Thursday, January 08, 2009
Montenegro's economy on verge of collapse
Jan 8th 2009 | PODGORICA
From The Economist print edition
A RECENT Montenegrin video, released on the internet, shows two shrieking teenagers filming the speedometer of their car as they roar through a tunnel at 260kph (160mph). Although the appearance of the film earned the boys criminal charges, at least they did not crash. In a curious manner, the video mirrors Montenegro’s present fate. After three years of breakneck growth, the economy is rapidly slowing down. It is has not quite crashed—but the aftershocks could still be nasty.
The capital, Podgorica, has been expanding fast in recent years. Flats and offices have sprouted all round the city’s edge as developers flush with cash from sales of villas and apartments on the coast to Russian, British and other investors have poured the proceeds into new property. But in the past few months, as the number of foreigners investing in coastal property has dried up, so has the cash. Workers at many building sites across the city have lost their jobs. Property prices have fallen by 50% or more.
Down by the coast things are as bad or worse. Planned developments, many aimed at rich Russians, have been scaled back, though the government hopes to lure Gulf Arab investors to take their place. Growth figures say it all. In 2006, the year it declared independence, Montenegro’s economy grew by 8.6%. In 2007 it accelerated to 10.7%. Last year the government forecast 8%, but the correct figure will be lower. And in 2009 the government is planning for growth of only 5%—and the IMF is talking of a mere 2%.
That will be disappointing to the Montenegrins, even if in these hard times some growth is better than none. But the government is also grimly aware that, besides coping with the general fallout from the global financial crisis, it faces two home-grown problems. The biggest is a huge aluminium factory on the edge of Podgorica. Its fumes are toxic, it makes a loss and it consumes gargantuan quantities of subsidised electricity. It is controlled by Oleg Deripaska, a Russian tycoon well known in Britain and elsewhere, who is now locked in disputes with the Montenegrins. Aluminium prices have crashed; unless he keeps getting subsidised electricity from the government, he will, he says, have to shut the whole place down.
In any other country this might not be front-page news. The problem for tiny Montenegro, with a population of only 650,000, says Sasa Popovic, an economist, is that the factory and its related industries account for a vast 40% of GDP. So its closure would be a huge political blow to the government of Milo Djukanovic, the prime minister.
He has already been embarrassed by a second matter. In December the government had to bail out a troubled bank owned, in large part, by his brother and, to a lesser extent, by his sister and himself. That Prva Banka was considered the family bank lured large numbers of people, companies and even government departments to transfer their accounts to it. But the end of the boom means that many of the bank’s borrowers cannot pay back their debts. “We are very nicely packaged from the outside,” says Daliborka Uljarevic, a financial analyst, “but when you open the box it does not look so nice inside.”
Gordana Djurovic, Montenegro’s Europe minister, admits that the bank affair seems “unusual” but insists that no laws were breached and that the cost of doing nothing was higher than the cost of doing something. Understandably she is keener to talk about good news. Just before Christmas Montenegro lodged a formal application for the status of candidate to join the European Union. Formal candidacy is “realistic” by December, claims Ms Djurovic.
Montenegro may by then have a new government. An election may even be called for March 29th. Mr Djukanovic is currently riding high in the polls, but much of that reflects the disarray of the opposition rather than his own personal popularity. Mr Popovic reckons that Montenegro’s economy may not crash but go into a kind of hibernation. That might give the opposition a chance to reorganise and make up lost ground—which explains why the prime minister may choose to go to the country sooner rather than later.
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