OREANDA-NEWS. The resignation of the Bulgarian government and the prospect of early elections increase fiscal uncertainty heading into 2017, Fitch Ratings says. Parliamentary support for the draft 2017 budget suggests that the scope for dramatic fiscal loosening is limited, but recent experience shows that over-expenditure is a risk to fiscal projections.

The Bulgarian parliament approved the resignation of Prime Minister Boyko Borisov of the centre-right Citizens for European Development (GERB) party 16 November. Borisov resigned after Rumen Radev, the candidate backed by the opposition Bulgarian Socialist Party (BSP), beat GERB's candidate in Bulgaria's presidential election.

The country's current president, Rosen Plevneliev, will now start consultations with political parties to form a new cabinet. Both GERB and BSP have said they will not seek to form a new permanent government, making early parliamentary elections likely in the first half of next year.

Early elections were also held in 2014 and 2013 after coalition or minority governments became untenable. A pattern of unstable governments is a weakness for Bulgaria's 'BBB-'/Stable sovereign rating, which we affirmed in June.

Parliament passed the first reading of the draft 2017 Budget by 44 votes only two days after the government's resignation last week. But political pressure for some fiscal loosening may resurface. Pension reform has been contentious, while the BSP used the first reading to renew its call for a more progressive tax system in place of the flat rate of income tax. Such measures are likely to be discussed again when the second reading begins this week. In addition, budget revisions by a new government could still occur post-election.

Revenue underperformance and overspending compared to budget targets contributed to the deficit widening in the run-up to early elections in 2014, although fiscal deterioration on a similar scale is unlikely.

Improvements in tax collection, lower-than-projected capex, and robust growth have resulted in a strong budgetary performance this year. Bulgaria's 2016 headline fiscal deficit is likely to be considerably lower than we anticipated, at below 1% of GDP in ESA 2010 terms, down from 2.1% in 2015.

We think discretionary measures in the draft 2017 Budget are consistent with another deficit below 1% of GDP under ESA 2010 methodology. The budget forecasts real GDP growth of 2.5%, close to our 2.4% forecast.

This is in contrast to 2014, when a slowing economy and bank-related costs combined with overspending to push Bulgaria's fiscal deficit sharply wider to 5.5% of GDP from 0.4% a year earlier.

While growth momentum is stronger today, political uncertainty may weigh on private investment, which appears to have contributed to a relatively strong performance in 1H16. Public investment may also slow due to lower absorption of EU funds in the absence of a permanent government.

Over the longer term, the lack of clarity over the composition of a new government increases uncertainty over attempts to address structural challenges and improve potential growth and GDP per capita.