Fitch says Bulgarian politics may not hit strong public finances

Global rating agency Fitch says recent political developments in Bulgaria that have resulted in early elections being called need not threaten the sovereign's public finances, which are likely to remain a ratings strength.

Political risk has increased with the resignation of former Prime Minister Boyko Borissov's government. This follows protests about corruption, high energy prices, and low living standards that have been characterised by some reports as "anti-austerity".

There has been a broad political commitment to fiscal prudence in recent years. Spending controls allowed Bulgaria to exit the EU's excessive deficit procedures in June 2012. Elections had been due in July 2013 and a political consensus on adhering to European Union guidance on the fiscal framework was one of the assumptions underpinning our affirmation of Bulgaria's 'BBB'/Stable rating last summer.

This assumption still holds. The early departure of the Borissov government has increased political uncertainty. The final outcome of the May election could depend on subsequent coalition talks involving smaller parties. But there is no new, explicitly anti-consolidation, political grouping or movement.

Since our affirmation, Bulgaria has introduced a public finance law that incorporates the fiscal compact's structural budget balance rule. Bulgaria's currency board arrangement constrains fiscal policy and ensures there is a significant fiscal reserve. The political commitment to maintaining the regime is broad-based and strong. It is rooted in memories of the 19961997 financial crisis, when inflation rocketed and the lev collapsed, and the acceptance across the mainstream political spectrum that the currency board system helped stabilize the economy. The healthy state of Bulgaria's public finances before the financial crisis, its low public debt, the success of its recent consolidation efforts (according to the Ministry of Finance the general government budget deficit was just 0.5% in 2012 in cash terms), even in the face of weak domestic demand, gives the sovereign some fiscal space to accommodate spending to alleviate social pressures.