Morningstar DBRS Assigns BBB (high) Credit Rating to Republic of Bulgaria, Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) assigns Long-Term Foreign and Local Currency -- Issuer Ratings at BBB (high) to the Republic of Bulgaria. At the same time, Morningstar DBRS assigns Short-Term Foreign and Local Currency -- Issuer Ratings at R-1 (low). The trend on all ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
Bulgaria's credit ratings are underpinned by its credible policy framework, membership of the European Union (EU), and the longstanding currency board. The credit ratings assigned also reflect Bulgaria's low government debt levels and its track record of prudent fiscal policy. Bulgaria has been running a currency board since 1997, and the Bulgarian lev has been included in ERM II since July 2020. However, significant structural challenges weigh on the credit profile, including those related to the low level of labour productivity, the declining and ageing population, and the large informal economy. In addition, the small and open nature of the Bulgarian economy renders it vulnerable to external shocks. In recent years, governance and institutional effectiveness have deteriorated, while a series of consecutive elections have further disrupted the implementation of reforms.

In February 2025, the Bulgarian authorities submitted an official request for the preparation of the convergence report to assess the country's readiness to join the euro area. The convergence report will assess whether Bulgaria has met the necessary criteria for joining the euro area, namely price stability, exchange rate stability, sound fiscal finances and convergence of long-term interest rates. If the assessment is positive, Bulgaria is expected to join the euro area in January 2026. Bulgaria has already fulfilled all the formal criteria for euro area accession, with the price criteria being the most challenging. The timing of entry will ultimately depend on the trajectory of inflation both domestically and across the EU. While uncertainty remains, it is likely that Bulgaria will join the euro in January 2026.

The Stable trend reflects Morningstar DBRS' view that risks to Bulgaria's credit ratings are balanced. Following GDP growth of 1.9% in 2023, Bulgaria's economic activity accelerated to 2.8% in 2024, far outpacing the 1.0% growth of EU peers and it should remain around this level in the 2025-2026 period. In its National Medium-Term Fiscal Structural Plan, the government forecasts that the fiscal deficit will come in at 3% of GDP this year, unchanged from 2024, primarily driven by higher expenditure on wages and pensions. Bulgaria's fiscal strategy in the period 2025-2028 aims for a net expenditure growth path consistent with EU recommendations, and with the fiscal deficit not exceeding the 3% of GDP threshold. While Bulgaria's public debt ratio is expected to increase in coming years, the level is still low at 24.1% of GDP in 2024, which provides the government with some fiscal space to respond to potential shocks.

CREDIT RATING DRIVERS
Morningstar DBRS could upgrade Bulgaria's credit ratings if one or a combination of the following occur: (1) there is evidence of successful implementation of measures that improve income and productivity, leading to a material convergence with the EU average; or (2) progress in strengthening governance and institutional capacity and increase in political stability.

Morningstar DBRS could downgrade Bulgaria's credit ratings if one or a combination of the following occur: (1) persistent economic and fiscal weakness that leads to materially higher public debt over time; or (2) the emergence of significant financial imbalances and/or materialization of contingent liabilities from the financial sector or SOEs.

CREDIT RATING RATIONALE

The Economy Has Shown Resilience, But Structural Weaknesses Remain

Bulgaria's economic performance prior to the pandemic has been strong, with real GDP growing at an average annual rate of 2.7% since 2014. The Bulgarian economy grew by 7.8% in 2021 recovering strongly from the pandemic-induced recession of 3.2% in 2020. The recovery was driven by strong private consumption, investment and net export growth. Real GDP growth moderated in 2023 to 1.9% due to weaker domestic and foreign demand, before accelerating to 2.8% in 2024. In 2025 and 2026, the Bulgarian authorities forecast real GDP growth of 2.7% and 2.9% respectively, as investment activity is expected to pick up, supported by the Recovery and Resilience Facility (RRF). Bulgaria's economic outlook is exposed to downside risks such as an escalation of global trade and geopolitical tensions, which could negatively affect its export-oriented industries or lead to a rise in commodity prices and put upward pressures on prices.

