Moody's: Montenegro's rising government debt and volatile growth pose credit challenges

Montenegro's B1 rating with a negative outlook is constrained by its rising government debt, small economy, volatile growth and strong reliance on foreign funding, Moody's Investors Service said in a new report.

The annual update, "Government of Montenegro -- B1 Negative Annual Credit Analysis", is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"Montenegro's credit challenges include its large fiscal and external imbalances and a high debt ratio, which limits the country's shock absorption capacity," said Rita Babihuga-Nsanze, a Moody's Vice President -- Senior Analyst and co-author of the report. "The country's debt-to-GDP ratio increased to 67% in 2016, more than double the 2008 level of 28.4%."

Moody's expects that Montenegro's fiscal metrics will deteriorate further because of the cost of building a major new highway to the coastal town of Bar, which will push government debt to above 80% of GDP by 2018.

The deficit is expected to deteriorate to 8.7% of GDP in 2017, higher than the authorities' forecasts, due to the acceleration of the implementation of the highway project and continued pressure on current spending.

Overall, Moody's believes that the fiscal expansion pursued over the past two years will limit options for any adjustment, coupled with an already rigid spending structure: pensions and wages account for around half of overall expenditure.

Moody's forecasts full-year real GDP growth of 3.3% in 2017 as construction work on the new highway and other investment projects continues. However, risks stemming from possible future delays to construction works persist. Private and public consumption should moderate following the introduction of fiscal consolidation measures at the end of 2016.

Montenegro's credit strengths include its relatively high per-capita GDP wealth levels compared with similarly rated peers; progress in the country's EU accession strategy and a growth outlook supported by large inflows of foreign direct investment (FDI), with projects in tourism and renewable energy.

The negative outlook on the rating reflects risks associated with the government's debt-funded growth strategy. Evidence that fiscal or external metrics have continued to deteriorate, or signs of reduced access to international capital markets, would put downward pressure on the rating. Weaker growth due to project delays, declining FDI or tourism would also be credit-negative.

Conversely, fiscal consolidation that puts the country's debt trajectory on a sustained downward trend, a reduction in contingent liabilities, improvements in external competitiveness and a material decline in external vulnerabilities would support Montenegro's creditworthiness.