EC: Montenegro’s Economic Quarterly

The European Commission published EU Candidate Countries’ & Potential Candidates’ Economic Quarterly (CCEQ) technical report which indicates macroeconomic development of potential countries. Like other European Economy Technical Papers, Q2 2017 report was compiled by the staff of the European Commission’s Directorate-General for Economic and Financial Affairs. Montenegro’s economy are indicated as the following:

Key developments

In June 2017, Montenegro officially became the 29th NATO member. On 20 June, two additional accession negotiation chapters with the EU were opened: Chapter 1 (Free movement of goods) and 22 (Regional Policy and coordination of structural instruments), while Chapter 30 (External relations) was provisionally closed. So far, 28 negotiation chapters out of 35 have been opened and 3 provisionally closed. On 25 May the annual economic and financial dialogue between the EU and the Western Balkans and Turkey jointly agreed country-specific conclusions and called on Montenegro to take, inter alia, additional fiscal measures in order to stabilize public debt and reduce public spending as well as to consider establishing an independent fiscal council. The privatization process stalled in April after the government decided to stop negotiations on the sale of a 30% stake in the Port of Bar and a 51% stake in the rail company Montecargo, arguing low price, insufficient planned investments and unclear plans from the same bidder. In early July, Italian utility A2A officially started the process of divesting its 41.7% stake in Montenegro’s electric power company EPCG.

Real sector

In 2016, Montenegro’s GDP per capita expressed in purchasing power standard remained –for the second consecutive year– at 42% of the EU average. In the first quarter of 2017, the revival of bank lending and government consumption added momentum to domestic demand; until then, mostly driven by investment. Overall, the economy expanded by robust 3.2% y-o-y, largely driven by a rapid (30.3% y-o-y) growth in gross fixed capital formation, reflecting strong construction activity in infrastructure. Private consumption recorded a 6.9% y-o-y increase, boosted by the fast growth of household loans and a 2% y-o-y increase in wages, pensions and employment. Despite the adoption of some fiscal consolidation measures in December last year, government consumption increased by 3.5% yo-y in the first quarter of 2017, compared to marginal 0.1% growth a year ago. A significant reduction of stocks (-47.8% y-o-y) marked the only negative contribution to domestic demand. Net exports also contributed negatively to growth as the strong import dependence of investment boosted imports (up by 14% y-o-y), which reached 74% of GDP. By contrast, despite increasing by 19% y-o-y (partly due to base effects), exports covered only one third of imports. In the first five months of 2017, industrial output declined by 8.7% y-o-y, largely driven by the sharp contraction in electricity production due to a two-month overhaul of the thermal power plant, and a 14% decline in basic metals production. Metal ores (i.e. bauxite) led the surge in mining production, largely outpacing the 15% y-o-y increase in coal production. At the same time, the output of other manufacturing products increased, like food (5% y-o-y), beverages (19%), chemicals (26%) and nonmetallic mineral products (i.e. marble) (23%).

Labor market

Overall economic growth supported the improvement of the labor market in the first quarter of 2017. According to the latest Labor Force Survey (LFS), the unemployment rate declined to 17.7%, down from 19.3% a year before. During the same period, total employment increased by 2%. As a result, the overall employment rate reached 51.6%, one percentage point higher than a year earlier. By gender, the employment rate of men further increased, reaching 57.3% significantly higher than the 45.8% rate for women, the latter recording some slight decline over the year. Youth unemployment remains high, accounting for 35% of the labor force aged 15-24. In May 2017, the average gross wage increased by 1.9% y-o-y, and the net wage by 2.2% y-o-y, reaching EUR 766 and 511, respectively. The fastest wage increases were recorded in accommodation and food services, administrative services, and water supply. By contrast, some contraction was recorded in processing industry wages.

External sector

Investment related imports caused the current account deficit to widen further, to 19.5% of GDP in the four quarters to March, compared to 19.0% at the end of 2016 and 15.8% in the same period a year earlier. The increase in goods imports keeps outweighing the growth of goods exports, driving the merchandise trade deficit up to 44.8% of GDP in March, from 41.2% a year before. The surplus from the balance of services accounted for 20.3% of GDP, while the balances of primary and secondary income offered far lower surpluses of 1.5% and 3.4% of GDP, respectively. In the four quarters to March, net FDI inflows surged by 45.4% y-o-y, totaling 10.6% of GDP and covering half the current account deficit in the same period.

Monetary developments

The strong number of tourist arrivals supported the increase in food, accommodation and restauration prices. In addition, transport prices (i.e. fuels) have been growing uninterruptedly since December 2016. Consequently, the annual inflation as measured by the harmonized index of consumer prices further accelerated to 2.6% in May, up from 2.5% in Q1 and 2.4% in April.

Financial sector

On 2 June, the Parliament adopted amendments to the Law on Voluntary Financial Restructuring of Debts to Financial Institutions (also known as ‘Podgorica approach’). The amended law extends the range of loans eligible for restructuring, and introduces new incentives for both banks and debtors to restructure impaired loans. Overall bank lending accelerated, from 5.5% y-o-y in the first quarter to 10.7% in May. After the rapid increase in government borrowing in March, credit to households and private companies led the expansion of credit in May, growing by 12% and 4% y-o-y, respectively. Bank deposits recorded 10.9% y-o-y growth in May, slightly accelerating from 9.5% annual growth in the first quarter. The increase in deposits continues to be largely driven by domestic private companies and households. The increase in lending activity also supported the reduction in the non-performing loans ratio, which declined to 9.3% in May, compared to 12.2% a year before.

