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Montenegro & Kosovo Country Risk Report Q1 2016

Montenegro & Kosovo Country Risk Report Q1 2016

Core Views

Although Kosovo and Serbia reached an agreement in August over major issues that divide them, we expect deep-seated nationalist sentiment on both sides to continue obstructing the implementation of the deal for the foreseeable future. In particular, the status of Kosovo’s Serb-dominated region of Northern Mitrovica will remain a major source of resentment.

The Stand-By Arrangement (SBA) between the International Monetary Fund (IMF) and Kosovo signed in early June (which needs to be formally approved by the IMF Executive Board in July) is likely to have a destabilising effect on Kosovo’s consumption-driven economic model. While the package, which is predicated on the implementation of structural reforms, aims to facilitate a shift in the economy towards an investment/export orientated model and away from its consumption dependence, the fragility of the social environment constitutes a major impediment to the programme’s goals, which is likely to render them elusive.


Executive Summary
- Kosovo
Core Views
Key Risks
Chapter 1.1: Political Outlook - Kosovo
SWOT Analysis
BMI Political Risk Index
Domestic Politics
'Landmark' Deal Offering Little Cause For Optimism
Although Kosovo and Serbia reached an agreement in August over major issues that divide them, we expect deep seated nationalist
sentiment on both sides to continue obstructing the implementation of the deal for the foreseeable future. In particular, the status of
Kosovo's Serb-dominated region of Northern Mitrovica will remain a major source of resentment.
Long-Term Political Outlook
Political Future Far From Certain Despite Serb Agreement
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 2024. 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.
Chapter 1.2: Economic Outlook - Kosovo
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Political Instability To Hamper Government's Plans To Boost Investment
We remain sceptical that Kosovo's new coalition government's plans to reorientate the economy from a consumption-driven model
towards an investment-focused one will bear fruit any time soon. We expect the fragile political stability outlook for the country to keep
investors at bay, hampering foreign direct investment inflows into Kosovo.
GDP By Expenditure Outlook
TABLE: PUBLIC CONSUMPTION FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Chapter 1.3: 10-Year Forecast - Kosovo
The Kosovan Economy To 2024
Economy To Remain Least Developed In Region
Kosovo's economy will remain the least developed in the Western Balkan region through to 2023, 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 2024.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Executive Summary - Montenegro
Core Views
Key Risks
Chapter 2.1: Political Outlook - Montenegro
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Coalition To Weather Opposition Challenge
Despite growing public protests, Prime Minister Milo Djukanovic's cabinet will weather the storm and remain in office for the duration of
its term, due to strong Western support for the regime, while opposition forces remain weak and divided.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Converging Towards The EU
Over our forecast period to 2024, 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 span, not least of which is a lingering legacy of regional conflict, fostering economic growth, and tackling difficult reforms.
Chapter 2.2: Economic Outlook - Montenegro
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Return Of Russian Tourists Helping A Modest Rebound In Economy
The Montenegrin economy will see a modest rebound in 2015 and 2016, in line with a recovery in the tourist sector, which was hit hard
by the withdrawal of Russian tourists in 2014.
GDP By Expenditure Outlook
Chapter 2.3: 10-Year Forecast - Montenegro
The Montenegrin Economy To 2024
BE Reforms Crucial For Convergence
We hold a relatively bullish outlook on Montenegro's long-term convergence prospects and forecast real GDP to expand by an average
of 3.0% between 2014 and 2024. 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. While we see significant scope for further foreign investment
over the long term, we believe growth will remain dependent on the production of aluminium, in addition to the tourism and infrastructure
sectors.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 2.4: Operational Risk - Montenegro
SWOT Analysis
BMI Operational Risk Index
Chapter 3: BMI Global Macro Outlook
Global Outlook
Exit The Dragon
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %

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