August 18 (SeeNews) - Montenegro may need aid from the International Monetary Fund (IMF) if the economic downturn deepens, Moody's Investors Service said on Tuesday.
"The government could be forced to enter into a stand-by arrangement with the IMF if the economic situation continues to deteriorate," Kenneth Orchard, Vice-President and Senior Analyst in Moody's Sovereign Risk Group, said in an annual report.
Last month Montenegro's Finance Minister Igor Luksic said the government and the IMF will agree on a financial support package in the following two to three month.
Luksic also said back then the government has revised its 2009 balanced budget, projecting a deficit equivalent to 2.6% of the gross domestic product instead, as the global crisis deepened. The budget shortfall is expected at some 900 million euro ($1.3 billion).
Montenegro's financial strength and vulnerability to event risk are assessed to be moderate, Moody’s said in the report.
“Although event risk is mitigated by the country's euroisation, there are several other risks remaining, including the risk that the economic slowdown could be exacerbated by deflating asset prices and the existence of large external imbalances,” it said.
Montenegro applied for European Union membership in December last year after signing a Stabilisation and Association Agreement in October 2007. It is expected to become a EU candidate country in 2010.
"The country's fiscal policy has been fairly prudent and the government's debt affordability is high. The ratio of interest payments to government revenue is forecast at only 2.0% in 2009, compared with the Ba rating category median of 12%," Orchard said.
"However, access to finance is partly constrained in the current environment, and the government was forced to inject most of the budgetary surpluses it accumulated in 2006-08 into the banking system in late 2008 to support liquidity," he added.
Moody's downgraded Montenegro's government bond rating to Ba3 from Ba2 in April, reflecting the country's deteriorating economic environment.
“The small size of its economy means that Montenegro's output is concentrated in a few sectors and, as such, is likely to suffer greater volatility over time,” the statement said. “It also makes the economy much more vulnerable than larger economies to sector-specific and company-specific shocks.”