Is there life after Divorce for this country?

Is there life post-divorce for this country?

So Montenegro divorced Serbia on June 2006 and has not been in the press much until now.

We have heard a lot from other countries about how the Global Crisis has affected their economies, so what of this small idyllic country? After all didn’t it want to be part of the EU?

This small nation with a big coastline, experienced robust growth of about 8% up until 2008, but the credit crunch was felt and a contraction in economic activity took place. So what are the prospects for this divorcee of Serbia and neighbour of Croatia?

While Foreign Direct Investment (FDI) held up, the bursting of the global asset bubble late 2008, quickly affected Montenegrin assets and overflowed into the banking system and difficulties in the corporate sector.

Historically, Foreign Direct Investment focused on the tourism and financial sectors, triggering a cycle of wealth effects. As property became more valuable, so it was used as an asset against which to secure loans, which in turn funded construction activities.

Rapid credit growth compromised the quality of banks’ portfolios; real estate prices soared beyond fundamentals; private sector debt swelled; a large output gap has emerged; competitiveness has been eroded; and the current account deficit grew. A story not too unfamiliar around the world.

Many of Montenegro’s domestic banks, which lacked foreign parent support, suffered more. Concerns about the robustness of the banking system sparked significant deposit withdrawals, a bit like the UK saw with Northern Rock. On top of this the property boom faltered. As a result economic growth contracted significantly in 2009 and unemployment edged up.

However, the government reacted swiftly to its country’s situation, with a mid-year review of the state budget and similar adjustments locally, driving significant cuts in capital expenditure, goods, services and the wage bills, limiting the cash deficit to 3.2 % of GDP. In their three-year budget plan, the authorities envisage the phasing out the deficit by 2012 but the detail of how this will be achieved, are yet to be elaborated on.

Foreign parents of banks boosted their liquidity, while the Central Bank of Montenegro kept up pressure for capital injections and stepped up its financial surveillance.  Emergency liquidity support and the placement of state deposits with Prva (the largest domestic bank) all helped. Deposits started to reflow in mid-2009.

Montenegro does not issue its own currency, but has been using the euro as legal tender since 2002. Last year Montenegro applied for EU candidate status and recently submitted answers to the questionnaire on conformity.

Future prospects

The economy could shrink further, possibly 1-2%, according to the IMF. But there are other nations who have fared far worse, countries like Romania spring to mind. While the Central Bank broadly agrees with these IMF projections, the Montenegrin government is more bullish, projecting growth of 0.5 percent.

From 2011, the economy could enjoy a more vigorous recovery and participate in the projected global upswing. Though still short of what was seen in the boom, IMF projects medium-term growth to rebound to 4% per year.

With savings recovering from their very low level, the current account deficit is projected to decline to 9 % of GDP and inflation to hover around 3½ % over the medium term.

Large infrastructure projects could find it challenging to attract finance, problems in parent banks, and weak private sector balance sheets could prove a drag on the recovery. Credit growth is likely to be low given the banks’ reduced risk appetite, and ongoing restructuring, e.g. of the Hypo Group Alpe Adria (HGAA).

However there is interest in electricity generation and infrastructure projects, from overseas investors, with substantial upside, reflecting Montenegro’s untapped potential and small size. The State has transferred 40 % of EPCG (the electricity utility) to a strategic foreign investor (with the option of a future majority stake). The authorities have also started granting licenses for electricity production with renewable sources of energy and are exploring options for greater integration into the European electricity grid. Even a handful of projects could turn around economic conditions very rapidly.

The Government is looking to establish a business friendly, open economy with low taxes and minimal state interference and to integrate the country. Last year Montenegro applied for EU candidate status and recently submitted answers to questions of conformity.

Progress in Montenegro’s EU candidacy will be important. And in the context of the Eurozone, Montenegro will need to further strengthen the banking system, and follow through on growth-enhancing structural reforms, especially in the labour markets. The government looks set to do this, but there may be a bit too much reliance on imbalances self-correcting in a favourable economic environment.

Montenegro has shown there is life as a divorcee. Having been through difficult times, it has battened down the hatches and has set itself on the road to recovery and success. It is hoping to rub shoulders with a broader array of neighbours in the future and not just be known as the former partner of Serbia. 

^{Posted by Louise Reynolds 1st June '10}  

Property Venture^® is an independent, UK-based agent. We help time-strapped investors and holiday home purchasers, buy abroad by guiding through the buying process, so reducing the hassle. We visit the countries you buy in, so we can offer common-sense, grounded advice. Overseas members of NAEA. This means we have been subjected to the membership criteria and have signed up to follow the professional Code of Conduct established to help you, the potential buyer or investor, buy property with confidence