Event

On 30 August, President Đukanović’s DPS party (the ‘Democratic Party of Socialists’) and its small allies lost power after parliamentary elections delivered a historic political defeat. Although the DPS remained the single largest party, with 35% of the vote, it lost against a coalition of opposition parties composed of three opposition blocs (pro-Russian and pro-Serbian parties and two civic-oriented and pro-EU groups), which obtained a slim majority (41 seats out of a total of 81) and agreed to form a government. The new alliance announced the future government would include non-party experts, pledged to honour the country’s international commitments, particularly with regard to the NATO membership and EU accession process, and rejected any temptation to seek revenge against the former government. Moreover, in order to fight against corruption and organised crime, the new government said it would depoliticise main state institutions. This political turning point is occurring in a severe covid-19-related recession for Montenegro.

Impact

The high turnout (75%) shows how tired the majority of the population is about M. Đukanović’s long-lasting regime and how determined it is to see change. While M. Đukanović’s presidential mandate expires in 2023, his historic defeat at parliamentary elections – the first since 1991 – had been in the air. Over the past years, anti-government protests gained prominence, especially from early 2019, after a corruption scandal involving M. Đukanović was revealed and after a controversial law on religious freedom, targeting the powerful orthodox church’s financial interests, was passed.

The new ruling government has been quick to state that democracy would be preserved, continuity in foreign policy ensured and that the reform process to join the EU would move forward. Nevertheless, as always in the Balkans, the ethnic mix and a fragmentation among the population between pro-EU and pro-Serbian/Russian people are likely to continue fuelling tensions and instability risks in Montenegro. That is probably where the top weakness of this fragile new ruling coalition, united against the DPS but with diverging interests, will lie in the coming months.

At the moment, the choice for continuity is wise, with a small government majority, as well as the most pragmatic one, given the current difficult economic environment and the country’s poor public finances. Indeed, Montenegro is among the European countries that have been hit the hardest by the covid-19-related economic shock due to, on the one hand, determined and effective containment measures hitting domestic activity and, on the other hand, the country’s high reliance on tourism. Therefore, keeping investor confidence and supporting the economic recovery – from an expected 8.7% contraction in 2020, which led Credendo to downgrade the commercial risk rating from B to C last spring – in a stable political climate appear as top short-term priorities. Montenegro is facing higher financing needs resulting from tumbled tourism revenues and FDI inflows and from portfolio capital outflows. The only positive collateral development comes from the chronically deep current account deficit which is expected to slightly decrease to 15% of GDP as weaker domestic consumption and FDI-related imports are outweighing the negative shock on exports. Faced with high emergency spending, Montenegro got assistance from the IMF RFI (Rapid Financing Instrument), the EU and the World Bank. This necessary support will ease direct financing pressures during the covid-19 crisis. However, the upcoming months promise to remain challenging. In fact, before the crisis, Montenegro’s fundamentals had already been deteriorating as a consequence of the beginning of the first phase of the China-funded highway project linking the country’s coast to Serbia. Worsened by the covid-19 crisis, financing gaps in the balance of payments are now projected until 2024 whereas the much wider fiscal deficit (i.e. -10% of GDP following -5.5% on average in 2015–19), which results from weaker revenues and fiscal stimuli, is expected to push the public debt further up, close to 90% of GDP this year, before gradually decreasing in the medium term.

To keep its public debt sustainable once the crisis is over, the government is expected to return to fiscal consolidation and think twice before starting extra phases in the development of a costly highway. As for the external debt, although it is heavy and expected to soar to a huge 190% of GDP and 466% of current account receipts this year, its maturities are largely in the medium- to long-term. Hence, short-term debt repayments should be manageable thanks to multiple external financing support, a stronger euro and low interest rates. Moreover, Montenegro’s use of the euro as a legal tender mitigates external liquidity risks and explains the stable short-term political risk rating in 2/7.

The economic outlook will depend on the duration of the pandemic and on the recovery of the key tourism industry, which is a central activity and provides more than 40% of the country’s total current account receipts. After the covid-19 brought it to a halt, tourism remains largely hindered by travel restrictions and high contamination levels in the region; it also remains to be seen to what extent travel patterns will change in the future. At this stage, covid-19-related uncertainty, notably during next winter, will weigh on the gradual economic recovery expected as of next year.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com