Montenegro is an upper-middle-income country with enormous growth potential. Montenegro became a member of the World Bank Group in 2007. Montenegro’s economy has huge potential, but is hindered by significant structural, economic, and fiscal risks.
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While many structural challenges like these continue to represent hurdles to sustained growth in the region, another, less predictable challenge also emerged during 2014 - significantly hampering grow... Show More +th in these countries and across the region as a whole: weather.Extreme weather events, including devastating floods in May, plagued much of the region throughout 2014 and negatively impacted nearly every economic sector in the region - from agriculture, to energy, to tourism.Unprecedented rainfall in May resulted in the worst floods the region has seen in more than 100 years. In Bosnia and Herzegovina, these floods killed more than 20 people and displaced a further 90,000 and resulted in billions of dollars in damages across the region. The floods are estimated to have cost the country some 15% of overall GDP in lost output and damages. In Serbia, the overall damage from these floods is estimated at around 4.7%. Nearly every segment of the economy was negatively impacted by these floods.The impacts of this flood were amplified by earlier weather events in the region, further exacerbating the negative effect they had on growth in 2014. A drought in the summer of 2012 and a severe winter that same year stymied the agriculture sector, reduced energy generation, hindered tourism, and slowed construction more than usual around the region. The severe impact these extreme events are having on economies in the region highlights the overall economic vulnerability of these countries. With climate, policymakers in these countries continue to explore options to help avoid or, at the very least, how to mitigate well these shocks.In addition to adaptation and mitigation efforts - such as flood defenses and weather-resistant infrastructure - the latest SEE RER also highlights the importance of expanding insurance markets in countries throughout the region to better protect homeowners and businesses against natural disasters - especially in the agriculture sector. As poorer households are more likely to work in agriculture and live in rural areas, the need for mechanisms to buffet them against the shocks brought on by floods, droughts, and heat waves is even more pressing. Although as many as 40% of people in Albania and 20% in both Bosnia and Herzegovina and Serbia work in agriculture, insurance rates for plan that protect against weather and other natural disasters among these people is drastically low. In FYR Macedonia, just 4% of registered farmers insure their crops against weather related perils. In Kosovo, insurance companies represent just 3% of the total assets of the financial system, while in Bosnia and Herzegovina they represent just 5% of the total.With economic growth forecasted at or above 3% in Albania, Kosovo, FYR Macedonia, and Montenegro, in 2015, this new year could see the South East region slowly emerge from stagnation. In addition to addressing the ongoing problems of high unemployment, stunted job creation, and boosting productivity of domestic firms, however, policymakers must also turn their attention to unexpected threats - such as floods, droughts and other natural disasters. Supplementing mitigation and adaptation initiative in these six countries with mechanisms such as insurance coverage - especially among the more vulnerable in the region - can go a long way in preventing the next disaster. These mechanisms can also drastically help recovery efforts on the ground if and when the next weather shock occurs. Show Less -
OverviewGrowth in the developing Europe and Central Asia region is estimated to have slowed to a lower-than-expected 2.4 percent in 2014, from 3.7 percent in 2013. This reflected a sharp contraction i... Show More +n Ukraine, spillovers from weakness in Russia and the Euro Area, and slowing capital inflows.Russia’s economy slowed to 0.7 percent in 2014. Tensions with Ukraine, sanctions, and falling crude oil prices interacted with a structural slowdown, although a depreciating ruble and increased public spending supported exports and industrial production in the final quarter of 2014 after a sharp contraction in mid-2014.Capital flight and the loss of access to international capital markets by Russian corporates under sanctions led to over 75 percent depreciation of the ruble against the U.S. dollar between January and mid-December in 2014, despite repeated interest rate hikes and interventions in the currency markets by the central bank.Conflict has taken a severe toll on Ukraine’s economy, with output estimated to have contracted an estimated 8.2 percent in 2014. An 85 percent depreciation of the currency against the U.S. dollar in 2014 and a sharp import compression led to a significant current account adjustment.In the Commonwealth of Independent States (CIS), growth slowed sharply to 1.5 percent, mainly attributable to the sharp output contraction in Ukraine, while Russia’s slowdown has had negative spillovers on trade and remittances. In the first half of 2014, export volumes to Russia fell more than 10 percent year on year in Kazakhstan, and by almost 20 percent in Uzbekistan. Others have been hit hard by a sharp contraction in the value of remittances in the first half of 2014. Tajikistan and the Kyrgyz Republic, where remittances from Russia represent 46 and 29 percent of GDP, respectively, are most exposed.Growth in Central and Eastern Europe (CEE) was broadly steady in 2014, at an estimated 2.6 percent, reflecting close trade ties to struggling core Euro Area countries. Many CEE countries are in or near deflation, due to negative output gaps, significant cuts in regulated energy prices (in Bulgaria, Croatia, Czech Republic, Hungary, and FYR Macedonia), and declining food and fuel prices. Growth in Turkey was an estimated 3.1 percent in 2014, exceeding earlier expectations. Strong government spending and export growth mitigated investment and consumption weakness associated with high inflation, domestic policy uncertainties, and rising geopolitical risk.OutlookAfter the sharp deceleration in 2014, the outlook for the region is for a modest recovery, with growth averaging 3.5 percent in 2015-17, but with considerable divergence across countries. The expected 2.9 percent contraction in Russia in 2015 and gradually tightening global financial conditions are expected to be offset to some extent by a modest recovery in Euro Area demand, diminishing political tensions, and the benefits of lower international energy prices on net importers.Ukraine’s economy faces a highly uncertain outlook, although—assuming no further escalation of tensions—activity is expected to bottom out in 2015 and gradually recover in 2016-17. Among energy-exporting CIS countries, a slowdown in emerging market trading partners (especially China and Russia) and continued weakness in crude oil and other key commodity prices are expected to reduce growth in 2015, before the onset of a recovery in 2016-17. In oil-importing CEE countries, a gradual strengthening in the Euro Area, additional monetary accommodation and a decline in international energy prices should support industrial activity and export growth. In Turkey, growth is expected to pick up to 3.5 percent in 2015 on the back of stronger private consumption, rising to 3.9 percent in 2017.RisksThe balance of risks to the region’s outlook remains tilted to the downside. Further escalation in political tensions with Russia, persistent stagnation in the Euro Area, or a sudden tightening of global financial conditions are key downside risks to the region’s outlook. Sharp or sustained declines in commodity prices or remittance inflows from Russia—the major source of remittances to the region - represent major risks for CIS countries. Failure of the expected modest upturn in the Euro Area to materialize represents a significant risk to the outlook of CEE countries that could derail their already-weak recovery. Financial market volatility is another potential source of uncertainty for countries with large financing needs.------------------------------------------For the purpose of this note, the developing Europe and Central Asia region includes 21 low and middle-income countries with income of less than $12,276 GNI-per capita in 2010. This classification excludes Croatia, the Czech Republic, Estonia, Latvia, Lithuania, Poland, the Russian Federation, Slovenia, and the Slovak Republic. The list of countries for the region may differ from those contained in other World Bank documents. Show Less -