Strong performance in 2022 but numerous risks loom
Montenegro’s economy grew faster than expected in 2022 owing to strong private consumption and a good tourism season. Strong performance in 1H22 (10.3% y/y) was driven by growth in private consumption and exports. The former benefited from a surge in real disposable income after the tax reform while the latter owes to better-than-expected tourism performance. Consequently, we upgraded our FY22 GDP forecast by 2.2pp to 7.2% y/y.
Meanwhile, unfavorable global economic outlook, persistent inflation, tighter financial conditions, constant political uncertainty, and depressed business sentiment were the key factors determining a downgrade of growth for next year. We have slashed our mid-year forecast and now see growth at 2.8% y/y in 2023, before moderate acceleration in 2024 (3.5% y/y).
After a decade long period of low inflation, this year we saw an explosion of prices. Global inflationary pressures, stemming from disturbances on global food and energy markets, have been driving a surge in prices. After 10M22 average inflation stands at 12.1%, with the latest available reading for October reaching 16.8% y/y. Inflation is expected to start decelerating more noticeably in 2Q23 albeit still at a very gradual pace.
Fiscal risks are pronounced as the agreed increase in public sector wages, pensions and social benefits substantially burdens the budget at a time when refinancing costs are rising sharply. Political instability remains a source of major domestic risk.