Strong external shock
The economy started to cool off in 2019 in line with moderating investments, with GDP growth landing at 3.6% y/y. Now the COVID-19 pandemic and the associated containment measures add to overall worries surrounding economic outlook. This health crisis is different from past crises because it implies a simultaneous shock to both the supply and demand side. Montenegro is particularly affected by constraints on travel and subsequent effect on tourism industry, which is a critical driver of growth as tourism receipts account for more than 20% of GDP. The country’s lack of monetary policy due to unilateral adoption of the euro, limited fiscal buffers, and high public debt amplify its vulnerability.
We expect the economy to contract by 10% this year as both engines of the economy in recent years, investment growth stemming from the highway project and tourism activity, are severely constrained. Budget gap is projected at EUR 0.4bn, hence putting additional pressure on already relatively high public debt level. Rating prospects deteriorated as now rationale suggest increased caution due to high twin deficits and gradual recovery potential.
Similar to regional peers, inflation was low in Montenegro averaging just 0.4% in FY19. Food was the main driver, while transport and notably fuel prices worked in the opposite direction. Following the COVID-19 outbreak, and subsequent effect on commodity prices and aggregate demand, we have accordingly cut our forecast and now expect prices to drop on average by 0.2% y/y in 2020.
The current focus of the public is on COVID-19 outbreak and the related measures implemented to minimize damage, but will eventually turn to regular parliamentary elections this year. We expect they could be held in 4Q20, absent a possible second wave of the virus. The outcome is uncertain and underlying tension from the past between the ruling party and opposition remain unresolved.