Studi Economici
Montenegro

Montenegro

Population 0.6 million
GDP 7,703 US$
C
Country risk assessment
A4
Business Climate
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 4.1 -15.2 7.0 5.5
Inflation (yearly average, %) 0.4 -0.2 2.1 2.0
Budget balance (% GDP) -2.9 -10.0 -1.7 -2.0
Current account balance (% GDP) -14.3 -25.0 -17.4 -15.5
Public debt (% GDP) 78.8 107.2 93.4 82.4

(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 since 2012
  • Member of the regional common market launched in late 2020 comprising the six Western Balkan countries seeking EU membership and aiming to eliminate trade barriers between 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 reliance on tourism (22% of GDP, including direct and indirect activities), resulting in a huge trade deficit
  • Electricity generation (50%) largely based on subsidised coal, underdeveloped hydroelectric sector (about 20% of potential used).
  • Unilateral adoption of the euro precludes European Central Bank (ECB) support and monetary policy independence
  • Significant poverty (25% of the population in 2018) against a backdrop of high unemployment (25% in 2022), low levels of education and a large informal economy (25% of the working population)
  • Poor governance: corruption, weak media independence and organised crime; politicised court system impedes contract enforcement and the treatment of insolvency
  • Despite investment, road and electricity networks are poor, hindering regional connectivity

RISK ASSESSMENT

Economic activity stabilises thanks to the gradual recovery of tourism

After a strong rebound in 2021 driven by a recovery in tourism, the Montenegrin economy will return to its normal growth rate in 2022. However, the recovery remains fragile, as the pandemic has severely impacted tourism and, partly by extension, private consumption and investment. While tourist numbers have increased since the second quarter of 2021, they remain well below 2019 levels. Uncertainty related to the health crisis will discourage travellers until vaccines are rolled out across Europe. Montenegro continues to lag behind; as of 13 January, 41,2% of the total population had been fully vaccinated.

 

In 2022, the main drivers of growth will be private consumption (73% of GDP) and net exports (-21% of GDP). Private consumption will increase by 6%, thanks in particular to the lifting of restrictions related to the health situation, since most of the population will be vaccinated by mid-2022. The recovery in tourism activity will support a drop in the unemployment rate, which is forecast to be 25.4% in 2022 after reaching 29.6% in 2021 following the withdrawal of public aid measures in response to the pandemic. Inflation, which got back to positive territory in the second half of 2021 due to rising prices for restaurants, hotels, transportation and foodstuffs, coupled with higher global oil prices, should moderate in 2022. The improving health situation and waning inflation will spur an increase in the disposable income of households and thus their propensity to consume.

 

Goods and services exports will support growth more than in previous years. They will benefit from a recovery in commodity prices (aluminium) and an improvement in tourism. However, imports will increase more rapidly due to the needs of infrastructure projects. The trade balance will therefore contribute negatively to growth, but less than previously.

 

Austerity measures to save the public finances 

The government has been forced to take austerity measures to counter the impact of COVID-19 on public finances. In July 2020, it adopted a stimulus package worth EUR 1.2 billion (26.6% of GDP), causing the budget deficit to explode. The rebound in activity has since boosted government revenues, which, combined with prudent fiscal management, will reduce the deficit. Austerity will keep public spending relatively low, resulting in a slowdown in fixed capital investment (27% of GDP in 2021), which is expected to contribute 1.4 percentage points to growth in 2022, compared with an average of 3.6 points in 2015-2020. To consolidate the public accounts, the Minister of Finance has indicated that a tax reform will be implemented between 2022 and 2023. Planned measures include the introduction of an income tax for legal entities, as well as a progressive income tax for individuals, while increasing the gross monthly tax-free salary to EUR 700. Health insurance contributions are to be phased out, while excise duties will increase. The government also plans to introduce a special levy on cash withdrawals to combat the informal economy. The country has received EU assistance to repay a 2014 loan from Eximbank of China for the construction of the first 41 km section of the Bar-Boljare motorway (171 km in total) to connect the coast to the Serbian border. The first repayment of USD 33 million was made in July 2021, out of a total amount of USD 944 million. The EU has indicated its intention to finance the remainder of the motorway. The country also issued a EUR 750 million Eurobond in December 2020 to repay the principal of loans maturing in 2021 and to finance the budget deficit. The country will seek financial support from its European partners to meet its commitments.

 

Montenegro produces and exports relatively few goods and has a structural trade deficit. A rebound in the services surplus (20% of GDP), thanks to tourism and, to a lesser extent, expatriate remittances, will help reduce the current account deficit.

 

The governing coalition grows increasingly unstable

The August 2020 parliamentary elections marked a major change as the Democratic Party of Socialists (DPS), which had been in power since 1991, lost to a disparate coalition (41 of 81 seats). However, once the unifying influences of the desire to get rid of the DPS, the fight against corruption and the crisis fade, the coalition could collapse before the August 2024 elections, since it is built around three very different alliances: For the Future of Montenegro (ZBCG - populist and conservative), led by Prime Minister Zdravko Krivokapic, Peace is Our Nation (centrist) and United Reform Action (progressive and green). The DPS and its leader, current president Milo Djukanovic, who was elected in April 2018, may try to exploit these weaknesses. On 5 September 2021, following the passage of a law transferring ownership of some religious buildings to the state, violent protests attempted to prevent the inauguration of the new head of the local branch of the Serbian Orthodox Church, the largest denomination in the country, in the presence of the Serbian patriarch. Despite being pro-Serbian and pro-Russian, the ZBCG, which represents people who assert their ties to Serbia and its church, is committed to remaining in NATO and on the path to EU membership. However, closer relations with Russia and Serbia cannot be ruled out.

 

Last updated: February 2022

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