Political Instability Delays Bulgaria's Eurozone Entry, Says Rating Agency

Political instability is hindering Bulgaria's progress toward joining the Eurozone, according to an analysis by the rating agency Scope Ratings. The Berlin-based agency has maintained Bulgaria's credit rating at BBB+ with a positive outlook in both local and foreign currency.

Scope Ratings, an EU and European Central Bank (ECB) recognized external credit rating agency, first assigned Bulgaria a BBB+ rating in 2021. The latest analysis highlights that while solid economic growth and public finances are bolstering the positive outlook, challenges in governance, susceptibility to economic shocks, and adverse demographics are limiting factors.

The agency anticipates that Bulgaria will join the Eurozone and adopt the euro by 2026 at the latest. This is a delay from the original target of January 2024 and the revised target of January 2025, largely attributed to persistent inflationary pressures. According to Scope Ratings, Bulgaria's average annual inflation was 4.7% in June, exceeding the maximum permissible level by 1.6 percentage points. This figure is based on the harmonized European methodology and does not account for extremely low inflation countries excluded by the ECB and European Commission methodologies. The European Commission's convergence report from June confirms that Bulgaria is not meeting the Eurozone entry criteria by a margin of 1 percentage point.

Joining the Eurozone could address several issues related to Bulgaria's rating, including mitigating currency risk, enhancing monetary policy flexibility, and improving access to financial markets. It would also provide Bulgarian banks with access to ECB credit facilities and the European Stability Mechanism, thus reinforcing the country's financial stability.

However,...