The Recovery and Resilience Facility commits EUR 5.7 billion (nearly 6% of 2023 GDP) in grants to Bulgaria over the period 2022-2026. The main objective of the plan is to enhance Bulgaria's economic resilience by improving the business environment, promoting the digital and green transitions and ultimately contributing to GDP convergence with the European average. However, the delays in the implementation of the RRP, related to frequently changing governments since 2021, pose risks to the growth outlook. Thus far, the Bulgarian authorities have received only one payment of the first tranche, while the second payment was withheld due to unsatisfactory implementation of the milestones and targets.

Bulgaria's ratings are constrained by the small size of its economy and low GDP per capita, at 61% of the EU average in PPP in 2024, which combined with the open nature of its economy makes it vulnerable to external shocks. While Bulgaria has become more integrated into global value chains over the past decades, with exports and imports of goods and services increasing from around 80% of GDP in 1998 to 109% in 2024, it continues to trail its EU peers in terms of the extent and depth of integration. Structural challenges that existed prior to the pandemic remain, related to income inequality, regional disparities, a large informal economy, a declining and ageing population and the need for increased productivity growth. These factors could weigh on potential growth if not addressed.

Public Finances Benefit from a Track Record of Fiscal Prudence, But Political Instability Could Hinder Effective Medium-term Fiscal Planning

Bulgaria's public finances benefit from a track record of conservative fiscal policy, but fiscal pressures will increase. Fiscal policies have been prudent prior to the Covid-19 pandemic, with fiscal surpluses averaging 1.5% of GDP in the period 2016-19. However, the fiscal accounts deteriorated due to pandemic related expenditures resulting in a 3.8% of GDP deficit in 2020 and 4.0% in 2021. The deficit improved to 2.0% in 2023 and increased to 3.0% of GDP in 2024, fulfilling euro entry criteria. According to the National Medium-Term Fiscal Structural Plan, Bulgaria's fiscal strategy in the period 2025-2028 aims for a net expenditure growth path consistent with EU recommendations and for the fiscal deficit to not exceed the 3% of GDP threshold. The National Medium-Term Fiscal Structural Plan foresees a 3% deficit in 2025, primarily driven by higher expenditure on wages and pensions. To balance higher expenditures the government plans to raise tax revenues by enhancing tax compliance and tackling tax fraud. Yet, the effectiveness of the measures remains uncertain, given the size of the informal sector and broader economic unpredictability. Morningstar DBRS notes that a protracted loosening of fiscal policy and adverse demographics, compounded by political instability that has hindered effective medium-term fiscal planning add challenges to public finances. In addition, the significant number of State-Owned Enterprises (SOEs) and their poor financial performance could pose risks to public finances, with total contingent liabilities amounting to 9.7% of GDP in 2023. These factors account for Morningstar DBRS' negative qualitative adjustment of the Fiscal Management and Policy building block assessment.

Debt Ratio Is Set to Increase, But Remains One of the Lowest in the EU

Bulgaria's public debt ratio is one of the lowest in the EU standing at 24.1% of GDP in 2024. Prior to the pandemic the debt ratio stood at 20.1% of GDP, reaching 24.4% of GDP and 23.8% in 2020 and 2021 due to the increased financing needs for the COVID related measures. The general government debt-to-GDP ratio is expected to reach 25.8% of GDP in 2025 from 24.1% in 2024. The sizeable fiscal reserves at around 5% of GDP as of February 2025 provide additional buffer. Looking ahead, the Ministry of Finance forecasts a further increase of public debt to around 31% of GDP in 2028. Despite the projected upward trend, debt-to-GDP ratio is expected to remain one of the lowest in the EU and below the maximum reference threshold of 60%. Risks to Bulgaria's debt sustainability are low, with almost all its debt at fixed rates, and long average residual maturity estimated at around 8 years at the end of 2024. Despite the very high share of debt issued in EUR, at 69.7% of total debt at end of 2024, the credible currency board framework mitigates the exchange rate risks.

