An unsustainable current account deficit
Overview:
Montenegro's economy has flourished over the last few years. Strong growth has been driven by bumper tourism receipts and large foreign direct investment inflows. Private sector consumption has also accelerated on the back of a large credit boom. Inflation has, however, picked up sharply since mid-2007. This is not just a reflection of food and commodity price increases but a tightening labour market and unsustainably large increases in wages. The government has delivered large fiscal surpluses but is loosening fiscal policy at a moment when the current account deficit already appears to have reached unsustainable levels. The economy remains too reliant on tourism and aluminium exports, both of which will be adversely impacted by the global growth slowdown.
Recommendation:
Montenegro uses the Euro and therefore has no independent monetary policy. Government debt is low and falling. Large external account imbalances cannot manifest themselves, then, as currency or government debt crises. Nevertheless, booming domestic demand has allowed asset prices to reach very high levels and they are vulnerable to correction. This is already playing out in the stock market but house prices are also likely to be vulnerable. Restricted access to credit would also suggest a period of much lower growth. We are underweight on Montenegro.