In its annual credit report on Montenegro, Moody’s Investors Service says that Montenegro’s Ba3 government bond rating reflects the economy’s small size and dependence on foreign investment as well as the economic and institutional benefits of Montenegro’s progress towards EU membership. The outlook on the rating is stable.
The rating agency’s report is an annual update to the markets and does not constitute a rating action.
Moody’s determines a country’s sovereign rating by assessing it on the basis of four key factors – economic strength, institutional strength, government financial strength and susceptibility to event risk – as well as the interplay between them.
Montenegro’s ‘low’ economic strength assessment is based on the economy’s small size, limited diversification and lack of domestic savings to fund investment. GDP growth decelerated to 0.5% in 2012 from 2.5% in 2011, largely due to poor metals sector output. Moody’s expects growth to recover to 1.5% in 2013, still below the 6 -7% average growth the country recorded in the five years preceding the global financial crisis.
Due to slower GDP growth in the last few years, Montenegro’s government tax revenues have fallen as a percentage of GDP, and the government has faced unanticipated expenses. As budget surpluses turned into deficits, government debt rose to 51% in 2012 from 29% of GDP in 2008. Moody’s assesses Montenegro’s government financial strength as ‘moderate’, noting that fiscal metrics have weakened in recent years, although debt sustainability indicators remain within the range for similarly rated countries. The government has undertaken expenditure control measures in 2012. These, coupled with a slow recovery in growth over the next two years, are expected to stabilize fiscal metrics over the medium term.
Montenegro has been independent since 2006. After applying to join the EU in December 2008, authorities have implemented several measures to strengthen judicial and administrative capacity to meet EU requirements. Montenegro’s ‘moderate’ institutional strength assessment anticipates that additional measures undertaken during the EU accession process, which began in 2012, could facilitate growth, trade and investment over the medium term.
Montenegro’s Ba3 rating could face downward pressure if the outlook for government finances and balance of payments deteriorated significantly, and if there was a reversal of recent efforts at fiscal consolidation and institutional strengthening. Signs that banking sector risks threaten financial stability or medium-term growth could also put downward pressure on the rating.
Conversely, upward pressure on Montenegro’s rating could come from a significant improvement in fiscal metrics and domestic savings, accompanied by a narrowing of the current account deficit. Montenegro’s credit profile would also benefit if the economy’s international competitiveness rose substantially, paving the way for accelerated growth and an improved balance-of-payments outlook.