Banking System is Resilient, Grey List Increases Reputational Risks

Bulgaria's banking system remained resilient throughout 2024, despite the challenges posed by the adverse external macroeconomic environment. The capitalization of the banking system is strong with the CET1 at 21% at the end of 2024, supported by strong profitability. The asset quality of the banking sector in Bulgaria has improved significantly over the last few years, after their peak in the period 2012-2014, when the NPL ratio reached approximately 17%. The NPL ratio stood at 2.5% at the end of 2024. In 2020, Bulgaria joined the European Banking Union, with the ECB now supervising four significant banks, which account for 68.6% of total banking assets. Bulgaria's banks are mostly foreign owned with the market share of EU subsidiaries at around 72% of the total banking sector assets, and the market share of domestic banks at 28% in 2022. Overall, the sector's funding is robust, supported by solid liquidity coverage ratio. The share of residents' deposits is high at 89.5% of total at the end 2024, with the share of lev-denominated deposits at 61.2% and the euro-denominated deposits at 33.3%.

Low interest rates and increasing income resulted in strong lending activity since 2022, especially in the household sector. The house price index has also grown strongly, with prices increasing by around 117.5% since 2015. Morningstar DBRS notes that persistent increases in credit growth could potentially lead to an increase in medium-term credit risks. In February 2025, domestic mortgage loan growth stood at 29.0% on a year-on-year basis, according to the ECB. To reduce potential risks to financial stability, the BNB increased the countercyclical capital buffer requirement (CCyB) from 1.5% to 2.0% in October 2023 and introduced borrower-based measures on residential real estate (RRE) lending in October 2024. In October 2023, the Financial Action Task Force (FATF) added Bulgaria to its list of countries under enhanced monitoring, also referred as FATF's "grey list" due to strategic deficiencies that were identified in Bulgaria's AML regime. The main risks are related to organized crime, corruption, and misuse of EU funds. The jurisdiction will be under increased monitoring while it completes the action plan. To reflect the risks from elevated credit growth and the potential impact of Bulgaria's grey listing on banks' intermediation and economic activity we add a negative qualitative adjustment in the Monetary Policy and Financial Stability building block assessment.

Bulgaria Has Managed to Strengthen its External Position Significantly

After the global financial crisis, Bulgaria managed to strengthen its external position significantly, reflecting enhanced economic resilience. The current account shifted from a large deficit position of 22% of GDP in 2008 to an average current account surplus of 1.6% of GDP in the period 2013-2020. With its participation to the Exchange Rate Mechanism (ERM II) since July 2020, Bulgaria achieved a significant milestone towards its euro area accession. Moreover, Bulgaria's comfortable level of foreign reserves act as a shock absorber and support the credibility of the exchange rate during the current period of participation of the lev in ERM II. Official reserves totaled EUR 42 billion at the end of 2024. Bulgaria's gradual integration to the global and regional supply chains resulted in exports of goods and services increasing from around 40% of GDP in 1998 to 56% in 2024. This compares to 51% for the euro area. Bulgaria also benefits from a diversified export base, including sectors such as chemicals, refined fuels, food, and machinery. Over the years, Bulgaria has also managed to increase the share of higher value-added exports, however, its export basket still lags its EU peers in terms of complexity as measured by the Economic Complexity Index (ECI). The current account balance deteriorated in 2021 and 2022 to a moderated deficit of 1.9% of GDP on average due to the pandemic and rising energy and raw material cost. The main downside risks stem from geopolitical tensions and trade protectionism measures. The imposition of U.S. tariffs is likely to have mainly an indirect impact on Bulgaria, given its small export share to the U.S. The current account surplus has also narrowed the external imbalances from a stock perspective. Bulgaria's net international investment position stood at around -4% of GDP in Q4 2024, significantly improved form its peak in 2009 at -100% of GDP. The main drivers for this include rising foreign reserve assets in Bulgaria`s National Bank (BNB) and the net deposits of commercial banks abroad. Net external liabilities consist mainly of FDI equity, which have been relatively stable since after 2009.

