Montenegro tries to show investors it's more than just a gamble

By bne IntelliNews October 20, 2010

Guy Norton in Moscow -

Given hopes that Montenegro will secure long-cherished EU candidate status in November and forecasts that the tiny Balkan republic will register positive economic growth this year after falling into recession last year, the country has been busy touting itself as the next frontier-market play with international investors.

According to the latest forecast by the World Bank, the Montenegrin economy is due to see a 0.5% rise in GDP this year, after contracting 5.7% last year to around €3bn.

The upbeat World Bank growth assessment is in line with recent comments voiced by Prime Minister Milo Dukanovic that the worst of the economic crisis in Montenegro is over and that the country is on the road to recovery. Part of that optimism is based on a successful tourist season, with the tourism minister reporting in October that tourism revenues so far this year had reached €638m, beating the planned annual figure of €620m.

Meanwhile, PM Dukanovic is hopeful that work on a number of major projects that will be key drivers of future economic growth will start in the first quarter of 2011. These include the Porto Montenegro project in Tivat, a tourism complex development in Lusica, and the Bar-Boljare motorway project. Greek-Israeli consortium Aktor-HCH is reported to be in final negotiations with commercial banks, World Bank, EIB and EBRD to raise funds for the 170-kilometre Bar-Boljare road, which will connect the Montenegro's Adriatic port of Bar, in the south, with the Serbian town of Boljare on the Montenegrin-Serbian border, in the north. The €2bn-plus public-private partnership initiative will form part of the larger Bar-Belgrade motorway project linking Montenegro with the EU-planned Corridor X. Corridor X will connect Western Europe with the Greek Aegean port of Thessaloniki.

First-time financing

Meanwhile, Montenegro has become the latest EU wannabe to tap the international debt capital markets for the first time, launching a Eurobond denominated in its adoptive currency, the euro. In September, it issued €200m worth of five-year bonds via lead managers Credit Suisse and Deutsche Bank. The deal was reported to be three times covered, with €600m of bids from 125 accounts. As a result, Montenegro was able to print the deal at the bottom end of the 8.0-8.125% yield talk. As well as being a debut issue, the offering also marked the first sovereign issue from emerging Europe in over a year and this added to the scarcity value of the deal.

According to the lead managers, roughly 45% of the deal was bought by investment funds, some 38% went to major commercial banks and the balance was shared among private banks, hedge funds, insurers and other types of investor. In geographical terms, UK-based buyers bought 30% of the deal, accounts in Austria/Germany 24%, 22% went to Switzerland, with the remaining paper going to investors from the US, Scandinavia, Eastern Europe and other countries.

Minister of Finance Igor Luksic said that the three-times oversubscription and lower than planned pricing showed that the maiden offering had been a success and had successfully avoided falling victim to investor concerns over the fiscal straits faced by the so-called Pigs - Portugal, Ireland, Greece and Spain. From a launch price of 99.501 the deal had priced up to by late October. "We will use this money to finance our budget gap which will stay unchanged at 4% for 2010 and to pay debts," Luksic said. "Not all the money will be spent, we will keep some for the next year."

At a time when investors are shying away from heavily indebted countries, Montenegro boasted a relatively unleveraged profile. State debt/GDP was a modest 34.8% at €1.115bn at the end of June, with internal debt at €377.5m, or 11.8% GDP, while external debt was at €737.8m, or 23% of GDP.

However, after two years of tourism and real estate-driven growth after independence from Serbia in 2006, Standard & Poor's (S&P), which cut Montenegro's credit rating to 'BB' from 'BB +' in March warned that last year's recession is putting pressure on government finances."In our view, Montenegro's government continues to be vulnerable to indirect and contingent risks associated with the significant pressure on its real economy and banking system, and deteriorating asset quality. The Montenegrin economy is suffering a hard landing," noted S&P analyst Marko Mrsnik.

Although Montenegro's maiden Eurobond proved popular abroad, at home there was criticism that the government was indebting the country in order to fund government spending. Zarija Pejovic, economic spokesman for opposition party Movement for Changes (PZP), said that it would have been better to have entered into an agreement with the International Monetary Fund, which would have offered cheaper funding than the €278.5m total cost of the bond, including interest payments.

Montenegro though seems to be making major strides forward in terms of its competitiveness. In the World Economic Forum's 2010-2011 Global Competitiveness Index report, Montenegro recorded the biggest year-on-year rise of any European country, rising 13 places to number 49 out of 139 countries in the survey.

Furthermore, Montenegro's scores for corruption and organised crime - traditional bugbears that have dogged the country for years – were lower than nearly all its Balkan neighbours.

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