When Montenegro broke free of Serbia after the May 2006 referendum, many voiced doubts about whether a state of just 670,000 people could sustain itself economically – despite the fact that Montenegro was independent between 1878 and 1916 (when Serbia was under Turkish occupation) and only reluctantly became part of the new Kingdom of Serbia, Croatia and Slovenia in 1918. There were also political concerns: critics pointed to the narrow margin of the vote (55.5% in favour, only 0.5% above the threshold set by the EU) and difficulties in devising a new constitution.
Most of these arguments now seem spurious. Soon after becoming the IMF’s 185th member in January, the world’s newest country signed a Stabilisation and Association Agreement (SAA) with the EU on March 15, the first major step towards membership of the union.
In 2006, gross domestic product (GDP) expanded by 8.2% and in the first quarter of 2007 foreign direct investment (FDI), at €195.4m, was three times higher year-on-year than in 2006, and rising; about €500m was invested last year, bringing FDI stock to almost €2bn, the highest in per capita terms in the Balkans.
Amazing progress
Little wonder that in July, World Bank representative Orsalia Kalantzopoulos said progress was “amazing”. She praised the banking sector for its stability and the private sector for its dynamism, although she also warned that reforms of the tax and pension system, the labour market and the land registry needed to continue.
For Gordana Djurovic, deputy prime minister and minister for European integration, Montenegro’s economic progress is vindication of its break with Serbia. “Independence and the EU’s ‘soft-power’ have enabled reforms to move faster. We still face major challenges but after 15 years of transition recession, Montenegrin citizens now enjoy an environment without the tensions of the past,” she says.
Johann Engel, author of the country’s tourism masterplan – which is seen as key to future prosperity because tourism now accounts for 20%-25% of GDP – agrees. “Independence meant an end to uncertainty. Montenegrins can now move forward knowing that they alone have responsibility for themselves and their country’s future,” he says.
The economy seems a far cry from the days when Montenegro (as part of Serbia and Montenegro) suffered sanctions and shortages of even basic foodstuffs. The 2006 growth pattern is continuing with inflation at about 2.5% and unemployment 12.5% (down from 30% in 2001), although the lost decade of the 1990s means that living standards still have a long way to rise (average monthly salaries are about €300).
Investor interest
Foreign investors are encouraged by the euro being Montenegro’s official currency (an oddity dating back to the Kosovo war when officials persuaded Germany’s Bundesbank to allow Montenegro to use the deutschmark rather than experience further hyper-inflation with the Yugoslav dinar). They have been further buoyed by Standard and Poor’s upgrading Montenegro’s long-term currency rating from BB to BB+.
Infrastructure improvements have also boosted interest. Following the completion of the new Podgorica airport at a cost of €30m, Montenegro now has two airports (the other is on the coast at Tivat), and the stylish steel Millennium Bridge in Podgorica has given the rather shabby capital city a much-needed landmark. The IMF has expressed concern that the debt financing of infrastructure projects could contribute towards over-heating – its opposition prompted Podgorica to turn its back on an IMF package in June. However, the European Bank for Reconstruction and Development (EBRD), which opened its Podgorica office in June, says that along with tourism and encouraging small and medium-sized enterprise growth, infrastructure is its priority. It is actively looking at various roads, rail, energy and water facility projects.
“Our pipeline looks very strong,” says EBRD resident representative Marek Lorinc, who expects the cumulative value of its projects to double from €43m, probably before end-2008.
The main investment activity, though, has been in tourism. Montenegro is currently very much Europe’s ‘in’ destination. According to the World Travel and Tourism Council, tourism in the country has been growing faster than anywhere else on the planet: an average of about 8% a year, rising from almost nothing to more than 20% of GDP.
In 2000, the country had 2000 tourist beds; now with the completion of large-scale hotel projects there are 35,000, with the construction of more four and five-star hotel projects under way. Luxury Singapore-based Aman Resorts paid €1.6m to rent Sveti Stefan, the iconic hotel island; about €40m will be invested to make it one of the most luxurious resort-hotels in the world. In an even bigger development, Canadian businessman Peter Monk is investing about €500m in transforming the sleepy resort of Tivat, with the construction of hotels, shops, luxury apartments and a state-of-the-art marina for ‘super yachts’.
Business stability
Montenegro’s success in attracting FDI reflects an underlying stable business environment. The Montenegrin Investment Promotion Agency (MIPA) was set up in 2005 and company registration simplified (a small limited liability company now needs just four days and E1 to establish itself) and since 1995, the Development Fund has been working to encourage investment and move privatisation forward.
Although not an issuing bank, the Central Bank of Montenegro (CBM) has handled financial sector stability, payments and foreign exchange transactions effectively. It began operating in March 2001 and among its priorities for this year are implementation of the Basel II principles “with a view to improving risk management in the banking system” and, over the longer term, a new banking law.
