S&P cuts Bulgaria's rating outlook to stable: what the twin deficits mean for investors and companies

What happened

On 13 November S&P Global Ratings revised the outlook on Bulgaria's long-term sovereign credit rating to stable from positive and affirmed the long- and short-term ratings at BBB+/A-2. In its report the agency said the change reflected weaker budgetary and external indicators "amid signs of an overheating economy". The Ministry of Finance said the revision reflected weakening fiscal and external sector indicators, BTA reported. Fitch Ratings, by contrast, moved its outlook on Bulgaria's BBB+ rating to positive at the end of September, according to the ministry.

The figures and background

The fiscal numbers are the core of the decision. S&P now estimates the general government deficit at 5.1% of GDP in 2026, which it describes as the largest in at least 12 years, and expects only a gradual decline to 3.0% by 2029. Eurostat data confirm the trend: Bulgaria's deficit was 2.9% of GDP in 2022, 2.0% in 2023, 3.0% in 2024 and 4.0% in 2025. S&P attributes the deterioration to public sector wage increases, with average public pay up 12.6% in 2025, similar increases in pensions and higher military spending.

The external account has turned just as sharply. S&P forecasts a current account deficit of 8.7% of GDP in 2026, the highest in 18 years, and an average of 7.0% in 2027-2029, compared with small surpluses between 2013 and 2021. It points to weak exports, with tourist arrivals down 0.4% in the nine months to September, and to strong imports linked to investment and higher energy costs.

The latest growth data show the same mix. The National Statistical Institute's flash estimate put third-quarter GDP growth at 0.6% on the quarter and 2.5% on the year, The Sofia Globe reported. Consumption was 6.3% higher than a year earlier, while gross fixed capital formation fell by 0.5% and exports dropped by 5.5%. According to Eurostat, annual growth has eased from 2.9% in the fourth quarter of 2025 and the first quarter of 2026 to 2.6% in the second quarter and 2.5% in the third.

S&P also lists signs of overheating: private sector wage growth of 11.7% in the first half of 2026, household credit growth of 21% and house price growth of 15.5% in the year to June. It cites a BNB analysis that points to a modest housing overvaluation of about 10%, and notes that gross non-performing loans were low at 2.7% of loans at the end of June.

How Bulgaria compares

Bulgaria still starts from a strong balance sheet. Eurostat data show government debt of 29.9% of GDP at the end of 2025, the fourth-lowest ratio in the EU after Estonia, Luxembourg and Denmark, against 81.5% for the EU and 87.7% for the euro area. Among neighbours, debt stood at 55.7% in Croatia, 58.9% in Romania and 145.4% in Greece.

The deficit picture is less favourable. Bulgaria's 2025 deficit of 4.0% was above the euro area (3.0%) and the EU (3.1%) and the 3.0% recorded by Croatia, while Greece ran a surplus of 2.0%. Romania's deficit, at 7.8%, was the highest in the EU. Eurostat also expressed a reservation on Bulgaria's 2025 data because of the recording of some Road Infrastructure Agency operations, which Bulgaria currently counts as adding 0.6% of GDP to the deficit.

On growth, Bulgaria's 2.5% annual rate in the third quarter was well above the euro area (1.3%) and the EU (1.5%), and above Hungary (1.5%) and Romania (0.3%), although below Poland (3.6%), Eurostat data show.

What it means for investors and companies

The rating itself has not changed, so the immediate effect on borrowing costs and on investors that use ratings in their mandates is limited. The change is in direction. A positive outlook signalled a possible upgrade; a stable one removes that prospect for now, and S&P has set out what could lead to a downgrade: stalled consolidation, for example because of difficulties containing spending "amid ongoing resistance to permanent tax increases", or a sudden and disorderly unwinding of private credit growth. An upgrade would require the current account deficit to move to a lower level on a sustainable basis.

Government financing is the most direct channel. S&P expects net debt to rise from 25% of GDP in 2026 to 30% by 2029, while interest costs stay low at about 3.6% of revenue. Non-residents held 49.1% of government debt at the end of June, up from 36.6% in 2022, which makes investor perception more important than in the past; S&P considers the risk of sudden outflows mitigated by euro area membership.

For companies, the budget response matters as much as the rating. The draft 2027 budget targets a deficit of 3.5% of GDP and relies partly on a one-off tax on excess profits, which the government estimates will yield €800 million, or 0.6% of GDP, in 2027; S&P calls the consolidation measures achievable but "somewhat lower quality". Banks, retailers and other sectors covered by the tax, discussed in our earlier analysis, are therefore directly exposed to how the government closes the gap. S&P also expects investment to fall in 2027 as Recovery and Resilience Facility funding ends, which affects construction and infrastructure suppliers.

Wage growth is the other pressure. S&P notes that Bulgaria's hourly labour costs are about one third of the EU average but that wages have outpaced productivity, giving one of the fastest increases in unit labour costs. For exporters this narrows a cost advantage; for consumer-facing businesses strong pay growth continues to support demand.

What to watch next

The political debate has already started. Democratic Bulgaria called for the 2027 draft budget to be rewritten with a deficit below 3% of GDP and argued that one-off revenues should not finance permanent spending, BTA reported. The main test is the final shape of the 2027 budget in parliament. The next data points are the NSI's preliminary third-quarter GDP figures on 4 December and Eurostat's regular GDP estimates on 7 December, which will show whether growth is shifting from consumption towards exports. Monthly current account data from the BNB will show whether the external deficit S&P forecasts is materialising.