After real GDP shrank by 5.7% in 2009-under the impact of the global economic downturn-the rebound in 2010 was tenuous, with economic growth estimated at 0.5%. The return to growth stemmed from a strong pick-up in exports, albeit from a very low base, and a resilient performance in services, mainly because of receipts from tourism. The outlook for Montenegro's export markets over the forecast period remains uncertain, as the recovery in the main euro zone economies may initially falter, following the replacement of stimulus packages by measures aimed at fiscal consolidation. However, the recovery will be promoted by stable international aluminium prices-generating nearly one-half of Montenegro's merchandise export receipts-which rebounded by around 25% in 2010. We forecast that real GDP will increase relatively modestly, by 2.5%, in 2011. It will then accelerate to 4.5% in 2012, as demand for Montenegrin exports picks up in the euro zone and in Balkan markets (where the weakening of the euro should boost Montenegrin sales), tourism expands and risk appetite for investing in emerging markets increases, bringing further investment in Montenegro's property sector.

There are significant downside risks to our growth outlook, owing to the large, albeit contracting, current-account deficit, which is forecast to average the equivalent of 12.4% of GDP in 2011-12. Such a deficit will be difficult to finance at a time when FDI inflows are not expected to match the record amount registered in 2009-which was boosted by the privatisation of EPCG-making Montenegro more dependent on foreign borrowing during a prolonged global credit squeeze. The authorities have few tools at their disposal to narrow the deficit, as the euro is the sole currency and the budget surpluses posted before 2008 will not recur during the forecast period. In addition to that risk, the Greek debt crisis will reduce import demand from Greece, which is Montenegro's second-largest export market.