Rating agency Moody’s said on May 14 it has downgraded Montenegro’s sovereign rating to B1 from Ba3 and maintained the negative outlook due to fiscal risks associated with the construction of the key Bar-Boljare motorway. At the same time, another global credit rating agency - Standard & Poor's (S&P) - also revised Montenegro’s outlook to negative from stable due to the widening fiscal deficit.

According to Moody’s, the costs for the construction of the first priority section of Bar-Boljare motorway – from Smokovac to Matesevo - could increase the country’s public debt, reducing the country's shock absorption capacity. The project's overall costs are estimated at more than 23% of 2014 GDP, which will push the government's debt burden to close to 80% of GDP by 2018, Moody’s noted.

It added that the project’s costs could overrun due to the challenging terrain on which the Smokovac-Matesevo stretch is being built. A cost overrun of around 20% could raise the government's debt burden to almost 83% of GDP.

The government is relying on the Bar-Boljare project to boost economic growth in the next three years. However, Moody’s said that the effect of the project is unclear.

Montenegro’s fiscal risk has also been assessed as high by the European Commission and the European Bank for Reconstruction and Development (EBRD) in their latest economic forecasts.

The government's pro-cyclical fiscal policy is set to weaken the government's balance sheet beyond the deterioration expected from the highway project, Moody’s also said.

"The government has engaged in significant pre-election spending, and an already very rigid expenditure structure -- pensions and wages account for around half of overall expenditure -- will limit any fiscal adjustment after the elections," it noted.

Moody’s also projected that the erosion in Montenegro’s external shock absorption capacity due to increased external imbalances will continue over the next few years.

“Montenegro's focus on large-scale investment projects, such as the highway, and the country's high import penetration imply sizeable external imbalances over the next years, further exposing the country to shifts in the external environment and changes in investor sentiment,” the rating agency noted.

The country’s current account deficit is expected to be around 20% of GDP over on average from 2016 to 2018, one of the largest in Moody's rated universe.

The negative outlook reflects Moody's view of the risks associated with the government's debt-funded growth strategy.

S&P also warned that Montenegro’s government debt will rise faster than previously projected, which is likely to further restrict policy responsiveness to domestic and external shocks. This was the reason behind the rating agency’s decision to revise the country’s outlook to negative.

“The negative outlook reflects our view of the likelihood of a further deterioration in public finances if Montenegro does not create fiscal buffers,” S&P said in a May 13 statement.

The agency affirmed Montenegro’s rating at B+/B.