1. EXECUTIVE SUMMARY 

Political outlook 

Montenegro is heading for a tough year of economic crisis and major political changes.

Montenegro’s first-ever government not formed by the Democratic Party of Socialists (DPS), which ruled for the past three decades, was appointed at the end of 2020. Although seen as a historic change, this also brings uncertainty and potential instability. 

The new ruling majority has pledged to continue reforms to bring the country closer to EU membership, but Prime Minister Zdravko Krivokapic is seen as open to influence from Serbia and Russia.

Macroeconomic outlook

The tourism-dependent economy of Montenegro suffered the worst contraction in the Western Balkans in 2020 and will make only a partial recovery in 2021. 

Budget and debt outlook

Krivokapic’s government has the difficult task of overcoming the economic recession and bringing the country back to growth, with limited resources due to its already very high debt. 

International financial institutions have advised Montenegro to be careful with state aid programmes and target only viable sectors and companies to help them overcome the crisis.

Real economy outlook

Tourism, a key sector of the economy, collapsed in 2020 due to the coronavirus (COVID-19) pandemic. A full recovery of tourist revenue cannot be achieved in 2021.

Montenegro is planning investments into hydropower after the opening of the subsea transmission line to Italy.  

Markets outlook

Montenegro’s stock exchange is small and not well developed.

 

2. POLITICAL OUTLOOK

Montenegro’s new government took office on December 7, putting an end to more than three decades of rule by the DPS led by President Milo Djukanovic and paving the way for significant changes.

The historic change of power followed the August 30 general election when opposition parties gained more votes than the DPS and its traditional allies, enabling major political change, which had seemed impossible a year earlier. The DPS made the grave political misstep of taking on the powerful Serbian Orthodox Church, and its support was further eroded by its handling of the pandemic. 

The Krivokapic government’s foreign policy is as yet unclear. He has repeatedly said that his government will continue pushing for reforms to bring the country close to EU membership. On the other hand, several parties backing his government are vocally pro-Serbian and pro-Russian. This orientation could seriously threaten the EU accession of Montenegro — the Western Balkan state that is believed to be the most advanced in its reforms currently. On the other hand, the government is expected to restore good relations with Serbia, which have been very tense for the last year.

Krivokapic has said his government will seek to achieve national unity and create conditions for knowledge-based economic development.

The new ruling coalition comprises around 20 small parties that were formerly in opposition. After the August general election, three coalitions — For the Future of Montenegro, Peace is Our Nation and Black in White — decided to set aside their political differences and form the next ruling majority, pledging to continue on Montenegro’s EU membership path and to tackle corruption. However, sceptics believe that Krivokapic’s government will not last long due to the significant differences between the coalition parties. Moreover, the initial intention of the coalition was to set up an interim government tasked with amending the electoral law and securing conditions for a fair and transparent new general election. Krivokapic then said shortly after being elected that his government will aim for a full four-year term.

The new government will also have the tough task of taking the country through a serious economic crisis as Montenegro was badly hit by the coronacrisis due to its strong dependence on tourism.

 

3. MACROECONOMIC OUTLOOK

Montenegro’s economy is expected to contract the most among the Western Balkan countries as tourism is a major contributor to GDP. The tourism and travel sectors contribute around 20% to the economy of the Adriatic country and they were the worst hit by the pandemic.

According to the European Commission (EC), the tourism shock is having deep knock-on effects on domestic consumption and investment. Moreover, even if travel resumes in the next two years, it is forecast to remain significantly below pre-crisis levels as travellers’ confidence recovers only gradually.

In November, local economists and the central bank suggested that GDP will contract by as much as 17% in 2020, while most international financial institutions expect a contraction of up to 12%.

The negative trend is expected to continue in 2021 as tourism cannot recover by the summer, which will lead to slower economic growth.

According to the European Commission, Montenegro’s economy could recover fast in 2021 only if coronavirus outbreaks remain limited to the winter and spring. The World Bank projected 6.1% economic growth for 2021 and 3.9% in 2022, which would not compensate for the estimated 14.9% contraction in 2020.

However, should the pandemic last longer, Montenegro will not be able to return to robust growth in 2021. The recovery could also be put at risk if Montenegro’s financial sector, which has proved resilient until now, is harmed by the coronacrisis. 

