Political instability is hindering Bulgaria’s progress toward joining the Eurozone, according to an analysis by the rating agency Scope Ratings. The Berlin-based agency has maintained Bulgaria’s credit rating at BBB+ with a positive outlook in both local and foreign currency.
Scope Ratings, an EU and European Central Bank (ECB) recognized external credit rating agency, first assigned Bulgaria a BBB+ rating in 2021. The latest analysis highlights that while solid economic growth and public finances are bolstering the positive outlook, challenges in governance, susceptibility to economic shocks and adverse demographics are limiting factors.
The agency anticipates that Bulgaria will join the Eurozone and adopt the euro until 2026 at the latest. This is a delay from the original target of January 2024 and the revised target of January 2025, largely attributed to persistent inflationary pressures. According to Scope Ratings, Bulgaria’s average annual inflation was 4.7% in June, exceeding the maximum permissible level by 1.6%. This figure is based on the harmonized European methodology and does not account for extremely low inflation countries excluded by the ECB and European Commission methodologies. The European Commission’s convergence report from June confirms that Bulgaria is not meeting the Eurozone entry criteria by a margin of 1%.
Joining the Eurozone could address several issues related to Bulgaria’s rating, including mitigating currency risk, enhancing monetary policy flexibility, and improving access to financial markets. It would also provide Bulgarian banks with access to ECB credit facilities and the European Stability Mechanism, thus reinforcing the country’s financial stability.
However, political instability has negatively impacted Bulgaria’s Eurozone accession process. Scope Ratings points out that frequent changes in government and prolonged periods of caretaker administrations have disrupted policy implementation. This instability affects convergence with Eurozone standards, including necessary reforms in the business environment, rule of law and anti-corruption measures, as reflected in the World Bank’s governance indicators.
Furthermore, political instability has delayed the implementation of Bulgaria’s Recovery and Resilience Plan. Unfavorable demographics, such as a declining working-age population and an aging society, also pressure public finances. The working-age population is expected to decrease by 0.9% annually over the next five years, which hampers Bulgaria’s potential growth, estimated at around 2.75% per year.
Despite being relatively stable compared to Eurozone peers, Bulgaria must improve productivity to accelerate its convergence with European and Eurozone income levels. Additionally, the aging population has led to increased government transfers to cover pension system deficits, which grew by 2.3% of GDP from 2019 to 2023 due to pandemic-related pension increases, contributing to larger budget deficits with anticipated further increases. (Novinite)