Montenegro outlook: Growth moderating but sentiment remains positive

After three exceptional years when growth averaged close to 9% y/y, pace of expansion started to slow. Real GDP growth averaged still solid 3.4% y/y in 1H24 driven by strong domestic demand. Positive sentiment was boosted in August when S&P upgraded the credit rating by one notch to B+ with a stable outlook. After hovering between 4% and 5% in 1H24, inflation again started to drop in 2H24, with the most recent print in September landing at 1% y/y. Fiscal performance continues to outperform budget figures, encouraging the government to proceed with the second phase of Europe now fiscal reform. Country made progress in EU accession process after getting a positive IBAR report in June, although after ruling majority lost elections in Podgorica jitters could rise again.

Real GDP performance in 1H24 (3.4% y/y) exhibited expected developments. Growth slowed, coming from a high base, but remains encouraging overall. Expansion was supported by strong household consumption and investments, while net exports worked in the other direction. Overall sentiment appears positive due to credit rating upgrade from S&P, but more importantly progress in EU accession process after the country received a positive report on the fulfilment of temporary benchmarks in the chapters on the rule of law.

Outlook suggest growth figures will fluctuate between 3% and 3.5% y/y over the forecasted period. Inflow of migrants from Eastern Europe, which had a strong influence on consumption figures in the past and current year has slowed while tourism has little to no spare capacity in the relatively narrow peak of the season. Nevertheless, activity should remain supported through fiscal reforms, with another round of wage hikes (since October 2024) and pension hikes (in January 2025) which should keep consumption firmly in the driver seat of the economy. External side of the equation suggest another challenging year.

Inflation averaged just 2.2% y/y in 3Q24 and fell as low as 1% y/y in September after somewhat surprising deflationary contribution from food prices. We expect prices will pick-up in the upcoming months but overall remain stable in the vicinity of 3% y/y.

Tourism results after 8M24 suggest slightly weaker season compared to 2023. Foreign tourist arrivals are 1.1% y/y lower, while foreign night spent are 5.8% y/y lower. While the preseason was good with 5.1% y/y higher arrivals in 2Q, both July and August displayed weaker result.

General budget revenues after 1H24 are 6.4% above plan while expenditures are 6.7% below plan, hence the 0.6% of GDP surplus achieved in mid-year is almost 3pp of GDP better than planned. Central budget results for the 3Q show a surplus as well suggesting similar dynamics continued in 2H24. Fiscal strategy sets the average 2025-2027 target gap at 3.2% of the GDP.

Public debt is expected to climb back above 60% of the GDP by year-end and then fluctuate between 60% and 65% of the GDP in the mid-term, depending on eurobond maturities which are sometimes prefinanced and can cause a relatively stronger jump in public debt ratio in a certain year.

The government formed in October 2023 and reshuffled in July 2024, has made EU accession its top priority. By March 2024, key judiciary and prosecution appointments were made, and in June 2024, a positive Interim Benchmark Assessment Report marked a significant step in the right direction, enabling the country to begin closing chapters and move a few steps closer to EU membership.

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