The Standard & Poor’s (S&P) agency has upgraded Montenegro’s outlook from “stable” to “positive,” maintaining its credit rating at B/B. However, they cautioned about borrowing risks associated with the ongoing construction of the highway.

According to the S&P report, despite the improvements, fiscal risks persist.

“These primarily stem from a potential government decision to fund the completion of vital highway segments through public debt. The initial phase of the Bar-Boljara highway has been completed. Our current forecasts do not account for additional financing for the highway’s construction as the government has yet to finalize its decision on subsequent project phases, and the total costs remain uncertain.”

The first segment of the highway from Podgorica to Kolašin (Smokovac-Mateševo) was built by the Chinese company CRBC. A design and construction contract was signed with CRBC on October 30, with the project budget set at €809.6 million. A financial agreement was also established, through which 85% of the funds were sourced from the Chinese Exim Bank, amounting to $944 million, with the remaining 15% covered by the budget. Construction began in 2015 and was completed in 2019. However, deadlines were extended three times, and subsequent contracts with Monteput raised construction costs by nearly €100 million. This section was inaugurated in July 2022.

S&P notes that an EU feasibility study is currently being conducted to determine costs, though uncertainties remain regarding the financing mechanism for project’s advancement.

“Montenegro has the potential to secure some funding from international financial institutions under favorable conditions and access small grants through the Western Balkans investment framework,” states the S&P report.

Credit ratings reflect opinions on credit risk over the upcoming period and assess the issuer’s capability and readiness to meet obligations. S&P employs a letter-based grading system starting with “A,” “B,” “C,” and “D,” where “AAA” denotes the best rating and “D” the worst. The rating ‘BB’ signifies a moderate degree of speculation, indicating a moderate risk of failing to meet obligations, but the issuer has the capacity to fulfill its financial responsibilities.

The S&P report indicates that Montenegro’s ratings are bolstered by significant benefits from structural reforms associated with the EU accession process (S&P anticipates that interest expenses will average around 6% of revenues until 2027).

“Our assessments of Montenegro are constrained by moderate public debt levels, the absence of an independent monetary policy, and a fragile external balance, despite recent improvements.”

Potential Rating Downgrade if Fiscal Results Falter

S&P indicates that it could revise its stable outlook or lower its rating within the next 12 months if Montenegro’s fiscal results significantly underperform relative to expectations.

“For instance, this may occur if new infrastructure projects funded through borrowing lead to a sudden rise in public debt, thereby diminishing Montenegro’s fiscal capacity,” they elaborated.

Conversely, an upgrade in Montenegro’s rating might occur within the next year if fiscal performances exceed current projections, particularly with a decreasing trend in net public debt.

“This could be facilitated by stronger economic growth or government fiscal consolidation measures. An improvement might also arise from a more robust external position than currently forecasted,” the report adds.

The Ministry of Finance of Montenegro announced today that the upgrade to “positive” primarily reflects the potential for further strengthening fiscal outcomes during 2024-2025.

The S&P report notes that while an average budget deficit is anticipated in the next couple of years, Montenegro achieved a balanced budget in 2023, largely supported by robust income as well as one-off factors like economic citizenship revenue and EU donations.

“Analysts suggest that a continuing growth in tourism and domestic consumption, along with improvements in tax administration and revenue collection measures, could bolster Montenegro’s budget performance. An average fiscal deficit of 3% of GDP is projected for 2024-2027, following a surplus of 0.5% in 2023, largely due to one-time income,” the report indicates.

The Ministry of Finance stated that the credit agency forecasts the current account deficit will average 12% of GDP over the medium term, while this year’s inflation is expected to stabilize at an average of 4.3%.