Montenegro: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|C||The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.|
Activity sustained by investment in energy and tourism
In 2016, growth is expected to rise further. Investment will be driven by the construction of the Podgorica-Kolašin section of the motorway intended to connect the Port of Bar to Boljare, on the Serbian border. The construction of the power line linking the country to Italy will pick up speed. Upgrade of the railway network is set to start and work on two new tourist complexes is about to get under way. At the same time, capacity extension for the treatment of wastewater, industrial waste and household refuse will continue, in order to fill the gaps in capacity during the summer influx of tourists. The construction of mini hydroelectric power stations and expansion of the thermal power station at Pljevlja is due to start. Conversely, household consumption will remain constrained by still high unemployment (18%), income stagnation and the very sparing distribution of credit by a concentrated banking system, dominated by foreign interests (90% of assets) and weakened by non-performing loans (16%). Public consumption will be hit by the concentration of spending on investment. Tourism, which contributes 10% to GDP, is expected to remain firm despite economic difficulties in Russia, Serbia and the Ukraine from where 60% of holidaymakers originate. Exports of aluminum and steel, which resumed following the purchase of Kombinat Aluminijuma Podgorica (KAP) and the steelmaker Toscelik Niksic by private investors, will be hit by low prices.
Imbalanced public and external accounts
The public deficit and debt are still high. Tax collection, based on VAT and social security contributions, is poor, while control of current spending, especially staff costs, has not been mastered, and capital spending, despite the use of public-private partnerships and concessions, is still high. Moreover, tax exemptions intended to attract foreign investment in tourism are costly. Debt will continue to increase, particularly because of the cost (6% of annual GDP until 2019) of constructing the route from Bar to the Serbian border. Moreover, the case brought in Cyprus by the Central European Aluminum Company (CEAC), minority shareholder in the KAP when it went bankrupt and owned by a Russian oligarch, poses an additional risk due to the guarantees which the state, as the majority shareholder, had given for the payment of the plant’s debt amounting to 10% of GDP. However, if one subtracts spending on roads, the accounts are close to equilibrium. The authorities hope that completion of the investment program, by favoring growth, especially tourism, will facilitate deleveraging. The road works are financed by a Chinese loan, repayment of which over 20 years will start two years after the road opens and will be based on road tolls.
Despite the income from tourism, there is a trade deficit amounting to 20% of GDP. Exports, mainly of metals and electricity which are highly sensitive to the international economic cycle and rainfall levels, are far exceeded by imports of equipment and food products. The authorities are counting on the modernization of agriculture (10% of GDP) financed by a loan of EUR 50 million from Abu Dhabi, as well as on future electricity exports to Italy and income generated by the new tourist complexes. Expatriates’ remittances represent almost 4% of GDP. Foreign investments, 28% of which are Russian, in tourism and energy as well as undeclared capital inflows cover the current account deficit. 40% of real estate assets are Russian. The country is not in control of its exchange rate as it unilaterally adopted the euro in 2002. External debt represents 115% of GDP (excluding debt linked to FDIs), of which 60% is owed by the private sector.
Political landscape frozen since 1991
Prime Minister Milo Djukanovic and the Democratic Party of Socialists (DPS), successor party to the Communist Party, have dominated the political scene since 1991. They lead a governing coalition which includes the Social-Democratic Party (SDP) and the Liberal Party, with the support of MPs from the Albanian and Bosnian minorities. Since autumn 2015, protests supported by the Democratic Front, which brings together two conservative parties representing the Serbian minority (30% of the population), demanding the Prime Minister’s resignation and the appointment of a technical government before the October 2016 elections occur regularly. The Socialist People’s Party (SNP), the other opposition party also with its roots in the Serbian community, has stayed neutral. The DPS is expected to remain as the strongest party, but maintaining of the coalition will depend on the mix of alliances and the attitude towards future membership of NATO. Corporate life is complicated by corruption, the politicization of justice, organized crime, an inaccurate land register and slow administrative procedures. EU accession negotiations are prompting progress which puts the business climate on a par with Turkey or Bulgaria. The country has also asked to join NATO, provoking the ire of Russia whose presence in finance and property is significant.