London, September 09, 2022 — Moody’s Buyers Service (“Moody’s”) has at this time affirmed Authorities of Montenegro’s (“Montenegro”) B1 long-term issuer and senior unsecured debt scores in addition to Montenegro’s Not Prime (NP) short-term issuer ranking. The outlook stays secure.
The choice to affirm the scores balances the next key ranking elements:
(1) Montenegro’s excessive revenue degree relative to friends which is balanced by its slender financial base uncovered to an more and more difficult exterior surroundings;
(2) An elevated public debt burden that limits fiscal area, balanced towards favorable debt affordability metrics;
(Three) Montenegro’s average susceptibility to occasion threat, primarily pushed by liquidity and exterior vulnerability dangers in addition to banking sector threat, though political volatility is rising as a consequence of frequent adjustments in authorities, constraining more practical policymaking.
The secure outlook displays Moody’s expectations that debt burden will decline in 2022 and can stabilize thereafter and that fiscal dangers associated to the Bar-Boljare freeway undertaking will stay contained; Whereas the spillovers from the Russia-Ukraine army battle weigh on the financial and monetary outlook, Moody’s expects restricted credit score implications given average commerce and monetary linkages with the 2 international locations, and specifically restricted vitality ties with Russia.
Montenegro’s foreign-currency nation ceiling stays unchanged at Baa3. Within the context of full euroization, Montenegro doesn’t have a neighborhood foreign money nation ceiling. The four-notch hole between the foreign-currency ceiling and the sovereign’s ranking balances sufficient predictability of establishments and authorities actions towards elevated exterior indebtedness in addition to minimal switch and convertibility dangers.
FIRST DRIVER: NARROW ECONOMIC BASE THAT LIMITS SHOCK ABSORPTION CAPACITY AMID AN INCREASINGLY CHALLENGING EXTERNAL ENVIRONMENT
The affirmation of Montenegro’s B1 ranking balances its stronger place in comparison with regional and ranking friends when it comes to wealth ranges towards its small measurement and financial base that expose it to exterior shocks, resulting in a extra risky progress efficiency that friends.
The diversification of the economic system stays restricted, as tourism accounts for about one-fourth of GDP and employment as of 2021 in accordance with the World Journey & Tourism Council. A slender export base, each when it comes to sectors and locations, makes it susceptible to fluctuations in worldwide demand, significantly from Serbia and from the EU which account for 24.5% and 31.1% of whole items exports and 27.6% and 20.four% of vacationer arrivals in 2021, respectively.
GDP per-capita stood at $22,566 in buying energy parity phrases in 2021 in contrast with a median of $eight,820 for B-rated international locations and is among the strongest throughout the Western Balkan area. Montenegro´s speedy revenue convergence, that had reached above 50% of the EU’s median revenue, got here to a halt as a consequence of a pointy collapse in tourism ensuing from the pandemic shock.
The economic system rebounded strongly after the pandemic shock with actual GDP progress increasing by 12.four% in 2021 from a contraction of 15.Three% in 2020 supported by the restoration of the tourism sector. Regardless of a sturdy first quarter (actual GDP grew by 7.2%), progress in 2022 is anticipated to decelerate as greater inflation will weigh on non-public consumption. Inflation reached 13.7% in July from four.5% in December, pushed by the rise in meals and non-alcoholic beverage in addition to vitality and transport classes.
Moody’s count on the financial spillovers of the Russia-Ukraine army battle to stay contained, reflecting comparatively average commerce and monetary linkages with each international locations and specifically restricted vitality ties with Russia, given the dominance of coal and renewable vitality sources within the nation’s vitality combine. However, Russia and Ukraine nonetheless accounted collectively for nearly 16% of vacationer arrival in 2021. Whereas preliminary indications counsel that the efficiency of the vacationer sector in the course of the summer time season has been sturdy, Moody’s expects a major progress deceleration this yr, with actual GDP projected to develop by round Three.5% in each 2022 and 2023. Subsequent yr progress might be pushed by home demand and tourism exercise, though draw back dangers have elevated materially because of the deteriorating exterior surroundings.
Montenegro additionally faces numerous structural challenges that maintain again its progress potential, together with excessive unemployment charges, persistent emigration and a big casual sector. Whereas the federal government this yr has applied an bold reform programme referred to as “Europe Now”, the financial influence of the measures will take time to grow to be clearer.
SECOND DRIVER: ELEVATED PUBLIC DEBT BURDEN THAT LIMITS FISCAL SPACE, BALANCED AGAINST RELATIVELY FAVORABLE DEBT AFFORDABILITY METRICS
The second driver of the ranking affirmation is elevated, albeit declining, debt burden. After rising considerably because of the pandemic shock, common authorities debt to GDP declined to round 85% in 2021 from 105.Three% in 2020, due to sturdy progress, a decrease fiscal deficit and debt repayments.
