Montenegro

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENT

Growth durably driven by tourism

Robust post-pandemic recovery slowed in 2023 but still remained strong, primarily driven by the tourism sector which constitutes approximately 25% of GDP. Arrivals exceeded 2019 levels during the summer of 2023 (13% higher than 2019 from January to August) which also boosted commercial and hospitality activities. Additionally, industrial production increased due to favourable weather conditions for the hydroelectric sector. In 2024, growth will decelerate slightly but still remain robust, on back of continued brisk activity in the tourism sector. However, Montenegro's economy's exposure to the weakness of its European partners may impact arrivals. Private consumption (73% of GDP) will continue to support activity. Strong growth in 2023 is a result of substantial tourist arrivals, real wage growth which saw an increase in the minimum wage from EUR 250 to EUR 450 per month since January 2022, removal of employee health contributions, plus an increase in public sector salaries in January 2023, as well as significant migration flows, especially from Russia and Ukraine. In 2024, significantly more moderate inflation and the increase in the minimum retirement pension will benefit household purchasing power. Investment recovery (20% of GDP) is expected to accelerate somewhat. The incoming government will enhance the business climate perception, thus fostering private investor interest. However, weak external demand and tightener financing conditions could pose obstacles. Although eurozone interest rates appear to have peaked, a reduction in ECB rates is not expected before mid-2024. ECB decisions will impact Montenegro as its use of the euro deprives the central bank of independent monetary policy. An end to the political stalemate will help advance the public investment agenda.

Budgetary position is improving, but challenges persist

The public deficit situation improved significantly in 2023 thanks to effective budget consolidation efforts. The government benefited from strong fund inflows, including support from the European Union's energy package and a number of measures to broaden the tax base implemented in July. In 2024, the public deficit is expected to widen again. Without the EU’s cash injection, revenues are likely to be less robust. The budget plans a significant increase in the minimum pension (+52%), benefiting two-thirds of retirees. At the same time, the government aims to increase capital investment spending, focusing on infrastructure development, particularly Phase 2 of the Bar-Boljare highway construction. Authorities will face a significant debt servicing bill amounting to 7.4% of GDP for 2024. The trajectory of public debt that has lessened since 2021 is expected to reverse, mainly due to significant financing needs approaching the repayment deadlines of Eurobonds starting in 2025. Public debt is 90% external of which 45% is in Eurobonds and 17% is a loan from the Chinese Eximbank, which financed the construction of the first section of the highway between the port of Bar and the Serbian border.
The current account deficit eased in 2023. The increase in the import bill relating to the rebound in consumption was more than offset by the rise in service exports, primarily driven by tourism revenue. The reduction in the deficit will be less in 2024. The robustness of tourism will maintain a substantial surplus in services (around 19% of GDP). The massive structural trade deficit (around 39% of GDP) is expected to decrease due to more moderate domestic demand growth. Nevertheless, exports remain exposed to the underperformance of European economies, while the country's strong dependence on imports makes it vulnerable to fluctuations in global commodity prices. Weaker growth in expatriate remittances could limit inflows into the transfers balance (around 6% of GDP). Financing the current account deficit will involve external borrowing and foreign direct investment (FDI), mainly in the construction of tourism-related infrastructure.

A pro-European majority government despite a diverse coalition

The second round of the Presidential election on 2 April 2023 was won by former Economy Minister Jakov Milatović, co-founder of the "Europe Now!" party (PES) who garnered 60% of the votes, defeating the incumbent president, Milo Đukanović (Democratic Party of Socialists, DPS). Jakov Milatović pledged to fight corruption, improve living standards and strengthen ties with Serbia, with which strong differences persist, particularly regarding the independence of Kosovo. The President's party also emerged the winner of the Parliamentary elections in June 2023. Failing to secure an absolute majority (24 seats out of 81 in Parliament), PES was forced to form alliances. A coalition agreement was confirmed on 31 October after several months of negotiations. Led by Prime Minister Milojko Spajić, it includes six parties: PES, the right-wing coalition with a pro-Serbian and pro-Russian orientation "For the Future of Montenegro," Democratic Montenegro (DCG), the People's Socialist Party (SNP), and other smaller parties representing the Albanian minority. Despite the diversity within the coalition, the government maintains a pro-European majority and is aiming for a swift EU accession. A member of NATO since 2017 despite strong opposition from the Serbian minority and sanctions against Russia, Montenegro has been engaged in EU accession negotiations since 2010. Although short-term integration seems unlikely, the momentum of a new government could invigorate the process, provided that divisions in parliament do not prove to be a persistent obstacle. Montenegrins went to the polls in 2023 amid a political crisis marked by government infighting. After being in power for three decades, the 2020 Parliamentary elections marked a loss of power for the DPS. Three opposition coalitions, "For the Future of Montenegro," "Peace is Our Nation," and the United Reform Action (ARU) together won an absolute majority of seats. However, despite their initial agreement to fight corruption, opposition parties grappled with internal divisions once in power. The government led by Zdravko Krivokapić was overthrown in February 2022 and was then replaced by a minority government led by Dritan Abazović, which, in turn, faced a vote of no confidence from the DPS in August 2022 over an agreement governing relations with the Serbian Orthodox Church and was subsequently forced into caretaker status.

Last updated: April 2024