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Montenegro and Kosovo Country Risk Report Q1 2017

  • November 2016
  • -
  • Business Monitor International
  • -
  • 53 pages

Core Views

While efforts to combat radicalism appear to be bearing fruit, the weakness of Kosovo’s state institutions and a lack of a concrete state identity suggest that the government will continue to struggle to curb radicalism. We expect these tensions to weigh on the business environment, undermining economic growth. We also maintain our 2017 real GDP forecast of 5.0% as strong remittance growth and the provision of US aid to improve the country’s economy will be supportive of growth. However, the ongoing dispute with Serbia over the privatisation of the mines presents downside risks.

Major Forecast Changes We are upgrading Kosovo’s 2016 real GDP forecast to 3.8% (from 2.4% previously) on the back of stronger than expected H116 growth. Core Views

Montenegro’s economy grew by 2.7% y-o-y in Q216, from 1.1% in Q116, and we are maintaining our forecasts for real GDP growth to come in at 2.0% and 2.9% in 2016 and 2017, respectively. Although we expect economic growth to recover modestly over the coming months, growth will remain below the 3.2% rate registered in 2015. There are risks construction of the Bar-Bolijare highway will be behind schedule, while private consumption will be capped, and ongoing political uncertainty will weigh on FDI and tourism arrivals. Following the October 16 parliamentary elections, the incumbent Democratic Party of Socialists (DPS) led by long-standing Prime Minister Milo Djukanovic will most likely form a coalition government, with a narrow majority. However, the continued volatile and unstable political environment will be negative for Montenegro’s business environment and its economy, which will be compounded by worsening ties with Russia due to the former’s NATO accession bid.