External sector

Investment related imports caused the current account deficit to widen further, to 19.5% of GDP in the four quarters to March, compared to 19.0% at the end of 2016 and 15.8% in the same period a year earlier. The increase in goods imports keeps outweighing the growth of goods exports, driving the merchandise trade deficit up to 44.8% of GDP in March, from 41.2% a year before. The surplus from the balance of services accounted for 20.3% of GDP, while the balances of primary and secondary income offered far lower surpluses of 1.5% and 3.4% of GDP, respectively. In the four quarters to March, net FDI inflows surged by 45.4% y-o-y, totaling 10.6% of GDP and covering half the current account deficit in the same period.

Monetary developments

The strong number of tourist arrivals supported the increase in food, accommodation and restauration prices. In addition, transport prices (i.e. fuels) have been growing uninterruptedly since December 2016. Consequently, the annual inflation as measured by the harmonized index of consumer prices further accelerated to 2.6% in May, up from 2.5% in Q1 and 2.4% in April. Financial sector On 2 June, the Parliament adopted amendments to the Law on Voluntary Financial Restructuring of Debts to Financial Institutions (also known as ‘Podgorica approach’). The amended law extends the range of loans eligible for restructuring, and introduces new incentives for both banks and debtors to restructure impaired loans. Overall bank lending accelerated, from 5.5% y-o-y in the first quarter to 10.7% in May. After the rapid increase in government borrowing in March, credit to households and private companies led the expansion of credit in May, growing by 12% and 4% y-o-y, respectively. Bank deposits recorded 10.9% y-o-y growth in May, slightly accelerating from 9.5% annual growth in the first quarter. The increase in deposits continues to be largely driven by domestic private companies and households. The increase in lending activity also supported the reduction in the non-performing loans ratio, which declined to 9.3% in May, compared to 12.2% a year before.

External sector

Investment related imports caused the current account deficit to widen further, to 19.5% of GDP in the four quarters to March, compared to 19.0% at the end of 2016 and 15.8% in the same period a year earlier. The increase in goods imports keeps outweighing the growth of goods exports, driving the merchandise trade deficit up to 44.8% of GDP in March, from 41.2% a year before. The surplus from the balance of services accounted for 20.3% of GDP, while the balances of primary and secondary income offered far lower surpluses of 1.5% and 3.4% of GDP, respectively. In the four quarters to March, net FDI inflows surged by 45.4% y-o-y, totaling 10.6% of GDP and covering half the current account deficit in the same period. Monetary developments The strong number of tourist arrivals supported the increase in food, accommodation and restauration prices. In addition, transport prices (i.e. fuels) have been growing uninterruptedly since December 2016. Consequently, the annual inflation as measured by the harmonized index of consumer prices further accelerated to 2.6% in May, up from 2.5% in Q1 and 2.4% in April. Financial sector On 2 June, the Parliament adopted amendments to the Law on Voluntary Financial Restructuring of Debts to Financial Institutions (also known as ‘Podgorica approach’). The amended law extends the range of loans eligible for restructuring, and introduces new incentives for both banks and debtors to restructure impaired loans. Overall bank lending accelerated, from 5.5% y-o-y in the first quarter to 10.7% in May. After the rapid increase in government borrowing in March, credit to households and private companies led the expansion of credit in May, growing by 12% and 4% y-o-y, respectively. Bank deposits recorded 10.9% y-o-y growth in May, slightly accelerating from 9.5% annual growth in the first quarter. The increase in deposits continues to be largely driven by domestic private companies and households. The increase in lending activity also supported the reduction in the non-performing loans ratio, which declined to 9.3% in May, compared to 12.2% a year before.

Fiscal developments

Economic growth and new fiscal measures adopted in late 2016 had a marked impact on revenues in the first quarter of 2017. Income from excises increased by 21.9% y-o-y, VAT receipts rose by 5% y-o-y, and corporate income taxes soared by 17.5% y-o-y. The latter was supported by the government restructuring scheme of companies’ tax arrears. Nonetheless, the first-quarter general government deficit amounted to EUR 75 million, or 1.9% of expected full-year GDP. Apart from the decline in personal income tax and social security contributions, the main reasons for the fiscal gap were substantial increases in wages, interest payments, and social protection expenditure, as well as the repayment of past contingent liabilities. So far, capital expenditure has remained largely below the plan, as there was no new withdrawal of funds to finance the highway. In the first five months of 2017, the central government deficit slightly narrowed to 1.5% of GDP. On 8 June 2017, the government adopted a fiscal strategy for the period 2017-2020. Proposed measures include additional increases in excise duties and in the general VAT rate, lower spending on wages, replacement of every three retired civil servants by one, benefit curbs for mothers of three children or more, as well as additional cuts to budget discretionary spending. The strategy aims to bring the budget into balance in 2019 and to lower the public debt ratio as of 2020. On 29 June, the parliament adopted amendments to the 2017 budget, necessary for a technical harmonization of the budget law with new amendments in public administration organization resulting in the merger of some administrations. The rebalance of the budget also adjusted for EUR 8 million of higher revenue. In the first quarter of 2017, net public debt (excluding municipalities) further increased to 61.6% of GDP, up from 59.5% a year before, mostly driven by a EUR 180 million increase in government borrowing from local banks and issuance of treasury bills. The stock of external public debt –which accounts for 80.6% of the total–, remained practically flat in the first quarter of 2017.

Montenegrin Economy Graphs

Benchmark with other SEE Countries

Full report: EC