Coface Group
Montenegro

Montenegro

Population 0.6 million
GDP per capita 8,826 US$
C
Country risk assessment
A4
Business Climate
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 5.1 3.6 -12.0 5.5
Inflation (yearly average, %) 2.6 0.4 -0.1 0.7
Budget balance (% GDP) -6.2 -2.4 -10.4 -4.9
Current account balance (% GDP) -17.0 -15.2 -14.2 -13.6
Public debt (% GDP) 71.9 79.3 90.8 88.1

(e): Estimate (f): Forecast

STRENGTHS

  • Tourism (sea, mountains) and hydroelectric potential
  • Use of the euro facilitates trade and contributes to relative financial stability
  • International support, notably from the European Union (EU) and the International Monetary Fund (IMF)
  • Association and Stabilisation Agreement with the EU and accession negotiations
  • Member of the regional common market launched at the end of 2020 comprising the six countries of the Western Balkans seeking EU membership and aiming to eliminate trade barriers among the countries by 2024 and coordinate investment policies
  • Member of NATO since 2017

WEAKNESSES

  • Small market and unfavourable demographics (38% of the population lives abroad)
  • Under-diversified economy and heavy dependence on tourism (25% of GDP including direct and indirect activities), resulting in a huge trade deficit
  • Electricity generation largely (50%) based on subsidised coal
  • Unilateral adoption of the euro precludes European Central Bank (ECB) support and monetary policy independence
  • High poverty (20% of the population) against a backdrop of high unemployment (15% in 2019), low levels of education and a large informal economy (25% of the labour force)
  • Poor governance: corruption, weak media independence and organised crime, while politicisation of the court system impedes contract enforcement and the treatment of insolvency
  • Despite investment, road and electricity networks are deficient, hindering regional connectivity

RISK ASSESSMENT

A timid and uncertain recovery that will depend on tourism

Montenegro had its worst recession in 20 years in 2020. Tourism was hit hard by the border closure from March to June 2020. Overnight stays fell by 80% year-on-year in the first half of 2020. Although borders were reopened in early July 2020, the restrictions in force and Montenegro’s worsening health situation made the high season from June to September the worst on record. This, combined with the drop in remittances (10% of GDP) from Serbia, Croatia and Turkey (two-thirds of remittances), caused private consumption (71% of GDP) and services (72% of GDP, 80% of employment) to plummet. The rise in unemployment and poverty should be stemmed by the many measures, including wage subsidies for the most affected sectors (tourism and agriculture), that have been in force since March 2020 and that could be renewed in 2021. These are unlikely to be enough to boost consumption, especially since informal workers cannot access them. The return of tourists will be necessary for a recovery and will support the 2021-2024 stimulus plan (26% of GDP), which targets sectors such as tourism, agriculture and energy.
Investment (27% of GDP), which has driven growth in recent years, is expected to slow in 2021, while benefiting from delays to projects that were due to be completed in 2020, such as the motorway linking Bar in Montenegro to Boljare in Serbia. The deadline for completion of the first 41 km section built by the China Road and Bridge Corporation (CRBC) and linking Podgorica to Matesevo was postponed to June 2021. The aim is to stimulate trade, which is expected to continue to show a substantial deficit, despite a small decrease in 2020. The decline in imports (63% of GDP), as delayed investments reduced imports of machinery and equipment (15.5% of the total) and oil (7%), more than offset the fall in exports, especially of aluminium (22%).

Sluggish domestic demand in 2020 led to mild deflation. The recovery in 2021 could fuel weak inflation, while the central bank lacks the room to manoeuvre to really boost credit to the private sector. The banking sector is being consolidated, with the two largest banks, CKB and Podgoricka Banka (40% of all assets), set to merge by early 2021 to address rising compliance costs. Strong capitalisation and liquidity levels, and the reasonable share of non-performing loans (5% of the total in August 2020), will help the sector cope with waning profitability and moratoria on loan repayments until August 2021, especially in tourism and agriculture.

 

Public finances are weakening

The 2020 stimulus plans (11% of GDP) caused a sizeable increase in the deficit, which will be financed by the remaining funds from the USD 593 million Eurobond issued in late 2019 and by new domestic and external borrowing, notably from the IMF (USD 84 million) and the EU (USD 130 million). These loans significantly increased the public debt/GDP ratio, which had already been pushed up by the loan from China’s Eximbank to finance the first section of the motorway (17% of GDP), whose repayment is due to begin in 2021. There is significant uncertainty about the renewal of a USD 270 million Eurobond maturing in March 2021 and about payment of the debts of state-owned enterprises, after aid was provided to the railway operator in 2020. The government has opted for a public-private partnership with CRBC to fund the second 51 km section linking Bar and Podgarica (cost estimated at 5% of GDP). Resuming the fiscal consolidation that began in 2017 and refraining from major investments in 2021, such as the launch of the third and final 136 km section (cost estimated at 22% of GDP), should ensure that the debt (mainly medium- and long-term, 18% denominated in foreign currency) remains sustainable.

The structurally high current account deficit should narrow slightly with completion of the first section and the possible return of tourism. With multilateral donors replacing weaker FDI, external debt has risen to 191% of GDP. Nearly one-quarter of this is in intra-group loans and 37% is held by the public sector. Foreign exchange reserves remain strong (USD 1.2 billion in September 2020, five months of import coverage).

 

An unstable coalition ends the ruleof the dominant party

The parliamentary elections of August 2020 marked a change in power with the defeat of the Democratic Party of Socialists (DPS), which had ruled since 1991, as a coalition of opposition parties won a narrow majority (41 seats out of 81). However, once the unifying influence of the crisis fades, the coalition may prove unstable as it is based around three different alliances: For the Future of Montenegro (ZBCG - populist and conservative), Peace is Our Nation (MNN - centrist) and United Reform Action (URA - progressive and green). The DPS and its leader, current president Milo Djukanovic who was elected in April 2018, may try to exploit these weaknesses. The election result followed the souring of the DPS's relations with the Serbian Orthodox Church, the largest denomination in the country. Despite being pro-Serbian and pro-Russian, the ZBCG, which has a majority in the coalition, is committed to remaining in NATO and on the path to EU membership. Closer ties with Russia and Serbia cannot be ruled out.

 

Last updated: February 2021

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