Tourism outcome will determine the recovery
Complete loss of last year’s tourism season resulted in one of the deepest recessions in Europe, as GDP declined 15.2% y/y in 2020. Net exports knocked almost 7pp off the headline result, followed by depressed private consumption, which slashed an additional 4.7pp.
While the worst is likely behind us in terms of the pandemic, the relatively late start of immunization makes it difficult to predict this year’s outcome. The government is hoping for 55% of pre-pandemic tourism levels. The figure is achievable contingent on immunization pace and the reintroduction of flight arrangements following the bankruptcy of Montenegro airlines. The above-mentioned level of tourism recovery suggests growth close to, but under, the area of 7%. The risks to our baseline forecast seem balanced.
The demand shock brought on by the pandemic, accompanied with the plunge in oil prices, resulted in deflation for three quarters of last year. As the output gap begins to narrow, and commodities rally comes into play, this year’s CPI is expected to average 1.8% y/y.
The lack of tourism revenues and need to support the economy during the pandemic lifted the fiscal deficit to 11% of GDP in 2020. That and December’s pre-financing activity pushed public debt to a record-high 105% of GDP. The new government is looking to make significant savings on the expenditure side, targeting a rather optimistic 3% of GDP budget gap.
The new technocrat government that took office in December 2020 is under a lot of pressure, given the difficult economic situation. Its decision-making is constrained by a slim parliamentary majority and clear political polarization.