Bulgaria: Breaking the Political Deadlock, Reforms Vital for Credit Outlook

The newly created anti-graft group ‘We Continue the Change’ (PP) is in the lead as final ballots are counted. The party’s victory could end the political deadlock after two rounds of inconclusive elections earlier this year. The election result reflects discontent with former Prime Minister Boyko Borisov’s GERB.

The challenge for Bulgarian lawmakers, in a government which looks likely to be led by PP, will be leading the country out of current dual political and pandemic crises.

The main task is forming a government with a clear mandate to enhance governance, strengthen the rule of law, tackle corruption and meet common EU objectives such as addressing environmental risk, improving digitisation and raising infrastructure investment. Ending Bulgaria’s political deadlock could also support achievement of a 1 January 2024 euro accession date if a new government is more committed to reform and improves longer-run economic planning.

The road to reinstituting confidence in Bulgaria’s public institutions

Curtailing political turbulence and rebuilding popular confidence in government will not be straightforward even assuming Borisov exits the political centre stage, given his domination of politics over more than a decade and the resistance of some political institutions to change. Recent political instability in Bulgaria serves as warning to other European countries about consequences of prolonged periods of one-man rule.

Critical factors to watch now are the longevity of any government that forms after these elections and its capacity to meet requirements of the EU’s Exchange Rate Mechanism II whilst, at the same time, easing prevailing social unrest sparked by the alleged corruption of the previous government.

The importance of moving on from the Borisov era after these elections and safeguarding rule of law are all the more relevant given Bulgaria’s reliance upon EU funding.

Toughened EU stance on the rule of law has been gamechanger within the region

The introduction of ‘rule of law conditionality’ in EU development funding has been a gamechanger, leading to the suspension of payments to member states where violations of the rule of law “affect or seriously risk affecting” management of European Union funding. The European Commission has postponed the approval of Hungary’s and Poland’s national recovery programmes.

Bulgaria’s recovery plan architected by the ex-Prime Minister was revised and approved by a caretaker government after significant delay, with lack of a permanent Bulgarian government to this stage holding back EU financing. Bulgaria submitted a Recovery and Resilience Plan requesting EUR 6.6bn in grant monies (10.8% of 2020 GDP) to Brussels in October, but this was several months after submissions of other central and eastern Europe (CEE) EU member states.

Comparatively moderate absorption of EU financing an economic challenge

Bulgaria’s absorption rate of EU financing remains among the lowest of CEE at 60% over a 2014-20 EU budgetary period. Developing the institutional capacity needed for more efficient spending of EU funding is vital to boosting Bulgaria’s growth potential to more than a current 2.75% a year. A next government has other important challenges to confront as well, not least the Covid-19 public health crisis.

Such challenges elevate pressure upon political leaders to seek consensus after the opportunity presented by these elections and negotiate a working government. Political stability will be decisive for both the country’s sovereign rating outlook (for which the rating agency I represent evaluates Bulgaria with a BBB+ investment-grade rating) and sustained economic recovery out of this crisis.

For a look at all of today’s economic events, check out our economic calendar.

Levon Kameryan is Senior Analyst in Sovereign and Public Sector ratings at Scope Ratings GmbH and the new lead sovereign analyst for Bulgaria.