Bulgaria's Credit Ratings are Constrained by its Weak Institutional Framework

Following seven general elections since 2021, in October 2024 snap elections, a coalition government led by the GERB party, with the participation of the Socialist Party (BSP) and the There Is Such a People (ITN) party. Former Speaker of the National Assembly Rosen Zhelyazkov is the new Prime Minister. Main target of the coalition government is to implement all the pending necessary reforms related to the country's euro area accession. The coalition government reduces the risk of political instability and improves the prospects for the implementation of pending reforms, however, concerns about its longevity are high. Morningstar DBRS notes that Bulgaria's unstable political environment and the high polarization in the political system prevent the formation of stable government coalitions. Bulgaria's credit ratings are constrained by its weak institutional framework. The World Bank's governance indicators for Bulgaria are relatively weak and below its EU peers. Institutional quality suffers from increased corruption and a business environment that hinders investment. The Corruption Perceptions Index ranks Bulgaria in 76th position out of 180 countries in 2024. There are reforms under Bulgaria's RRP that aim to improve the institutional framework, introduction of a stronger anti-corruption framework, and reforms to address deficiencies in the judicial system and enhancements in the anti-money laundering framework.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

General Considerations
ESG Considerations had a significant effect on the credit analysis.

Social (S) Factors
The following Social factor had a significant effect on the credit analysis: Human Rights and Human Capital. Bulgaria's GDP per capita estimated at USD 17,589 in 2024 is relatively low compared with its euro system peers. mainly due to low labour productivity and significant territorial disparities. Despite the comparatively lower economic productivity, respect for human rights is high, and access to quality healthcare and other basic services is widespread. Morningstar DBRS has taken this factor into account in the Economic Structure and Performance building block.

Governance (G) Factors
The following Governance factor had a significant effect on the credit analysis: Institutional Strength, Governance, and Transparency. According to the World Bank Worldwide Governance Indicators in 2023, Bulgaria's ranks for Rule of Law (53.8 percentile) and for Government Effectiveness (53.3 percentile) were significantly lower than its EU area peers. The following factor had a relevant effect on the credit analysis: Bribery, Corruption and Political Risks. Bulgaria underperforms the EU average in the `Control of Corruption' indicator (50 percentile rank) and has made limited progress in recent years improving its score in the Corruption Perception Index from 41 in 2012 to 43 in 2024. These factors have been taken into account in the Fiscal Management and Policy and Political Environment building blocks.

Environmental (E) Factors
There were no Environmental factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at (13 August 2024) https://dbrs.morningstar.com/research/437781.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments. https://www.dbrsmorningstar.com/research/453122.

Morningstar DBRS notes that the above press release was amended on 5 May 2025 to include the disclosure on a newly rated issuer.

Morningstar DBRS notes that this Press Release was amended on 19 May 2025 to update the title of the ESG methodology.

Notes:
All figures are in BGN unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments (15 July 2024) https://dbrs.morningstar.com/research/436000. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for this credit rating include the Ministry of Finance (2025 Draft Budget; National Medium Term Fiscal Structural Plan 2025-2028, Investor Presentation August 2024), Bulgarian National Bank (Annual Report 2023, Banks in Bulgaria October - December 2024, Economic Review 4/24), Republic of Bulgaria-National Statistical Institute, European Commission (Autumn 2024 Economic Forecast; 2024 Country Report - Bulgaria), European Central Bank, European Banking Authority, Eurostat, Bank of International Settlements, Organisation for Economic Co-operation and Development, IMF (WEO and IFS), World Bank, the Social Progress Imperative (2024 Social Progress Index), The Atlas of Economic Complexity (Country and Product Complexity Ranking (ECI)), and Macrobond. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

This credit rating concerns a newly rated issuer. This is the first Morningstar DBRS credit rating on this issuer.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/453121.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Yesenn El-Radhi, Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Global Sovereign Ratings
Initial Rating Date: 2 May 2025
Last Rating Date: Not applicable

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