Moody’s credit ratings agency has raised its long-term foreign and local currency sovereign credit ratings on Bulgaria to ‘Baa1’, changing the outlook to stable from positive.
The ratings upgrade was the result of “enhanced institutional capacity and policymaking as the country enters a critical phase of euro area accession”, Moody’s said. It also reflected “reduced exposure to foreign currency debt risk, large fiscal reserves and expectations that positive fiscal and debt dynamics post pandemic shock will preserve the government’s strong balance sheet.”
Bulgaria joined the Exchange Rate Mechanism (ERM2) in July after completing commitments in several policy areas, which was proof of “the credibility of Bulgaria’s ambition to join the euro area,” the credit agency said.
Going forward, Moody’s said it expected Bulgaria to continue to pursue “sound economic and financial policies, as entering the euro area will require both sustainable economic convergence and readiness to participate in the banking union.”
Despite the negative impact of the Covid-19 pandemic, Bulgaria’s fiscal credit profile remained strong after four years of growing structural fiscal surpluses, which resulted in the second-lowest debt-to-GDP ration in the EU, at 20.4 per cent, Moody’s said.
The credit ratings agency estimated Bulgaria’s economy shrinking by 3.5 per cent this year and bouncing back 2.7 per cent in 2021. Although it forecast government debt to grow to 23.9 per cent of GDP this year and 24.2 per cent of GDP in 2021, debt affordability would remain strong, Moody’s said.
The stable outlook balanced Bulgaria’s improving economic and institutional framework against the negative impact of adverse demographics, as well as “continued reform needs in the fight against corruption, judicial independence and the rule of law.” The stable outlook also assumed that Bulgaria’s next government will remain committed to joining the euro area.
Fundamental improvements in the quality of executive institutions and the judiciary, or “a clear and sustained convergence path towards better infrastructure and overall higher living and institutional standards” could lead to an outlook improvement or even credit upgrade, Moody’s said. Conversely, a deterioration in those areas could put downward pressure on the rating.
This is the highest credit rating Moody’s has ever assigned to Bulgaria and one step above the current BBB ratings by S&P Global and Fitch, which are equivalent to Moody’s Baa2 rating.