The failure to form a government after April’s Bulgarian election raises the possibility of prolonged political uncertainty, Fitch Ratings says, but this is unlikely to result in significant changes to key economic policies. Commitment to prudent fiscal and macro policies, and euro accession is broad-based and long-standing, and none of the anti-establishment parties that made gains are seeking to change relations with the EU.
Public dissatisfaction with the country’s established political parties, fuelled by corruption scandals at various levels of government that led to a series of protests in recent years, was reflected in parliamentary elections held on 4 April. The centre-right Citizens for European Development of Bulgaria (GERB), the leading party in the incumbent coalition government, won the largest share of the vote but this fell to 26.2% from 32.7% in 2017. At 15%, the centre-left Bulgarian Socialist Party’s (BSP) share of the vote almost halved.
Anti-establishment parties increased their representation, notably There Is Such a People (TISP), formed by TV anchor Slavi Trifonov last year, which is now the second-largest parliamentary party after winning 18% of the vote. The three-party centrist Democratic Bulgaria alliance received 9.5% of the vote.
The more fragmented National Assembly increased the challenge of assembling a government, with GERB failing to build a coalition even after its leader Boyko Borissov said he would not remain as Prime Minister. TISP was unwilling to work with GERB or to govern with BSP support. Following three failed attempts to form a government, Bulgaria will now face fresh elections, most likely in early July, but opinion polls suggest these would not greatly improve prospects for the formation of a government. A multi-party coalition could prove unstable, as they have in the past.
Fitch noted the potential for uncertainty following April’s elections when we last reviewed Bulgaria’s sovereign rating on 19 February. The Positive Outlook we assigned to the ‘BBB’ rating reflected the dissipation of macroeconomic risks from Covid-19 and continued gradual progress towards eurozone membership (planned for 2024). We still see little risk of abrupt changes to the macro-economic policy settings that underpinned the Outlook revision.
All parties, including those that are anti-establishment, see significant benefits to investment and growth from upcoming EU funding programmes. Cross-party consensus on euro adoption is similarly broad, as is commitment to fiscal prudence and the currency board framework.
Indeed, questions around the rule of law, institutional quality and corruption have become central to domestic politics, which could help accelerate reforms in these areas, which lagged under the outgoing government. Bulgaria’s governance indicators are in line with ‘BBB’ category peers but are the weakest in the EU.
However, when new elections are called, an interim government will take power, with limited executive prerogatives and no ability to pass legislation in parliament. Protracted political stasis could delay reforms, including those linked the Next Generation EU (NGEU) Covid-19 recovery fund, of which Bulgaria is set to be a major beneficiary. The extent of conditionality around NGEU disbursements remains unclear, but is increasingly in focus as recipients submit their Recovery and Resilience Plans (RRPs) to the European Commission.
Fitch believes EU funds, including transfers under the next 2021-2027 Multi Annual Framework as well as NGEU funds, could lift growth from a projected 3.4% in 2021 to 4%-5% in 2022-2025. In the absence of clarity on Bulgaria’s capacity to absorb and deploy NGEU funds, which may face institutional, administrative and political constraints, we have not yet made an assessment about whether they could improve longer-term growth potential by lifting investment and productivity. Bulgaria’s low growth potential is a sovereign rating weakness.