There are already signs of trouble as Montenegro was among only four countries in Central and Southeast Europe to see an increase in non-performing loans (NPLs) in the 12 months to end-June 2020, according to a report by the Vienna Initiative. NPLs rose by €0.2bn or 15.4% during this period, the highest percentage increase across the region. However, Montenegro has the highest NPL coverage ratio at 84.3%. 

The EC expects that GDP will grow by 6.8% in 2021 and by 3.7% in 2022. The World Bank’s forecast is similar: a 6.9% expansion of GDP in 2021 and 4.2% in 2022. The IMF has a slightly more pessimistic forecast that Montenegro’s economy will expand by 5.5% in 2021.

Montenegro’s consumer prices are projected to fall by 0.4% in 2020 and rise by 0.9% in 2021, according to the IMF.

The country’s current account deficit remains among the region’s highest, but is seen falling to 14.2% of GDP in 2020, down from 15.2% a year ago. The gap is set to contract to 13.6% in 2021.

 

4. BUDGET AND DEBT OUTLOOK 

As Montenegro’s new government only took office on December 7, it has a very short time to draft the budget for 2021. Krivokapic has pledged that his government will draft the budget by December 20, but has also complained that the outgoing government of Dusko Markovic had not provided the necessary information in advance.

Just three days after taking office, the new government issued a €750mn Eurobond. Finance Minister Milojko Spajic said the country had been “saved from bankruptcy” by the Eurobond issue after the coronavirus pandemic hammered the local economy. 

“Montenegro got today an economic future. Mass layoffs, wage and pension reductions and other scenarios that were envisaged for the new government were avoided in the best way for Montenegro. Money was secured for repayment of unfavourable credits and for investment in our growth and recovery,” Spajic wrote on Twitter at the time of the issue.

In 2020, Montenegro was forced to spend more than planned to support the sectors that were affected by the coronacrisis and revised its budget deficit plan to 3.4% of GDP from the initially anticipated 0.99% of GDP.

Ahead of the Eurobond issue, the European Bank for Reconstruction and Development (EBRD) forecast that public debt would pass the 90%-of-GDP mark by the end of 2020. The debt ratio is expected to inch down over the next two years, to around 83% of GDP by 2022, according to the EC.

 

5. REAL ECONOMY OUTLOOK

Montenegro’s key sector — tourism — has suffered the most from the coronacrisis with arrivals collapsing by around 80%. According to industry experts, the winter season will also be bad, but the country has a chance to see the sector restored to some extent in the 2021 summer season.

Montenegro’s then prime minister Dusko Markovic said in August that the energy sector could be a mainstay of the country’s economic recovery and stronger GDP growth during the coronavirus crisis.

The PM also said that Montenegro has become the "energy hub of Southeast Europe” with the link between the Balkans and the Apennines, and a regional leader in the integration of renewable energy sources. The submarine power link with Italy was put into operation in November 2019. 

Among the investments expected in 2021 is the launch of construction of Komarnica hydropower plant (HPP) by the state-owned power firm EPCG. The Komarnica HPP should have a 172-MW installed capacity and be able to produce 213 GWh annually. It will be located on the Lonci river. Construction should last five years.

Another energy project that is expected to be launched in 2021 is the upgrade of the third aggregate of the Piva HPP. EPCG signed an agreement with Slovenia’s Litostroj Power Ljubljana and Serbia’s Elektroremont on the upgrade. The renovation is expected to extend the lifespan of Piva HPP. The two companies should begin the repair works in April 2021, and they will take nine months.

The new government announced the closure of troubled flag carrier Montenegro Airlines. The state plans to launch a new airline, 2 Montenego,.

The US State Department commented on the investment environment, writing in a September 2020 report that Montenegro has adopted legislation that provides guarantees and safeguards for foreign investors, as well as several other business laws compliant with the EU’s standards, but still has to improve their implementation in order to attract more foreign investments. The country also lacks fully developed legal institutions, which leaves room for corruption and weak control over conflicts of interest. The report also noted that the judiciary is still slow to adjudicate cases, while court decisions are not always consistently reasoned or enforced.

 

6. MARKETS OUTLOOK 

Montenegro’s stock exchange is small and not well developed. Its market capitalisation was €3.3bn at the end of October, while the turnover stood at €7.45mn. As in previous years, in 2021 the bourse is not expected to develop significantly due to the small market in the country of around 620,000 people.