The final authorities finances deficit narrowed sharply to 1.9% in 2021 from 11.1% of GDP in 2020 reflecting income overperformance pushed by sturdy financial restoration in addition to decrease pandemic-related extraordinary help and under-execution of capital spending.
The finances deficit is anticipated to widen materially in 2022, primarily reflecting the prices of the implementation of the reform program “Europe Now”. Moody’s initiatives the deficit to achieve 7.5% of GDP, in keeping with the newest authorities’ projections. The deficit was revised upward from a goal deficit of 5.1% of GDP within the 2022 finances as a consequence of extra expenditure objects and fewer favorable financial prospects than initially deliberate. A gradual fiscal consolidation is anticipated from 2023, with the deficit projected to achieve round four% of GDP solely in 2025. Fiscal dangers are tilted to the draw back reflecting uncertainty concerning the financial and monetary influence of the reform program, which could not result in the anticipated outcomes underneath the present surroundings or take extra time than anticipated to comprehend materials features. However, there’s some fiscal room within the finances to regulate in case income underperformance, unexpected expenditure or decrease than anticipated financial progress given massive deliberate capital expenditure and the existence of contingency reserves.
Moody’s initiatives debt-to-GDP to say no to about 75% in 2022 and stabilize at round 76-77% in 2023-2024. Whereas the debt will decline considerably this yr, additionally supported by sturdy nominal GDP progress, it is going to stay nicely above the B-rated median degree (at 57% in 2022). A delayed fiscal consolidation amid home political uncertainty and more difficult exterior surroundings poses a threat to the debt trajectory. Whereas the primary part of the Bar-Boljare freeway undertaking grew to become operational in mid-July, the completion of the total four-stage undertaking continues to pose challenges to Montenegro’s fiscal place given restricted room to finance the development of the three remaining sections and different funding choices would doubtless enhance contingent legal responsibility dangers.
That stated, fiscal energy stays supported by favorable debt affordability metrics. Curiosity funds account for round 5.Three% of common authorities income in 2021, evaluating very favorably to the B-rated median (9.5% in 2021). Whereas Moody’s expects that tightening world financing situations will weigh on debt affordability additionally bearing in mind the nation’s important reliance on international funding, the comparatively lengthy maturity of debt profile and excessive proportion of fixed-rate debt will partly mitigate the sensitivity to greater rates of interest.
THIRD DRIVER: MODERATE EXTERNAL VULNERABILITY, LIQUIDITY AND BANKING SECTOR RISKS DRIVE SUSCEPTIBILITY TO EVENT RISK, ALTHOUGH POLITICAL VOLATILITY IS RISING
The third driver for the ranking affirmation is a average susceptibility to occasion threat, pushed by exterior vulnerability and authorities liquidity dangers in addition to banking sector threat. However, the dangers posed by more and more polarized home political surroundings and rising geopolitical threats have gotten extra distinguished.
Exterior vulnerability threat is mirrored by traditionally extensive present account deficits, primarily pushed by investment-related imports, though dangers are mitigated by excessive internet FDI inflows, which lined greater than half of the deficit on common over the previous 5 years. Moreover, the present account deficit has narrowed considerably in 2021, primarily reflecting the restoration in tourism receipts. Whereas Moody’s initiatives it to widen to 13% of GDP in 2022, it is going to stay beneath the extent seen within the interval 2016-2020, when it averaged round 18% of GDP.
The banking sector’s threat is principally pushed by its intrinsic monetary energy and its comparatively massive measurement (108.5% of GDP as of finish 2021). That stated, the outcomes of the Asset High quality Evaluate carried out in 2021 to judge the well being of the banking sector confirmed its stability and sufficient capitalization. The central financial institution’s potential to supply emergency liquidity help to the banking system in case of want is constrained by Montenegro’s adoption of the euro as authorized tender. Nevertheless, the excessive share of international possession supplies a mitigation.
Due to proactive debt administration, the federal government had a cushty liquidity buffer on the finish of 2021 (about 9.5% of GDP) which, together with borrowing from home banks, will cowl financing wants for 2022. Nevertheless, refinancing dangers will enhance within the medium time period with three eurobonds maturing in 2025, 2027 and 2029 (totaling EUR1.75 billion, equal to 33% of Moody’s estimated GDP in 2022) amid tightening world financing situations. Moody’s estimates that gross financing necessities will enhance from roughly 10% in 2023-24 to about 16% of GDP in 2025.
Lastly, political volatility has elevated because the nation noticed already two adjustments in authorities for the reason that first switch of energy for the reason that nation’s independence in December 2020. Extended coverage uncertainty might delay fiscal consolidation and hinder reform implementation towards the EU accession path. Montenegro’s publicity to geopolitical dangers has additionally elevated due to the army battle between Russia and Ukraine, making it more and more a goal of disinformation campaigns and cyber-attacks.
