Montenegrin Finance Minister Sees Tourism Fueling Growth Coming Years

(Corrects the year of independence in third paragraph.)

Montenegrin economic growth will match or exceed last year’s 2.5 percent rise amid a tourism boom, Finance Minister Milorad Katnic said.

Tourism, which generates one-tenth of economic output for the Adriatic Sea nation, grew 8 percent in the first seven months, more than the government’s 5 percent forecast, he said yesterday in an interview while attending meetings at the International Monetary Fund and World Bank in Washington D.C.

The country, which gained independence in 2006 and wants to join the European Union by the end of the decade, is relying on 2 billion euros ($2.7 billion) in planned Italian and Egyptian investments in energy and tourism over the next decade to turn the smallest former Yugoslav republic into an energy hub of the Balkans and holiday choice for the wealthy, Katnic said.

Montenegro will be the fastest-growing tourism destination in the world with an “average growth rate above 5 percent in the next 10 years,” he said, citing data from the World Tourism Organization. “We are trying to move from more mass tourism to luxury tourism to find a specific niche.”

Montenegro, with a population of about 662,000, has borders with Serbia, Croatia and Albania. The government is now trying to create conditions for a 1 billion-euro investment in the next 10 years by Orascom Hotels and Development on its pristine coastline, he said.

Hotel, Energy Investments

Another 1 billion-euro investment is expected from Italy’s Terna Rete Elettrica Nazionale SpA (TRN), which wants to build an undersea cable, the second largest in Europe in the next five years. “If it happens, all of our countries will benefit and Montenegro will be a hub for transmission of energy,” he said.

Economic expansion in 2011 has also been bolstered by rising output in agriculture, infrastructure projects and sales of commodities, he said.

While the IMF has forecast 2012 growth at 3.5 percent, Katnic said he prefers a conservative projection of 3 percent because Europe’s debt crisis could affect the country.

“This year we projected growth of 2.5 percent, but it seems that it will be” faster, Katnic said. “We are a very small, open economy and any turbulence in international markets or any external changes can damage our economy. We’re trying to be careful about the projection to be on the safe side.”

The government remains committed to following Maastricht criteria for the budget gap and public-spending levels and wants to lower the budget deficit to 2 percent of gross domestic product in 2012 from “around 3 percent” in 2011. Its medium- term goal is to slash public spending to 40 percent of GDP from 45 percent in 2011.

The targets have been challenged by “strong public pressure” to boost spending in an economy suffering from a lack of liquidity and whose mainly foreign-owned banks are plagued by non-performing loans. Unemployment stood at 19.9 percent in seven months to July and fiscal spending was 6.6 percent above plan as the government stepped up wage and pension payments.

Eurobond Issue

Some budget revenue, including cash from state-asset sales, have underperformed and could force the government to seek additional borrowing this year, according to the Finance Ministry’s September macroeconomic report.

Katnic said this year’s deficit financing has been secured and Montenegro will tap foreign markets again next year if market conditions are right.

“We’ll look for around 150 million euros to 200 million euros, like in the previous Eurobond issue,” he said. Depending on market conditions, the government may look for financing alternatives, including more cash from the World Bank or even some “new issuance programs” from the IMF. “But for us, the Eurobond is the first choice.”

To contact the reporters on this story: Scott Rose in Moscow at rrose10@bloomberg.net; Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net

To contact the editors responsible for this story: James M. Gomez at jagomez@bloomberg.net; Balazs Penz at bpenz@bloomberg.net

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