Banking confidence
The CBM has presided over a banking sector that has been largely free of shocks, with confidence reinforced by the introduction of a Deposit Protection Fund in January 2006, protecting depositors up to €5000. Consolidation has already taken place, with foreign banks now owning almost 90% of bank assets; as of end-2006, there were 11 banks in operation, plus one undergoing bankruptcy and another in liquidation. Acquisitions have been plentiful. In August 2006, Hungary’s OTP acquired Crnogorska Komerijalna Banka (Montenegro Commercial Bank – MCB), the country’s largest bank,with assets worth €650m, for €105m.
Two further bank sales were completed last year: Pljevaljska Banka sold to a consortium (Atlasmont Bank, Atlasmont IF and FinInvest) for €3.1m, promising to invest €20.4m over three years; and Niksicka Banka was bought by Montenova, a local entity, for €2.3m. They followed Société Générale’s purchase of Podgoricka Banka for €14.2m in October 2005 and Slovenia’s Nova Ljubljanska Banka, which in May 2003 bought Montenegrobanka for €11.1m, subsequently acquiring another small local bank and merging both into NLB Montenegrobanka.
The EBRD’s Mr Lorinc says there may be more consolidation ahead.
“The problem right now is not shortage of credit but a lack of people to lend to. That said, with so much money coming from property and tourism, I see opportunities for wealth management as well as other financial services,” he says. He expects new players in the insurance market to compete with market leader Lovcen Insurance. Generally, however, Montenegro’s non-bank financial sector remains very much in its infancy.
Tax environment
As well as a stable banking sector, tax policy has encouraged investment: Europe’s lowest rate of corporate tax (just 9%), a flat income tax rate (15%), regional investment incentives and a favourable rate of VAT for investors in tourism (7% in place of the normal 17%) are all aimed at getting potential investors to reach for their cheque books.
The government’s privatisation strategy reveals the same intent, direct sales continuing apace. As well as MCB, Hungarian companies bought Telecom Montenegro, and Interbrew snapped up national beer company Niksic for €21m. Still on the block are the Port of Bar, Montenegro Airlines, and the national electricity, railways and airport companies.
The jewel in the crown is probably Plantaze, the largest wine company in former Yugoslavia, producing about 17 million bottles a year with a turnover of €32m. Despite being 51% state-owned, it is one of Montenegro’s most persistently profitable companies. It sells to markets across Europe and makes, among other products, Pro Corde, a smooth, powerful wine high in proanthocyanidols with reputed cardio-vascular benefits. Its privatisation should fetch a decent price.
Against the background of strong investor interest and continuing growth, Dr Djurovic believes Montenegro will be in a position to apply for EU candidate country status in the first half of 2008. It could be ready for membership in 2012, she says, although whether this happens will depend on the mood within the EU for further enlargement.
Until then, she concedes that one of Montenegro’s priorities is defining its image. To the dismay of Serbs who fear marginalisation, Podgorica is following the Council of Europe recommendation and defining itself as a community of citizens rather than nations, in recognition of a state in which only 43% of the population are ethnic Montenegrin (31% are Serbian, 16% Bosnian or Muslim and 7% of Albanian origin). However, as The Banker went to press, parliament had yet to agree the new constitution, which could yet go to a referendum – something opinion polls suggest a majority of Montenegrins would prefer.
Politics aside, for a place that few people had heard of a year ago, Montenegro is now firmly on the map, especially in the key real estate and tourism sectors. Foreign money is flowing in so fast that the government wants to curb excessive growth: proposals to restrict large-scale foreign purchases of land are reportedly under consideration, and the latest masterplan revision warns against overbuilding along Montenegro’s relatively unspoiled coastline.
Keeping control
Echoing World Bank concerns, Dr Djurovic admits that excessive interest in such a small country (just 14,000 square kilometres) poses one of the biggest challenges. “It is vital that we keep our own space and control the development process here. Although we are keen to attract investment, long-term sustainability is vital,” she says.
Another concern is that, although external debt is only 40% of GDP, the current account deficit has been rising fast, reaching an estimated 30% in 2006 against 8.6% in 2005. In part, this reflects the rising cost of energy imports. However, as the EBRD points out, this must be seen in context: Montenegro seems unlikely to tap global capital markets in the foreseeable future and, generally, the FDI outlook is healthy.
The focus on tourism – perhaps the world’s fastest growing industry – has done much to mitigate concern. Nonetheless, observers say policymakers cannot entirely relax.
“Fiscal policy has been cautious but the small size of this very open economy means that any external shock could have a major impact,” says Mr Lorinc.