RATIONALE FOR STABLE OUTLOOK
The secure outlook displays Moody’s expectations that debt burden will decline and stabilize thereafter and that fiscal dangers associated to the Bar-Boljare freeway undertaking will stay contained by limiting the quantity of public financing and contingent liabilities. Whereas the spillovers from the Russia-Ukraine army battle weigh on the financial and monetary dynamics, which have been recovering from the pandemic shock, Moody’s expects that the credit score implications will stay manageable, specifically given restricted dependence on fuel.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Montenegro’s ESG Credit score Impression Rating is reasonably adverse (CIS-Three), balancing reasonably adverse environmental and social dangers and impartial to low governance dangers. Montenegro’s capability to answer pricey environmental hazards or social calls for is constrained by its very restricted fiscal buffers.
The nation’s total E issuer profile rating is reasonably adverse (E-Three), pushed by reasonably adverse dangers associated to the depletion of pure capital and waste and air pollution. Montenegro’s progress mannequin poses challenges in balancing strategic funding priorities with the safety of pure assets, that stay key given its excessive financial reliance on tourism. Moody’s sees low dangers stemming from bodily local weather change, carbon transition and entry to water.
Moody’s assesses its S issuer profile rating as reasonably adverse (S-Three), reflecting average adverse dangers throughout most classes. Unfavorable demographic traits that may scale back the nation’s labour provide pose a long-term threat on financial and monetary metrics. As well as, labour market mismatches constrain medium-term progress.
Governance doesn’t pose particular dangers (G-2 issuer profile). The nation’s working surroundings has been constrained by regulatory and administrative weaknesses since its independence in 2006. Nevertheless, authorized and administrative reforms in preparation for EU accession are anticipated to enhance Montenegro’s governance framework. Whereas Moody’s doesn’t count on Montenegro to affix the EU within the foreseeable future, we count on the method itself to reinforce the working surroundings and assist elevate potential progress.
GDP per capita (PPP foundation, US$): 22,566 (2021) (also called Per Capita Earnings)
Actual GDP progress (% change): 12.four% (2021) (also called GDP Progress)
Inflation Charge (CPI, % change Dec/Dec): four.5% (2021)
Gen. Gov. Monetary Steadiness/GDP: -1.9% (2021) (also called Fiscal Steadiness)
Present Account Steadiness/GDP: -9.Three% (2021) (also called Exterior Steadiness)
Exterior debt/GDP: [not available]
Financial resiliency: ba1
Default historical past: No default occasions (on bonds or loans) have been recorded since 1983.
On 06 September 2022, a ranking committee was referred to as to debate the ranking of the Montenegro, Authorities of. The details raised in the course of the dialogue have been: The issuer’s financial fundamentals, together with its financial energy, haven’t materially modified. The issuer’s fiscal or monetary energy, together with its debt profile, has not materially modified. The issuer’s susceptibility to occasion dangers has not materially modified. Different views raised included: The issuer’s establishments and governance energy, haven’t materially modified.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATINGS UP
The ranking could possibly be upgraded if the federal government launched into a transparent fiscal consolidation path and the fiscal dangers associated to the remaining sections of the Bar-Boljare freeway stay contained. As well as, important progress towards EU accession can be credit score constructive. A discount in susceptibility to occasion threat would even be supportive of a better ranking.
WHAT COULD CHANGE THE RATINGS DOWN
Conversely, downward stress on the ranking would develop ought to the federal government’s fiscal administration deteriorate considerably. Vital extra debt or contingent liabilities because of the completion of the three remaining components of the Bar-Boljare freeway undertaking can be additionally credit score adverse. Different adverse elements embrace a weakening of Montenegro’s exterior place pushed by a cloth worsening of competitiveness within the areas of tourism or the emergence of challenges in funding the current-account deficit as a consequence of a major decline of FDI. Proof of liquidity challenges as a consequence of bigger than anticipated financing wants and troublesome refinancing situations would additionally exert adverse credit score stress. Elevated political polarization leading to inadequate dedication to medium-term fiscal consolidation and to the reforms underneath the EU accession path to would even be credit score adverse.
The principal methodology utilized in these scores was Sovereign Rankings Methodology printed in November 2019 and out there at https://scores.moodys.com/api/rmc-documents/63168. Alternatively, please see the Score Methodologies web page on https://scores.moodys.com for a duplicate of this technique.
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Daniela Re Fraschini
Vice President – Senior Analyst
Sovereign Threat Group
Moody’s Buyers Service Ltd.
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Sovereign Threat Group
JOURNALISTS: 44 20 7772 5456
Consumer Service: 44 20 7772 5454
Moody’s Buyers Service Ltd.
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London, E14 5FA
JOURNALISTS: 44 20 7772 5456
Consumer Service: 44 20 7772 5454