Outlook for 2011-12

The Democratic Party of Socialists (DPS) is set to remain the dominant political force over the forecast period, following its victories in the parliamentary election in March 2009 and the local elections in May 2010. The new prime minister, Igor Luksic, will rely on the support of his predecessor, the DPS leader, Milo Djukanovic, to establish his authority. EU integration will remain the priority of foreign policy, and-given sufficient progress in reforms-Montenegro could start EU accession talks in 2012. After a contraction of 5.7% in real GDP in 2009 the Economist Intelligence Unit estimates a rebound of 0.5% in economic growth in 2010, following a recovery in import demand in the euro zone and a pick-up in tourism. We expect real GDP to grow by 2.5% in 2011, accelerating to 4.5% in 2012. We forecast that although the current-account deficit will contract further in 2011-12, it will remain large at an annual average of 12.4% of GDP.

The political scene

Mr Luksic became prime minister on December 29th 2010, when he formed a streamlined government, following the long-awaited resignation of Mr Djukanovic. The EU granted Montenegro the status of an EU candidate in mid-December 2010, accepting a recommendation to that effect from the European Commission. However, it was made clear to Montenegro that it should introduce further reforms before it could open EU accession talks. Montenegro's relations with Serbia have improved, as highlighted by the signing of an extradition treaty between the two countries at the end of October.

Economic policy

The budget surplus amounted to EUR11.9m (US$15.4m) in the third quarter of 2010, as expenditure declined more markedly than revenue. With the fiscal outlook remaining uncertain, the government has been discussing with the World Bank a possible budget support loan of US$85m.

The domestic economy

Industrial output rebounded in the third quarter by 41.7% year on year and grew robustly in October, albeit from a low base. Credit growth remained negative, with a year-on-year contraction of 12% in September. Inflation remained restrained, with the consumer price index rising by 0.6% in October, as higher transport and food prices were offset by lower utility tariffs.

Foreign trade and payments

Merchandise exports rose by 14.8% year on year to EUR86.9m in the third quarter, while imports increased by 6.8%, to EUR469m The EU's share in Montenegro's exports rose to 55% in January-October 2010, from 51% a year earlier, while its share in Montenegro's imports remained largely unchanged, at 37.4%.