Bulgaria has been a strong performer among emerging economies, though periods of economic overheating have caused concern at times. Average annual real GDP growth was +3.7% over the past 20 years, well above the respective average of the Central and Eastern European EU member states. The global Covid-19 crisis affected the Bulgarian economy markedly in 2020 (-3.7% contraction), but it rebounded strongly with a +5.7% output increase in 2021. However, Bulgaria’s economic prospects have significantly deteriorated since the war in Ukraine. This is due to the country’s (pre-war) energy import-dependence on Russia and the impact of EU sanctions against Russia on the domestic economy (for example increased inflation and potential energy shortages). In 2022, economic activity in Bulgaria still held up better than initially expected, thanks to robust consumer spending, investment and external demand. Statistical base effects also helped to achieve growth of +4.1% annually. However, the impact of surging inflation, rising interest rates, weakening external demand and deteriorating business confidence took full effect thereafter. As both domestic and external demand slowed down markedly, real GDP grew by just +2.1% in 2023 and the momentum gradually slowed down during 2024. The first half of 2024 saw a strong expansion of private consumption, backed by double-digit wage increases. On the contrary, both public and private investment were weak, reflecting political uncertainty and low absorption and delay of EU funds leading to a growth rate of +2.2% in 2024. Looking ahead, we expect growth rates of +2.5% in 2025 and +2.4% in 2026.

We expect currency stability to be maintained but price stability will not be fully regained before 2025. Bulgaria’s currency board (BGN1.95583:EUR1) should remain stable since foreign exchange (FX) reserves continue to clearly cover the monetary base (a requirement for a currency board; currently at over 140%). However, the currency board largely neutralizes monetary policy, preventing its use to counter upward price pressures since 2021. Following an average 13.0% in 2022 and 8.6% in 2023, inflation decelerated steadily in the first months of 2024 due to substantial reductions in food and energy prices. Headline inflation reached its lowest point at 1.2% in September due to reduced fuel prices. We expect inflation to stabilize at around +2.7 for% for 2025 and +2.4% in 2026, owing to continued strong wage pressures and accelerating credit growth.

Bulgaria's business environment is adequate though spots of weaknesses remain. The World Bank Institute’s annual “Worldwide Governance Indicators” surveys suggest that the regulatory framework is generally business-friendly while weaknesses remain with regard to perceived corruption and the legal framework. The Heritage Foundation’s “Index of Economic Freedom” survey 2024 assigns Bulgaria rank 31 out of more than 180 economies, reflecting strong scores with regard to property rights, tax burden, business freedom and trade freedom. Weaknesses remain in the areas of judicial effectiveness and government integrity. In our proprietary “Environmental Sustainability Index”, Bulgaria is ranked 94th out of 210 economies, reflecting above average scores for energy use and CO2 emissions per GDP, water stress, as well as its exposure to climate events and its readiness to protect itself against such events. However, there are still weaknesses regarding renewable electricity output and the recycling rate.

Overall systemic political risk is moderate. Bulgaria is a democracy and has good international relations. It is a member of the EU and NATO and an OECD accession candidate. However, government instability has become a concern. Six parliamentary elections since 2021 have failed to produce a stable, lasting government. In October 2024, Bulgaria held its seventh election with the center-right GERB emerging as the largest party, winning 26% of the vote. Bulgaria's parliament approved a cabinet led by Rossen Zhelyazkov, ending months of negotiations on forming a coalition government. Bulgaria fully joined the Schengen Area on 1 January 2025, marking a significant milestone in its EU integration efforts.