For foreign investors

03Feb2023
Paris, February 03, 2023 — Moody’s Investors Service (“Moody’s”) has today afrmed the
Government of Bulgaria’s long-term issuer and senior unsecured ratings at Baa1, while also
afrming the Senior Unsecured MTN programme rating at (P)Baa1. The outlook remains stable.
The afrmation of Bulgaria’s Baa1 ratings balances the following key rating drivers:
1) Moody’s expectation that the European energy crisis will not materially weaken Bulgaria’s
economic and fscal strength
2) The support to Bulgaria’s credit profle stemming from the prospect of euro adoption, despite
the risk of delays to adoption beyond 2024.
3) Risks to government effectiveness and progress on key policy priorities stemming from
Bulgaria’s protracted domestic political deadlock.
The stable outlook refects Moody’s expectation that Bulgaria’s key credit metrics for economic
and fscal strength are unlikely to signifcantly change over the coming 12 to 18 months. It also
refects the balance of risks between the potential negative effects on the credit profle
stemming from the country’s political deadlock, and the potential positive effects from eventual
adoption of the euro.
Bulgaria’s local currency (LC) and foreign currency (FC) ceilings remain unchanged at Aa2. The
fve notch-gap between the LC ceiling at Aa2 and the sovereign rating at Baa1 refects strong
policy predictability and reliability of institutions as well as moderate political risk and external
imbalances. The FC ceiling, at the same level as the LC ceiling, refects strong policy
effectiveness with a longstanding currency board, under which the Bulgarian lev is fxed to the
euro. Both ceilings beneft from euro accession plans, which have supported institutional
development and minimize transfer and convertibility risk. Bulgaria is not yet a euro area
member but has entered the fnal stages prior to full adoption of the euro. For euro area
countries, a six-notch gap between the LC ceiling and the sovereign rating as well as a zero-notch
gap between the local and foreign currency ceiling is typical.
RATINGS RATIONALE
RATIONALE FOR AFFIRMING THE Baa1 RATINGS
FIRST DRIVER: MOODY’S EXPECTATION THAT THE EUROPEAN ENERGY CRISIS WILL NOT
MATERIALLY WEAKEN BULGARIA’S ECONOMIC AND FISCAL STRENGTH
The European energy crisis and the broader economic fallout from the Russian invasion of
Ukraine represents a signifcant economic shock to Bulgaria and its main European trading
partners. However, despite rising producer and consumer prices and a broader European
economic downturn, the available data until November 2022 point to both industrial production
and private consumption in Bulgaria being relatively resilient to these shocks. Moody’s estimates
that the Bulgarian economy grew by 2.7% of GDP in 2022. While the rate of growth is expected to
slow to 1.4% of GDP in 2023, Moody’s expects that this will be among the more robust growth
rates among European sovereigns this year, and that growth will pick up to 2.9% in 2024, broadly
in line with Bulgaria’s pre-pandemic average growth rate
Bulgaria’s status as a net exporter of electricity generated from nuclear, lignite and hydropower,
and the strong performance of the energy sector is one important factor behind the relative
strength of industrial production and the overall economy over the past year. The windfall gains
of state-owned energy utilities from exporting electricity at elevated market prices have also
helped fund one of the most generous energy price subsidy schemes for non-household
consumers in Europe, which has also supported the broader resilience of Bulgaria’s industry and
manufacturing sector in the current crisis. The government’s ability to provide such support to
industry without weakening its fscal strength is an important factor why Moody’s does not
expect that the energy crisis will cause signifcant lasting economic scarring on the Bulgarian
economy. Moody’s also expects that strong nominal wage growth will continue to support
private purchasing power and consumption in 2023, even though infation will be high but
declining towards 6.0% by the end of 2023, from 14.3% at the end of 2022.
Bulgaria’s principal credit strength remains its very low level of government debt, which Moody’s
estimates stood at 23.1% of GDP at the end of 2022. This is signifcantly below the median of its
Baa1-rated peers of 52.3% of GDP and also the second-lowest government debt burden of any
EU member state. Despite the successive shocks of the coronavirus pandemic and the European
energy crisis, Moody’s estimates that Bulgaria’s government debt burden was only about three
percentage points of GDP higher at the end of 2022 than at end-2019, prior to the outbreak of the
coronavirus pandemic. The debt burden of its Baa1-rated peers increased by 18.6 percentage
points of GDP over the corresponding period.
Moody’s estimates that Bulgaria’s headline government defcit reached 3.0% of GDP in 2022,
down from a pandemic high of 3.9% in 2021. Fiscal forecasts are made more uncertain by the
fact that parliament, due to the absence of a regular government, has not yet adopted a budget
for 2023. However, Bulgaria’s caretaker government currently operates under a prolongation of
the 2022 budget, which, together with the need for Bulgaria to hold its defcit below 3% of GDP to
meet the euro area convergence criteria, leads Moody’s to expect that the headline defcit will
remain broadly stable around 3% of GDP also in 2023 and 2024. Coupled with a high but slowing
rate of nominal GDP growth, Moody’s expects this will lead to a slight increase of Bulgaria’s debt
burden to 23.8% and 24.7% of GDP at the end of 2023 and 2024 respectively, keeping Bulgaria’s
overall fscal strength broadly intact.