Montenegro
Montenegro Macroeconomic Snapshot1. Overview
Montenegro’s economy is badly affected by the recession in the rest of Europe, the end of the property boom and the lack of liquidity in the banking sector. The government has been holding talks with the IMF and other international organizations to secure financial support; the government of Montenegro has been so far reluctant to accept the accompanying austerity measures, as the challenges of the implementation in terms of fiscal consolidation are enormous. Global financial turmoil and recession will likely have a substantial adverse impact on investor confidence, credit growth and FDI inflows in 2009. The euroization of the Montenegrin economy constitutes fiscal policy as the only available macroeconomic instrument.
2. Growth Performance
According to the ministry of finance, real GDP growth reached 8.1% in 2008 (from a growth of 10.7% recorded in 2007). EIU forecasts that real GDP will contract by 5.8% in 2009 as foreign investment falls and the tourism and mining sectors suffer due to the global slowdown. FDI to real estate has dried up, with property prices have fallen by 50% or more. World prices for aluminum, which generates about 40% of Montenegro's merchandise exports, are forecast to drop by nearly one-half year on year in 2009. Despite booming credit growth, Banks’ Non Performing Loan ratios have been rising. Private sector credit growth decelerated to 23% in 2008 (compared to the record high 173% in 2007) reflecting prudential tightening measures, lower risk appetite and declining deposits (IMF).Banks are vulnerable to shocks to foreign financing from their parents as global financial turmoil continues.
3. Balance of payments
According to the Central Bank of Montenegro, exports fell to US$0.7bn (an 18.0% yoy contraction) while imports expanded by 0.5% to total US$2.8bn in 2008. The demand for Montenegrin exports (primarily base metals) is projected to fall in 2009 due to weak global demand. EUI forecasts that the current account deficit will narrowto 13.9% of GDP in 2009 (from 27.8% in 2008).The C/A deficit increased to over 30% of GDP in 2008 as booming FDI and credit stimulated strong demand for imports (IMF), but is set to drop to 15% in 2009-10.
4.Inflation- Monetary Policy
Although euroization shields Montenegro from currency crises, the scale and pace of the deterioration in the current account could indicate eroding competitiveness. According to official statistics the inflation rate in 2008 was 8.4%; EIU forecasts inflation for 2009 at 1%.
5. Fiscal Position
After posting a 1.5% budget surplus in 2008, the 2009 budget will suffer from a lack of foreign investment and slowing revenues. The government sees the 2009 budget gap at 3% of GDP. Plans for tax cuts and increases in capital and social expenditure will substantially increase the deficit in 2009 and beyond, implying a risk of rapidly rising public debt. The government's debt/GDP ratio could increase to almost 50% in 2010 from under 30% in 2007-08.
6. Business Environment
Montenegro ranks better than the regional and income group averages for the three available rankings. In most recent Doing Business Report, Montenegro ranked among the top 20 countries in the protecting Investors indicator.