Table Of Contents

Montenegro and Kosovo Country Risk Report Q1 2017
Brief Methodology 5
BMI Indices - Brief Methodology 5
Composite Score 5
Political Risk Index5
Economic Risk Index 5
Operational Risk Index 5
Executive Summary - Kosovo 7
Core Views 7
Major Forecast Changes 7
Key Risks7
Chapter 1 1: Economic Outlook - Kosovo9
Economic Growth Outlook10
Growth To Pick Up Amid Stable Remittance Outlook 10
We are upgrading Kosovo's 2016 real GDP forecast to 3 8% (from 2 4% previously) on the back of stronger than expected H116 growth
We also maintain our 2017 real GDP forecast of 5 0% as strong remittance growth and the provision of US aid to improve the country's
economy will be supportive of growth However, the ongoing dispute with Serbia over the privatisation of the mines presents downside
risks
GDP By Expenditure Outlook 11
TABLE: GDP GROWTH FORECASTS 11
TABLE: PRIVATE CONSUMPTION FORECASTS 11
TABLE: PUBLIC CONSUMPTION FORECASTS 12
TABLE: FIXED INVESTMENT FORECASTS 12
TABLE: NET EXPORTS FORECASTS 12
Chapter 1 2: 10-year Forecast - Kosovo 13
The Kosovan Economy To 2025 13
Economy To Remain Least Developed In Region 13
Kosovo's economy will remain the least developed in the Western Balkan region through to 2025 as underdeveloped road and energy
infrastructure act as a clear check on growth potential over the long term Foreign assistance and remittance inflows will remain key
sources of external capital, particularly as elevated political risk continues to deter large-scale foreign investment We project real GDP
to expand by an average of 4 6% between 2015 and 2025
TABLE: LONG-TERM MACROECONOMIC FORECASTS 13
Chapter 1 3: Political Outlook - Kosovo 15
Domestic Politics16
Weak Domestic Factors To Limit Deradicalisation Efforts 16
While efforts to combat radicalism appear to be bearing fruit, the weakness of Kosovo's state institutions and a lack of a concrete
state identity suggest the government will continue to struggle to curb radicalism We expect these tensions to weigh on the business
environment, undermining economic growth
TABLE: POLITICAL OVERVIEW 16
Long-Term Political Outlook 18
Political Future Far From Certain Despite Serb Agreement 18
Kosovo's long-term political future is far from assured, with a host of structural economic inefficiencies, weak institutions and societal
schisms weighing on the country's outlook through to 2025 Our core scenario envisages an international stalemate developing over the
2008 unilateral declaration of independence which, in turn, leads to a broad consensus for the current peaceful status quo, although the
April 2013 agreement signed with Serbia does pave the way for eventual EU membership While the lack of international recognition will
certainly constrain the government's presence in international bodies such as the UN, it will not prevent Kosovo from developing deeper
trade links with the broader region
Contents
Executive Summary - Montenegro21
Core Views 21
Key Risks 21
Chapter 2 1: Economic Outlook - Montenegro23
Economic Growth Outlook24
Growth Recovery To Be Modest 24
Montenegro's economy grew by 2 7% y-o-y in Q216, from 1 1% in Q116, and we are maintaining our forecasts for real GDP growth to
come in at 2 0% and 2 9% in 2016 and 2017, respectively Although we expect economic growth to recover modestly over the coming
months, growth will remain below the 3 2% rate registered in 2015
GDP By Expenditure Outlook 25
TABLE: GDP GROWTH FORECASTS 25
TABLE: PRIVATE CONSUMPTION FORECASTS 25
TABLE: GOVERNMENT CONSUMPTION FORECASTS26
TABLE: FIXED INVESTMENT FORECASTS 26
TABLE: NET EXPORTS FORECASTS 26
Chapter 2 2: 10-Year Forecast - Montenegro 27
The Montenegrin Economy To 202527
BE Reforms Crucial For Convergence 27
We hold a relatively positive outlook on Montenegro's long-term convergence prospects and forecast real GDP to expand by an average
of 3 1% between 2016 and 2025 That said, we stress that in order to realise its full growth potential, Podgorica will need to address
ongoing shortcomings to the country's underlying business environment
TABLE: LONG-TERM MACROECONOMIC FORECASTS 27
Chapter 2 3: Political Outlook - Montenegro 29
TABLE: POLITICAL OVERVIEW 30
Domestic Politics30
Uncertain Political Environment To Undermine Economy 30
Following the October 16 parliamentary elections, the incumbent Democratic Party of Socialists (DPS) led by long-standing Prime
Minister Milo Djukanovic will most likely form a coalition government, with a narrow majority However, the continued volatile and
unstable political environment will be negative for Montenegro's business environment and its economy, which will be compounded by
worsening ties with Russia due to the former's NATO accession bid
Long-Term Political Outlook 32
Converging Towards The EU 32
Over our forecast period to 2025, we expect Montenegro to experience a sanguine domestic policy environment while gradually
converging with Western European norms and gaining eventual entry into the EU Nevertheless, the country faces significant
challenges over this period, not least of which is a lingering legacy of regional conflict, fostering economic growth and tackling difficult
reforms
Chapter 2 4: Operational Risk - Montenegro 35
Operational Risk 35
TABLE: SOUTHEAST EUROPE - LABOUR MARKET RISK35
TABLE: SOUTHEAST EUROPE - LOGISTICS RISK 38
TABLE: SOUTHEAST EUROPE - CRIME AND SECURITY RISK 43
TABLE: SOUTHEAST EUROPE - TRADE AND INVESTMENT RISK 44
TABLE: MAIN IMPORT PRODUCTS, 2014 45
Chapter 3: BMI Global Macro Outlook49
Global Macro Outlook 49
Austerity Has Peaked, But Populism Is Not Yet Policy 49
TABLE: GLOBAL ASSUMPTIONS49
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 50
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 51
TABLE: KOSOVO - MACROECONOMIC DATA and FORECASTS 53
TABLE: MONTENEGRO - MACROECONOMIC DATA and FORECASTS 53

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