Wasted Time: Bulgaria's Political Struggles and Missed Opportunities
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Country strategy: Wasted time
It took five rounds of inconclusive snap elections in just over two years to end up with the political scene looking pretty much the same as it did at the start. During this time, Bulgaria missed the opportunity to join the Eurozone and Schengen area from 2024 and has lost precious time in absorbing EU funds from the Recovery and Resilience Facility.
Even the usually praised prudent fiscal stance is coming under question as the interim governments had limited capacity to steer spending. Following the latest elections in April 2023, a grand coalition between GERB and Continuing the Change is shaping up. While common ground seems to have been found in the overall pro-EU policy direction, some details of the agreement (eg, prime minister rotation every nine months) are making the coalition a fragile one. Nevertheless, this is as good as it gets for now.
Forecast summary
Decoupling from politics only lasts so long
One year of real negative wage growth and two years of political uncertainty have dampened consumer morale. This has led to a slowdown in private consumption as revealed by the retail sales numbers that show three consecutive months of contraction (February-April 2023), a first since 2009. We believe this could be a bottom for consumption as the strong wage advances (which we estimate at 15.0% for 2023) should prop-up consumer spending.
A stable government will also give a boost to EU-funded investments, though it might be too late to reap the benefits in 2023. We expect a fairly anaemic 1.7% GDP growth in 2023, followed by an acceleration to 3.1% in 2024 should political stability prevail.
Real GDP (%YoY) and contributions (ppt)
Moving lower but not low enough
With past energy prices out of the statistical base and current prices on a downturn, inflation started to ease considerably over the past couple of months. We estimate that HICP inflation will average 9.2% in 2023, from 13.0% in 2022. In 2024, HICP inflation could average around 4.5% which would mean that Bulgaria will not be even close to meeting the price stability criterion for Eurozone entry.
We currently estimate the average for the three best performing EU member states to be below 2.0% in 2024. Given the significant real convergence that Bulgaria still needs to deliver (which could come with some associated inflationary pressures), it will take quite an indulgence by the EU to overlook the price stability criterion.
Inflation (%YoY) and main components (ppt)
BGARIA credit: Some hope for political stability
While it remains uncertain how successful a grand coalition will be in implementing structural reforms and how stable such a government may be, the recent agreement offers some hope for an end to the political uncertainty that has plagued Bulgaria and therefore a reduction in the political risk premium. In the longer term, signs of concrete progress towards Eurozone accession will be key.
Bulgaria is one of the weaker performers YTD among CEE EUR sovereigns and underlying fundamentals are very strong (current account near balance, low government debt and strong FX reserve position).
BGARIA credit spreads vs BBB EUR sovereigns (bp)
