June 22 (SeeNews) - Moody's Investors Service said that Montenegro's rising government debt, small economy, volatile growth and strong reliance on foreign funding constrain the country's B1 rating with a negative outlook.
Montenegro's fiscal metrics are expected to deteriorate further because of the cost of building a major new highway to the coastal town of Bar, which will push government debt to above 80% of gross domestic product (GDP) by 2018, Moody's said on Wednesday in its "Government of Montenegro -- B1 Negative Annual Credit Analysis" report.
The deficit is expected to deteriorate to 8.7% of GDP in 2017, higher than the authorities' forecasts, due to the acceleration of the implementation of the highway project and continued pressure on current spending, Moody's said.
"Montenegro's credit challenges include its large fiscal and external imbalances and a high debt ratio, which limits the country's shock absorption capacity," Moody's vice president and author of the report, Rita Babihuga-Nsanze, said. "The country's debt-to-GDP ratio increased to 67% in 2016, more than double the 2008 level of 28.4%."
Overall, Moody's believes that the fiscal expansion pursued over the past two years will limit options for any adjustment, coupled with an already rigid spending structure: pensions and wages account for around half of overall expenditure.
Moody's forecasts full-year real GDP growth of 3.3% in 2017 as construction work on the new highway and other investment projects continues. However, risks stemming from possible future delays to construction works persist. Private and public consumption should moderate following the introduction of fiscal consolidation measures at the end of 2016.
Montenegro's credit strengths include its relatively high per-capita GDP wealth levels compared with similarly rated peers; progress in the country's EU accession strategy and a growth outlook supported by large inflows of foreign direct investment (FDI), with projects in tourism and renewable energy, the credit agency said.
The negative outlook on the rating reflects risks associated with the government's debt-funded growth strategy. Evidence that fiscal or external metrics have continued to deteriorate, or signs of reduced access to international capital markets, would put downward pressure on the rating. Weaker growth due to project delays, declining foreign direct investment (FDI) or tourism would also be credit-negative, Moody's noted.
Conversely, fiscal consolidation that puts the country's debt trajectory on a sustained downward trend, a reduction in contingent liabilities, improvements in external competitiveness and a material decline in external vulnerabilities would support Montenegro's creditworthiness, the credit agency added.
In May 2016, Moody's cut Montenegro's sovereign ratings by one notch to B1, four steps below investment grade, citing a potential further increase in government debt and worsening external imbalances.