of reform and limiting longer-term economic planning – and contributed to populist government spending, weighing down on an otherwise strong sovereign balance sheet,” Dennis Shen, analyst at Scope, said. He added that the critical factors to watch here are the longevity of the next government and its capacity for reform within the requirements of Exchange Rate Mechanism II while easing social unrest related to alleged corruption of the previous government

The credit rating agency also pointed to a long list of long-standing challenges standing before a new Bulgarian government - from accelerating a behind-the-curve vaccination programme to instituting reforms of the judiciary and public prosecutor’s office to reinforcing the rule of law, while ensuring steps are taken towards euro area membership by a current target date of January 1, 2024.

“The caretaker government in place since April elections has gotten the ball rolling with enhancements of public- sector transparency, but the formation of a permanent government in Bulgaria is crucial to clarifying the outlook for reform in these uncertain times,” Shen said.

Populist political formation There Is Such a People (TISP) received the largest number of votes in Bulgaria's snap general election last month but failed to win outright majority. TISP designated business person Plamen Nikolov for prime minister last week and invited pro-reform Democratic Bulgaria (DB) coalition, the Bulgarian Socialist Party (BSP) and Rise Up, Thugs Out! political formation renamed to Rise Up.BG, We're Coming after the vote, for consultations on a minority government list that it intends to propose to parliament. The four groups control 148 seats in parliament among themselves.

TISP faces testy final negotiations to solidify the support of DB and Stand Up.BG for a possible government and would need the additional backing of a mainstream group such as the BSP to pass a confidence vote in parliament, Shen said.

“Should such efforts fail, the outcome could be a third round of elections this year, coinciding with the presidential polls of the autumn, but extending Bulgaria’s current political uncertainty and impediments to reform.”

Bulgaria's new government needs to increase the percentage of Bulgarians vaccinated against Covid-19, which, at only 15% of the population, is the lowest of the EU, and has some 6 billion euro of EU Recovery Fund monies to deploy, Scope said.

“Five priorities identified by TISP’s Prime Minister-designate Plamen Nikolov aim in the right direction, such as alleviating institutional shortcomings and reforming the healthcare, pension and electoral systems," Shen said, noting that the fragmented parliament that was formed as a result of July 11 election will likely constrain a TISP-led government’s room for manoeuvre, especially should talks produce a minority government.

Scope affirmed Bulgaria’s BBB+/Stable investment-grade credit ratings on June 18, with the next review scheduled for December 3, 2021.

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