Mon­tene­gro

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Mon­tene­gro’s econ­omy has fi­nally reached pre-cri­sis lev­els of ac­tiv­ity but the growth pace will slow in 2014. Tight credit and lim­i­ta­tions on tourist ca­pac­ity hold back the re­cov­ery. A huge cur­rent ac­count deficit poses great risks for the econ­omy. There has been some progress in re­duc­ing per­sis­tent fis­cal im­bal­ances but high­way im­prove­ments will add sub­stan­tially to bud­get deficits and pub­lic debt in com­ing years. Un­em­ploy­ment ex­ceeds 20%. Mon­tene­gro's econ­omy grew steadily be­tween 2003 and 2008 and in­fla­tion slowed af­ter the coun­try adopted the euro. De­mand was sup­ported by large in­creases in credit. Em­ploy­ment and wages rose and un­em­ploy­ment fell sharply in 2005-2008. The coun­try ex­pe­ri­enced some­what of a prop­erty boom with wealthy Rus­sians and Euro­peans buy­ing prop­erty along the coast. How­ever, the econ­omy slipped into re­ces­sion in 2009 when prop­erty prices fell by more than 50% and real GDP con­tracted.

Growth re­sumed – but at a mod­est pace – in 2010 and 2011. The re­cov­ery was slowed by a debt over­hang in the pri­vate sec­tor. The econ­omy stalled in 2012 as a re­sult of se­vere weather con­di­tions and a sharp slow­down in alu­minium pro­duc­tion. The econ­omy con­tin­ued to strug­gle in 2013, plagued by prob­lems in the me­tals sec­tor and the high level of pri­vate sec­tor debt. Short­ages of do­mes­tic liq­uid­ity were an­other con­straint.

Eco­nomic prospects

Mod­est growth is ex­pected in 2014 with real GDP ris­ing by 2.8%, down from 3.4% in 2013. Tight credit and lim­i­ta­tions on tourist ca­pac­ity slow the re­cov­ery.

In­fla­tion was 2.8% in 2013 and prices are ex­pected to rise by 0.2% in 2014.

Mon­tene­gro's huge cur­rent ac­count deficit poses great risks for the econ­omy. In 2013, the deficit was 15.0% of GDP. Im­prove­ments in com­pet­i­tive­ness will be es­sen­tial to keep the im­bal­ance from wors­en­ing as the econ­omy gains strength.

House­hold de­mand and in­vest­ment re­main weak and bank credit con­tin­ues to de­cline. The real value of pri­vate fi­nal con­sump­tion rose by 1.5% in 2013 and gains of 0.4% are ex­pected in 2014.

Un­em­ploy­ment was 20.4% in 2013 and it will dip to 20.2% in 2014. Par­tic­i­pa­tion in the labour force is at a very low level while the share of long-term un­em­ployed con­tin­ues to grow.

The econ­omy has been sub­ject to vul­ner­a­bil­ity from per­sis­tent fis­cal im­bal­ances and a rapid in­crease in pub­lic debt. Some progress was made in 2013, as rev­enue col­lec­tion was im­proved and ex­pen­di­tures were con­tained. How­ever, the con­struc­tion of the Smoko­vacMatesovo high­way will add sub­stan­tially to bud­get deficits and pub­lic debt in the com­ing years.

Eval­u­a­tion of market po­ten­tial

The econ­omy still faces a large de­gree of re-

struc­tur­ing. There is a small, market-ori­ented sec­tor which gen­er­ates the most growth; a large, un­re­formed so­cial­ist sys­tem; and the hid­den “black econ­omy”, es­ti­mated to gen­er­ate 40% of GDP. Real growth of 2.6-2.9% per year is ex­pected in medium term.

Agribusi­nesses have con­sid­er­able po­ten­tial. The elim­i­na­tion of wait­ing times at bor­ders would make it pos­si­ble for pro­duc­ers to shift from low-profit frozen ex­ports to fresh ex­ports. In ad­di­tion, the grow­ing sea­son is unique and fits com­fort­ably with the EU's needs.

Eco­nomic prospects should be rea­son­ably bright once Western Europe's re­cov­ery gath­ers steam. So far, how­ever, the ben­e­fits of re­cent progress have not reached the masses. Av­er­age salaries are just €250 per month. The large cur­rent ac­count deficit lim­its ef­forts at ex­port di­ver­si­fi­ca­tion.

Busi­ness en­vi­ron­ment

Mon­tene­gro has an am­bi­tious pro­gramme of pri­vati­sa­tion and plans to mod­ernise labour leg­is­la­tion with the goal of im­prov­ing labour flex­i­bil­ity. The coun­try's large alu­minium com­plex and most of its fi­nan­cial sec­tor have re­cently been pri­va­tised.

The bank­ing sec­tor, telecom­mu­ni­ca­tions, and oil im­port and dis­tri­bu­tion in Mon­tene­gro are 100% pri­vately owned. Some pri­vati­sa­tions, how­ever, have been du­bi­ous. The elite are be­lieved to have prof­ited ex­ces­sively from pri­vati­sa­tion. Nepo­tism is an­other prob­lem which hand­i­caps the ju­di­ciary. The coun­try's busi­ness en­vi­ron­ment is lum­bered by a maze of ex­ces­sive reg­u­la­tions. Greater flex­i­bil­ity in wage set­ting and em­ployee pro­tec­tion is needed. The abil­ity to pro­tect prop­erty rights is also lim­ited.

The gov­ern­ment has passed new leg­is­la­tion which will im­prove the en­vi­ron­ment for busi­ness de­vel­op­ment, in­vest­ment and eco­nomic growth. The labour market re­mains rigid, lim­it­ing the abil­ity of firms to re­struc­ture. The tech­ni­cal and ad­min­is­tra­tive skills of the agen­cies pro­vid­ing busi­ness ser­vices are also ex­tremely lim­ited.

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