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Global Credit Research - 30 Mar 2011
London, 30 March 2011 -- Moody's Investors Service has today changed the outlook on Montenegro's
Ba3 government bond ratings to stable from negative and has affirmed the
rating at its current level. The outlooks on the Baa1 foreign currency
bond ceiling and the B1 foreign currency deposit ceiling were also changed
to stable from negative.
Moody's decision to move the outlook to stable from negative was
prompted by the rating agency's assessment that the Montenegrin
government is addressing the key risks that triggered the negative outlook
in April 2009. In particular, Moody's notes improvements
in the following areas:
(1) The government has started to reverse the significant fiscal deterioration
it experienced in 2008/09, as reflected by a lower-than-planned
2010 budget deficit. The authorities have also implemented important
measures that address some of the more structural weaknesses in the public
(2) The economy is showing signs of a gradual recovery. In 2010,
real GDP growth was positive compared with earlier expectations of a second
year of recession after the steep decline in 2009. The growth outlook
for 2011/12 -- while far more moderate than in the pre-crisis
period -- is more positive than it was at the time that Moody's
assigned a negative outlook to Montenegro's ratings.
(3) The situation of the banking sector is stabilising. Capitalisation
levels in the system have been strengthened, with foreign bank owners
having generally provided support for their local subsidiaries where needed.
The potential contingent liability for the government has thus been reduced
substantially. Liquidity in the banking sector has improved,
with retail deposits in particular flowing back into the system.
RATIONALE FOR CHANGE IN OUTLOOK
Firstly, the government managed a significant improvement in the
budget position last year, with the general government budget deficit
declining from 5.7% of GDP in 2009 to 3.9%
in 2010, compared with an initial target of 4.5%.
While this was partly due to the low execution of capital programs (5.4%
of GDP against a plan of 7.7% of GDP), Moody's
notes that current expenditures have also been reduced by more than was
initially planned (-8% vs. target of -2.9%).
The budget for 2011 targets a further reduction in the deficit to 2.4%
of GDP for the general government sector. Taking into account ongoing
and substantial tax and expenditure arrears (which amounted to 0.9%
of GDP in 2010), Moody's expects a higher deficit of 3.5%
of GDP, but acknowledges the significant improvement in Montenegro's
public finances since 2009. The authorities are aiming to achieve
a balanced budget in 2012 and a return to budget surpluses from 2013 onwards.
Even more importantly, the government started to address some of
the key structural weaknesses in its public finances, in particular
the large outlays for wages and pensions. A pension reform introduced
in December 2010 gradually increases the retirement age to 67 years,
and links pension payments more closely to the (lower) inflation rate
rather than average wage growth as has been the case until now.
In order to better control the public-sector wage bill, the
government introduced a strict hiring policy for the entire (and large)
public sector (to be in place until 2013), and abolished bonuses
and other discretionary payments to public-sector employees.
According to budget execution data, these measures yielded savings
of close to 0.2% of GDP in 2010 already. Over the
next three years, the government is targeting a reduction in non-capital
discretionary spending of 1.5% of GDP. Subsidies
of 0.8% of GDP to the manufacturing sector will be phased
out by 2012.
Secondly, the economy is recovering from the deep recession of 2009.
The estimate for 2010 real GDP growth has recently been revised up to
1.1% (from 0.5% previously). For 2011,
IMF and EBRD expect positive real GDP growth of 2% and 3%,
respectively. The lack of timely and high-frequency data
is continuing to hamper the analysis, but data for tourism,
industrial production and exports are confirming the picture of a gradual
recovery. In Moody's view, it is encouraging that foreign
direct investment flows have continued at high levels, amounting
to 18% of GDP in net terms in 2010. Montenegro's growth
strategy of focusing on high-end tourism and renewable energy production
will require continued high capital inflows to finance the upgrading of
the country's infrastructure over the next several years.
The more positive growth outlook should also provide some support for
the banking system. Moody's believes that the risks to the
banking system continue to remain elevated, as banks on aggregate
continue to be loss- making and problem loans are still increasing.
However, compared to two years ago, the system is better capitalized
as foreign parents have shown their willingness to support their subsidiaries
through capital injections. As such, Moody's now perceives
a lower risk of the government having to support the banking system than
it did when it changed the outlook to negative.
Moody's notes positively that Montenegro was awarded the status
of EU candidate country in December 2010, an important step towards
eventual EU membership, which should provide an anchor to government
WHAT COULD CHANGE THE RATING UP/DOWN
A further lift to the rating depends on a continued reduction in the government's
budget deficit and a reversal in the rising trajectory of public debt.
Moody's notes the significant change in the government's debt
structure towards market funding instead of funding from bilateral and
multilateral sources with concessionary interest rates. One of
Montenegro's rating strengths relative to peers -- its very
low interest payments/revenue ratio -- is likely to deteriorate significantly
over the next few years, making efforts to reduce the overall debt
burden all the more urgent. Improvements in external competitiveness
reflected in a narrowing of the current account balance and a sustainably
higher GDP growth rate would also be beneficial for the rating as would
be a further strengthening of the banking system given that non-performing
loans remain at elevated levels.
On the other hand, evidence that the commitment to structural reform
is flagging, accompanied by a deterioration in public debt and external
debt ratios would prompt downward pressure on the rating.
PREVIOUS RATING ACTION AND METHODOLOGY
Moody's last rating action affecting Montenegro was implemented
on 30 April 2009 when the rating agency downgraded Montenegro's
ratings to Ba3 with a negative outlook from Ba2. The rating action
prior to that was taken on 18 December 2008, when the rating agency
assigned a negative outlook to the Ba2 rating.
The principal methodology used in rating the government of Montenegro
is Moody's "Sovereign Bond Methodology", published in
2008, which can be found at www.moodys.com.
MD - Sovereign Risk
Financial Institutions Group
Moody's Investors Service
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
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Moody's Investors Service Ltd.
Moody's changes outlook on Montenegro's Ba3 rating to stable from negative, affirms rating
One Canada Square
London E14 5FA
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