PODGORICA (Montenegro), March 9 (SeeNews) – Moody's Investors Service has changed the outlook on Montenegro's B1 long-term issuer and senior unsecured debt ratings to stable from positive.
The key driver for the change in outlook is Montenegro's exposure to the significant fiscal risks that relate to the completion of the four-stage Bar-Boljare highway project, Moody's said in a statement late on Friday.
"Whilst the first section of the Bar-Boljare highway project is fully funded and completion is expected in the second half of 2020, in Moody's view, the visibility regarding the funding of the remaining three sections is impaired. The overall costs of the highway project are estimated at about 45% of GDP, out of which about 25% of GDP relate to the still-to-be funded three sections," Moody's said.
The B1 sovereign rating and was affirmed as a result of Montenegro's favourable medium-term growth outlook balanced by the economy's small size and low level of diversification and the country's improved underlying fiscal position which partially mitigates the significant fiscal risks that relate to the Bar-Boljare highway, the credit ratings agency added.
Montenegro's long-term foreign currency bond and deposit ceilings remain at Ba1 and B2, respectively. The short-term foreign currency bond and deposit ceilings remain Not Prime (NP).
The ratings agency also said:
"RATIONALE FOR THE AFFIRMATION OF MONENEGRO's B1 RATINGS
The first key driver of Moody's decision to affirm Montenegro's B1 ratings relates to the country's favourable medium-term growth outlook. This is driven by significant investment projects, the country's EU accession prospects as well as structural reforms. Moody's estimates potential growth at around 3.5%. That said, the economy's size, which is one of the smallest among Moody's sovereign rated universe, and its low level of diversification are constraints to Montenegro's economic strength.
The realization of large investment projects currently underway in the tourism, construction, energy and to a lesser extent in the agriculture sector will support the country's growth perspectives and gradually reduce the sizeable current account deficit. Those projects are typically funded by foreign direct investments (FDI). Moody's forecast net FDIs to remain solid with an average of around 9.5% in 2020 and 2021. In this context, large energy projects support investment and the country's export potential. The most important of these is an undersea power cable connecting Montenegro and Italy (Baa3 stable) that was put into operation in November 2019. This project makes Montenegro an important energy hub in the region, increasing the country's competitiveness and encouraging investments in new energy sources, particularly renewables.
Tourism is the country's most important sector, accounting for almost 22% of GDP when including positive spill-overs to other sectors. The number of tourists visiting Montenegro has more than doubled over the past decade to a record of more than 1.2 million in 2019, supported by new flight routes opened to additional Western European locations and by increasing capacities of high-end hotels. Moody's expects the Bar-Boljare highway will improve the country's economic prospects by facilitating access to main coastal hubs and diversifying the tourism sector further by opening links to the mountainous north of the country. However, Moody's expects the first section of the highway once in full operation will have very limited positive spill-over effects on the economy, but more substantial economic gains once the entire highway is completed and linked to Serbian capital Belgrade, which Moody's does not expect to be realized in the foreseeable future.
The second key driver of Moody's decision to affirm Montenegro's B1 ratings relates to the completion of most of the fiscal consolidation measures of the 2017 consolidation strategy which partially mitigates the fiscal risks related to the Bar-Boljare highway. The fiscal consolidation measures, which include measures on the revenue and expenditure side, have a volume of almost 3% of GDP over the period from 2017 to 2020 and translate in an improvement of the underlying fiscal position. This counter-cyclical fiscal policy contrasts with the pro-cyclical policy which eroded the government's fiscal space in the past. In Moody's view, it is especially important for Montenegro to regain fiscal space because of the full euroization of the economy as the main macro tool to mitigate economic shocks is fiscal policy.
Fiscal consolidation in combination with improved tax collection and solid economic growth resulted in a narrowing of the fiscal deficit of the general government to 2.0% of GDP in 2019 and Moody's expects a balanced budget in 2022 compared to an average of almost -5% over 2014-2018. Moody's expects the debt-to-GDP ratio to have peaked at about 79% in 2019 and -- assuming no crystallization of contingent liabilities that relate to the highway project -- to be on a firm downward trend thereafter, driven by solid growth, primary surpluses and favourable stock-flow adjustments.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Moody's takes account of the impact of environmental (E), social (S), and governance (G) factors when assessing sovereign issuers' economic, institutional and fiscal strength and their susceptibility to event risk. In the case of Montenegro, the materiality of ESG to the credit profile is as follows.
Environmental considerations currently exert limited influence on Montenegro's credit profile. This is highlighted by Montenegro not being among the 37 sovereigns whose credit quality is identified as most susceptible to climate change. The share of energy from renewable sources in gross final energy consumption was 38.8% in 2018 in Montenegro, which was one of the highest among EU countries and significantly above the EU average of 18.9%.
Social risks are a factor affecting Montenegro's credit profile given that its ageing population and low birth rate pose risks to the country's growth potential, and therefore also to its fiscal flexibility and the sustainability of its social security systems. In addition, labour market mismatches constrain medium-term growth, as highlighted by the persistently high, though decreasing, youth unemployment rate of 21.8% and a high share of long-term unemployed at 80.0% of the total unemployed in the third quarter of 2019.
Montenegro's framework of governance affects its credit profile. The country's operating environment has been constrained by regulatory and administrative weaknesses since its independence in 2006. However, several legal, administrative and procedural reforms are underway in preparation for EU accession which are expected to improve Montenegro's framework of governance.
WHAT COULD CHANGE THE RATING UP/DOWN
The rating would likely be upgraded if the government broadened its consolidation measures beyond current plans and at the same time significantly mitigated the fiscal risks related to the Bar-Boljare highway, resulting in an improvement of government's debt metrics and restoration of the government's fiscal space. In addition, significant progress on the completing of most of the EU's Acquis Communautaire with more chapters being closed and supporting progress towards EU accession would also be credit positive because of the resulting strengthening of the institutions and governance. Moreover, a material reduction in external vulnerabilities would also support Montenegro's credit profile.
Conversely, downward pressure on Montenegro's credit profile would develop should the government's consolidation efforts slow materially resulting in a deterioration of debt metrics. Cost overruns for the three remaining parts of the Bar-Boljare highway project that would go beyond the current estimates and would result in contingent liabilities would be credit negative, too. Other negative factors include a weakening of Montenegro's external position, for example, because of worsening competitiveness in the areas of tourism and other export-oriented industries."