Montenegro: Risk Assessment

Country Rating1

Rating: C

Business Climate Rating1

Rating: C

Risk Assessment2

Weak growth weighed down by lacklustre domestic demand

With investment and consumption slowing, Montenegro’s growth is now largely dependent on external conditions. Tourism and hydroelectric output will continue as the main growth drivers in 2014. The 1.3 million foreign holidaymakers, double the number of the indigenous population, come mainly from Serbia, Russia and Bosnia (55% of holidaymakers). The sector will remain dynamic with tax incentives for infrastructure investments maintained. The country’s major employer and exporter (40% of goods exported), the state-owned enterprise KAP, has propped up the aluminium industry. But lack of investment combined with the decline in world prices has made the business economically unviable. Its debts are piling up (10% of GDP) and production capacity hardly reaches 50%. The company launched bankruptcy proceedings in July 2013, so production will remain limited in 2014.

On the demand side, household consumption is affected by the freezing of public sector pensions and wages and by the increase in VAT from 17% to 19%, adopted in May 2013. Household and business debt (respectively 30% and 60% of GDP) has declined only slightly since 2007 (by -20% and -16% respectively in volume terms) and unemployment affects nearly 18% of the population. Overall, domestic demand is affected by a weak banking system, hit by a large stock of non-performing loans (18% of total loans). This context intensifies the risk aversion contributing to the containment of the demand for credit, which is however expected to grow in 2014 after falling for five consecutive years. Moreover, public investment is likely to be limited to the major motorway project linking the port of Bar to the Serbia-Montenegro border (43km). The substantial cost of which (25% of GDP) will be funded over 25 years (5 of which are a grace period) through Chinese funding. Private investments, chiefly foreign and directed to tourism, will remain sound. Finally, inflation will remain subdued as lower consumption will offset the recovery of international commodities prices, which has pushed up import prices.

Patent fiscal consolidation but unbalanced external accounts

The fiscal deficit declined noticeably between 2012 and 2013. The VAT rise will increase revenues in 2014 but the state-owned enterprise, KAP, will continue to burden the public finances. If the growth forecast is confirmed, the primary balance should again record a surplus in 2014. Public debt is thus likely to decline, after rising sharply in the recessions of 2009 and 2012.
Meanwhile, the external accounts are reporting a large deficit due to poor economic diversification. Abundant rainfall in 2013 helped to significantly increase electricity exports. The stabilisation of aluminium prices as well as the hesitant resumption of European growth (30% of goods exports) will bring down the current account deficit in 2014. Montenegro is still attractive for investors but foreign direct investments (15% of GDP) cover only 80% of the financing need. Foreign debt will therefore continue rising to reach 115% of GDP. Moreover, the central bank unilaterally decided to adopt the euro in 1999, which reduces its flexibility to balance its external deficit, but increases the stability of the business climate.

A political landscape historically dominated by the Democratic Party of Socialists (DPS)

Milo Djukanovic has been Prime Minister since 1991. But in October 2012 the DPS failed to obtain the required majority, forcing it to enter into a coalition. With 39 of the 81 parliamentary seats, it was only possible to form a majority with the support of the Albanian, Bosnian and Croatian minority parties, which had 5 seats between them. But this first coalition government faltered in August 2013 when it failed to secure the adoption at the first reading of a rectification of the 2013 budget. The political consensus therefore seems more precarious than ever. Meanwhile, President Filip Vujanovic (DPS) was re-elected as president for third time, in the first round in April 2013, but has only an honorary function. He was suspected in the past of various instances of corruption, as was Milo Djukanovic. Talks on Montenegro’s European Union membership began in June 2012. The process is not expected to conclude until after 2020. Presently, only 2 of the 35 negotiating chapters have been concluded. Finally, efforts to improve the business climate and to fight corruption are continuing. However, the size of the informal economy is still an issue.


  • Natural aluminium resources
  • Tourism potential
  • Negotiations on EU accession begun
  • Growth of regional trade (CEEC)


  • External account imbalance
  • Excessive private foreign debt
  • Weakened banking sector
  • Restrictive business environment

1Country and Business Climate Ratings courtesy of Coface (10/2013)
2Risk Assessment and methodology courtesy of Coface (10/2013).