SOFIA, June 2 (Reuters) - Ratings agency Standard & Poor's upgraded the outlook on Bulgaria's sovereign credit rating to positive from stable on Friday, mainly due to the Balkan country's recovering economy and solid fiscal performance.
S&P affirmed Bulgaria's long-term sovereign credit rating at BB+, one notch below investment grade, but said it could also be upgraded over the next 12 months if Sofia kept reducing its macroeconomic vulnerabilities and acted to further decrease the level of non-performing loans.
"The outlook revision reflects our expectation that Bulgaria's fiscal and external metrics will continue to improve and that the authorities will take further steps to strengthen Bulgaria's financial sector," it said in a statement.
Another upgrade trigger could be Bulgaria's admission into the European Union's exchange rate mechanism (ERM-2), commonly known as the euro's waiting room, the agency said, noting that political hurdles to the process were still high.
"We might also raise the rating if Bulgaria was granted entrance to the ECB's ERM II monetary framework, which we think would further bolster policy credibility. Still, we expect this decision could be delayed for several more years," it said.
Bulgaria meets the formal criteria to adopt the euro, but western diplomats and bankers say it needs to align its economy closer to its wealthier EU peers before it can join the euro zone.
Earlier on Friday, Finance Minister Vladislav Goranov said an entry into the ERM-2 would be an acknowledgment of Bulgaria's reform efforts.
Goranov has said strong domestic demand and exports can boost the economic growth above last year's 3.4 percent.
Bulgaria targets a fiscal deficit of 1.4 percent of GDP for this year and plans to balance its budget by 2020. It ended 2016 with a fiscal surplus of 1.6 percent of GDP.
On Thursday, Central Bank Governor Dimitar Radev told Reuters in an interview that the bank was working on a plan to further reduce bad loans that have dropped to 12.6 percent of all loans at the end of March from 14.5 percent at the of 2015.
Credit ratings agencies Fitch and Moody's keep Bulgaria's sovereign ratings at investment grade at BBB- and Baa2, respectively. Both maintain stable outlook. (Reporting by Tsvetelia Tsolova; Editing by Tom Heneghan)