June 13 (Bloomberg) -- Montenegro’s sovereign-credit rating was lowered one step at Standard & Poor’s to BB-, its third highest non-investment grade, as the Balkan nation’s economy slows and debt rises.
“The rating action reflects our view that the government is facing increasing challenges to its efforts to stabilize public debt levels given the weakening economic environment, pressures arising from contingent liabilities, and diminishing external bank financing,” S&P said in a statement today from London. The rating, which has a stable outlook, is level with the former Soviet republic of Georgia and one step above Albania and Ukraine.
The smallest of six former Yugoslav republics saw its economy expand 2.5 percent last year to 3.27 billion euros ($4.1 billion), even as industrial production fell 10.3 percent. Its budget gap was 143 million euros, or 4.37 percent of gross domestic product, while public debt rose 16.75 percent to 1.48 billion euros, or 45.3 percent of GDP.
Growth will slow to 0.5 percent this year, S&P said in the statement, as domestic demand remains subdued “due to anemic credit growth and the large private-sector debt overhang.” Meanwhile, the financial industry has continued to deleverage as the local units of foreign banks “increasingly rely” on domestic deposits to fund their loan books.
“The continuous withdrawal of credit from Montenegro’s private sector has interrupted the flow of working capital into the economy,” S&P said in the statement. “As a consequence, several companies have accumulated arrears to both private and public sector agents. Arrears accumulation is also hindering the government’s ability to consolidate public finances.”
The government may not be able to meet its revised deficit target of 2.5 percent of GDP this year, according to S&P, because of tax collections shortfalls.
Montenegro accumulated a budget deficit of 84.7 million euros in the first four months of the year compared with a full-year target of 168.4 million euros, according to Finance Ministry data. Public debt rose to 1.63 billion euros in April.
The stable outlook balances “our view of risks from any further deterioration in the external environment against the government’s general willingness to pursue reforms that address economic weaknesses,”
S&P said a further downgrade may follow an assessment that external refinancing needs were placing more-intense pressure on the Montenegro economy “than we currently expect.” Labor market and “business environment reforms” that would improve economic competitiveness and diversify the economy would be the key for the ratings upgrade, it said.
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