Montenegro: Risk Assessment

Country Rating¹

Rating: C

Business Climate Rating¹

Rating: C

Risk Assessment²

Recovery will run out of steam in 2012

After several years of steady growth, the economy was hard hit by the global economic downturn in 2009, with the drying up of international financing and plummeting exports. In 2011, activity was driven by the recovery of mining (aluminum, steel, bauxite) and energy (hydroelectricity) exports. In 2012, the scale of the slowdown will be limited by the recovery of agricultural production (8% of GDP) and healthy aluminum prices. The tourism industry, whose contribution to GDP is expected to rise from 16% to 36% between now and 2021, will continue its upsurge, supported by tax incentives, growing investments in hotel infrastructures along the Adriatic coast and the signing of partnerships with foreign airline companies. However, the dynamism of the economy will be held in check by the fiscal consolidation measures and an unemployment rate of nearly 20%. Moreover, the export sectors will suffer from slower demand in Greece and Italy, respectively the second and third most important markets.

Improvement in the current account deficit but persistent liquidity risk

The general government balance is expected to improve slightly in 2012 thanks to the budgetary restriction measures (stagnation of civil services salaries and social transfers). However, the slowdown in economic activity will adversely affect revenues from VAT and corporation tax. In this context public-sector debt is expected to stabilize at 43% of GDP, or ten points above its pre-crisis level (32% in 2006). Reducing the budget deficit will be made more difficult by the slowness of the privatization process (property, aviation) undertaken by the State and the weak interest shown by private investors.  Their reluctance with regard to Montenegro is explained by the inadequacy of the energy and transport infrastructures, the weakness of the banking system and the size of the informal economy. 

Export growth is expected to intensify thanks the strength of aluminum prices compared to those of other raw materials. At the same time, imports will remain stable, reflecting the weak growth of domestic consumption. The current account deficit is likely to narrow only slightly to settle at 18% of GDP. Foreign debt, essentially private, will remain high (98% of GDP) and will continue to represent a risk for the country, as there are insufficient foreign exchange reserves to mitigate an exchange rate crisis.

Ongoing EU accession process

The country was accepted as a candidate for membership of the European Union in December 2010, which attests to the rapid progress made by Montenegro, independent since 2006, on economic and institutional reforms. The EU accession negotiations, due to begin at the end of 2012, will relate, as a priority, to the independence of the judiciary system, the fight against corruption and press freedom. In power since 2009, the Democratic Socialist Party is expected to continue to dominate the political scene, alongside the Social Democratic party. The current Prime Minister, Igor Lukšić, is expected to continue the reforms necessary for improving the business environment in line with the country’s candidature for EU membership. However, though real progress has been made since independence, the business climate remains unattractive because of red tape and endemic corruption.

Strengths

• Mining resources and tourism potential
• Accepted as candidate for European Union membership in December
• Governance indicators above the regional average

Weaknesses

• Dependence on raw materials export prices (aluminum)
• Current account deficit still too high
• Excessive private foreign debt