S&P lowers Montenegro’s rating outlook to negative on high external vulnerabilities

By bne IntelliNews November 29, 2013

Standard & Poor’s affirmed on November 29 Montenegro’s BB-/B long- and short-term sovereign credit ratings but downgraded the outlook from stable to negative citing persistent external vulnerabilities, the ratings agency said in a statement. The negative outlook reflects at least a one-in-three chance of a rating downgrade during 2014, S&P said.

According to S&P, Montenegro is exposed to the risk of increasing external debt servicing costs or a reversal of foreign direct investment (FDI) inflows due to the country's high gross external financing needs (at 155% of current account receipts) in addition to a very high net external liabilities position (at 440% of current account receipts). Debt servicing costs represented just 3.5% of general government revenues on average over 2010-2012. But this is mainly due to the excess liquidity present in global financial markets and the high proportion of Montenegro's borrowing that was on concessional terms. The situation might change should the U.S. Federal Reserve Bank decides to tighten monetary conditions, S&P explained. The country’s gross external debt is estimated at some 128% of GDP in 2013 and should decline only gradually to 119% of GDP in 2016, due to slower accumulation of public external debt.

Montenegro’s current account gap is expected to remain high at close to 17% of GDP in the next two- three years, underpinned by rising foreign trade deficit. S&P noted that higher investments will likely support imports of capital goods, thus preventing recorded current account deficits from shrinking significantly in the near term. The current account gap will be financed largely by FDI, which is forecast to be close to 15% of GDP in 2014-2016, the agency said.

The rating affirmation, on the other hand, reflects Montenegro’s stable political environment and expected reduction of the government’s net debt to 47.5% of  GDP in 2016 from 54.0% in 2013, as budget deficits decline, S&P underscored. The agency noted, however, that there are downside risks related to the activation of state guarantees which may cause debt levels to increase above 60% of GDP. In 2013 the government paid around 3% of GDP in relation to guarantees for bankrupt aluminium producer KAP. Nonetheless, according to S&P, the remaining guarantees are less likely to be called than those made to KAP.

The country’s headline budget gap is seen narrowing to 1.8% of GDP in 2013 from 3.4% in 2012. According to S&P, budget revenues could increase if the government enforces more efficient collection of companies' tax arrears and tackles the grey economy.

According to S&P, Montenegro’s GDP will expand by 1.9% in 2013, while growth will accelerate to an average of 2.7% in 2014-2016 on the back of higher investments in the tourism and energy sectors. On the other hand, the high levels of corporate indebtedness coupled with significant non-performing loans will remain a drag on growth in the near-to-medium term as credit is forecast to continue retreating.


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