Weekly Briefing, Vol. 28, No. 2 (ME), April 2020
Covid-19 will push the Montenegrin economy into recession
The Montenegrin economy is small, import dependent and not characterized by high diversification, so the impact of external shocks is more pronounced. This external shock caused by the pandemic was reflected in the supply side. The biggest impact of the pandemic is on tourism, which is one of the most important economic branches of the Montenegrin economy. Measures taken to prevent the spread of the virus among the population primarily relate to restricting population movement and closing down many of enterprises in tourism and hospitality, transport, recreation and arts businesses and other segments of the service sector. Suspending or reducing production already has an impact on economic activity, so recovery in the post-corona period will be both difficult and long-term. Economic projections show that the Montenegrin economy will enter a recession this year, although, before the onset of the virus economic prospects were favourable. It is certain that the pandemic will leave a mark on all economic actors. However, a pandemic will also have a positive impact on one group of businesses (although the number is significantly smaller than those that will suffer damage). Also, the pandemic will influence the transformation of the economic activity of one group of companies towards their digitalization.
What are the prospects for the Montenegrin economy?
In general, it is very difficult to estimate the direction in which the economy will move and to what extent the pandemic will affect economic activity. Estimates and perspectives depend on a number of factors: when the pandemic will stop, whether it will return in the second wave in the second part of the year, what will be the situation in the countries with which Montenegro has the greatest economic cooperation etc. According to World Bank (WB) projections, the Montenegrin economy will record a negative real growth rate of -5.6% in the best case scenario in 2020, while the projected growth rate under the downside scenario will be -8.9%[1]. The recession is also projected by International Monetary Found (IMF) with a more pessimistic forecast of -9%[2]. The Economic Barometer by the Institute for Strategic Studies and Projections is also projecting a negative economic growth this year. Certainly, the rate of GDP growth depends on the length of the pandemic and the duration of social distance measures.
The impact of the pandemic will also be reflected in the labor market, which will have an impact on household consumption for which negative growth rates are projected. Closing a large number of businesses will result in a decrease in employment and/or a drop in earnings. Also, a bad tourist season will affect reduced seasonal employment, where nearly a third of the unemployed are hired during the summer season, which will additionally affect the disposable income of the population. The projected negative growth in Europe will also be reflected in seasonal employment abroad, which will affect the income of the population, since remittances are an important source of financing for a certain part of population. Such developments will contribute to rising unemployment and falling private consumption. Also, a reduced labour income inflow from abroad will result in a decrease in the Gross National Income of Montenegro.
Suspension of international traffic will have a direct impact on tourism revenues, i.e. the number of foreign tourists. So far, there is unknown time to re-establish international traffic. For example, if the ban applies by the end of the second quarter, the number of foreign tourists will decrease by more than a fifth, assuming that the number of tourists in other months will be at the same level as last year. In the case of a ban on international traffic, the reduction in the tourism sector will be significantly larger (more than three quarters). Considering that tourism revenues represent about a quarter of the total value of goods and services produced, a high GDP decline is inevitable. The decrease in tourism activity will directly affect the export of services, since that tourism represent the most significant part of it, which will ultimately have negative implications for the GDP growth rate. According to WB estimates, total exports will fall in the range from 18.5% to 28%, depending on the duration of the pandemic. Certainly, the trends in tourism depends on the spread of the virus and the economic situation in the countries from which most tourists come. The decline in exports of services will be accompanied by a fall in exports of goods due to limited and reduced production, but also a decrease in external demand. Due to the decline in economic activity and personal consumption, imports are also expected to decline.
Delaying the completion of the highway for the coming year, as well as expectations in the decline in construction activity as a result of reduced demand, are factors that will determine the trends of investments, which will decline in next period. In addition, high uncertainty will affect investments in the tourism sector, so that many projects in this area can be delayed. Also, due to unfavourable trends in the world, this year may see an expectation and a decrease in the inflow of foreign direct investments (FDI), which have been increasing in the previous period. Although the net FDIs will be positive, they will be at a significantly lower level compared to 2019.
During May, it is expected that the restriction in business will be phased out so that a part of the companies will start operating. These include hotels and restaurants, as the number of infected people decreases and new cases are not registered. The phasing out of the restrictions would also lead to a gradual recovery of the economy, which can be expected in the third and fourth quarters of this year.
What has the government done so far?
In the recent period, in response to the crisis caused by pandemic, the Government of Montenegro has adopted and proposed a series of measures aimed at counteracting the negative effects of the virus and preserving the business of entrepreneurs and SMEs. In order to maintain the level of employment and liquidity of the enterprise, the measures refer to different groups of enterprises, depending on the extent of the impact of the pandemic, whether the business is suspended or reduced. Also, the measures adopted include assistance to the most vulnerable categories of the population. The first two packages of measures adopted in the previous period relate to subsidies for enterprises and one-off benefits for the most vulnerable categories of people (least-income pensioners, social benefit beneficiaries and unemployed persons who do not receive any compensation), as well as deferral of tax and non-tax liabilities for a three-month period, a moratorium on repayment of loans to households and enterprises and special support measures for agriculture.
Subsidies to companies include subsidies for the two-month period in the amount of 50% to 70% of the minimum wage, depends on whether the enterprises are reduced or have their business suspended, as well as subsidies in the amount of 100% of taxes and contributions to the minimum wage for each registered employee in companies whose work is suspended. Additionally, any new employment is stimulated by subsidies of 70% of the minimum wage. Also, these measures include credit lines on more favourable terms than market ones by the Investment Development Fund, which can be used to solve liquidity problems of companies. Adopted measures cover nearly three quarters of the private sector, and according to WB estimates, total allocations for all measures are 1% of GDP. Certainly in the short term, i.e. in the next two to three months, these measures will give positive results to the economy and somewhat help enterprises to deal with the problem of liquidity and payment of salaries to employees. Delaying the payment of taxes and other liabilities is a significant benefit for all businesses to overcome the crisis. The government has also announced additional longer-term support measures, and in these measures the tourism sector will be particularly recognized.
A major challenge in providing assistance to the economy are financial resources. As Montenegro has no good borrowing prospects or significant opportunities for fiscal manoeuvring, since the high public debt which represented a significant percentage of GDP in the pre-coronavirus period. Public debt can be expected to be at least four-fifths of GDP this year. Limited budget reserve is also a problem in financing the measures. Furthermore, a worsening of the relationship between budget revenues and expenditures can be expected in the budget structure. As economic activity declines, revenues will fall, while expenditures are expected to rise at the same time. To this end, it is expected that the budget will be revised in the coming period, but also that budget line items on the expenditure side will be recompiled. In order to contribute to maintaining the stability of public finances, public procurements were suspended, salaries of public officials with the highest salaries in public administration will be reduced, and a number of other forms of budget savings are in place.
Either way, it seems that estimates of economic developments, this time, have to be based on epidemiologists’ estimates of the spread of the virus. Certainly, some future external shocks require greater diversification of the economy, so that the negative consequences could be less.
[1] World Bank (2020) The Economic and Social Impact of COVID-19, Western Balkans Regular Economic Report: Spring 2020