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Monday, 18 June 07:42 (GMT -05:00)

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Montenegro: outlook for investors


For many foreign investors (especially for those from Eastern Europe) Montenegro has become a fairly attractive object of investments. It has become especially popular with wealthy Russians, so popular, that The New York Times once referred to Montenegro as “Moscow-on-the-Sea”.
On the face of it, such an incredible investment activity may look excessive. At least it causes a lot of questions and doubt. Indeed, this country is relatively small (half the size of the Crimea), the biggest part of its territory is covered with mountains and forests. Only 8% of the land is suitable for agriculture. The population is less than 700.000 people. Montenegro cannot boast abundant reserves of mineral resources. There is almost no industrial production.
So, what is so tempting about Montenegro when it comes to investments?


Multiple advertising campaigns present Montenegro as a “Mediterranean tiger” or a “new Monaco”. According to the experts of Masterforex-V Academy, since 2006 Montenegro has really been one of Europe’s most attractive places for foreign investors. What makes Montenegro so tempting for investors?
Favorable geographic location. It is sufficient to say that it is located on the coast of the Adriatic Sea (some 200km to Italy by sea).
Montenegro has already received its EU membership candidacy. It is expected to become an EU member in 2015. According to Research and Markets, that will increase the inflow of foreign investments.  As for the common Euro currency, it is has been treated as a national currency for a long time.
Healthy environment. Montenegro’s constitution says it is an “ecological state”. Do you know a lot of such countries? Montenegro can boast Europe’s biggest virgin forest. That is why the air is so fresh.
Developed tourist industry. Tourism is a major source of income. Even though Montenegro is deprived of mineral recourses, its major treasure is climate, nature and sea. This is one of Europe’s few places when one can hide from civilization and enjoy wild nature. Moreover, tourists from numerous countries do not need visas to visit Montenegro. The country is especially popular with tourists with moderate income. However, the local authorities do not like that. They want to abandon mass tourism and to turn Montenegro into a premium resort for the rich. The country is going to challenge Monaco.
Investment attractiveness of Montenegro’s housing market. Before the crisis foreign investors used to invest in the country’s fixed property, especially Russians and other nations from the ex-USSR. Only this year 426 foreigners have got the right to buy or build a house. 261 of them are Russians.



Manufacturing production, including metallurgy, woodworking, chemical and food industry. In the 1st half of 2011 Montenegro’s economy grew by 2.1%. The external trade boosted by 15% mostly due to higher export of non-ferrous metals, iron and steel. By the way, the country’s budget deficit is as low as 1.6% of the national GDP. 
Relatively mild business climate. Montenegro is not an offshore zone, its tax system is relatively favorable for businessmen: income tax - 15%, VAT - 17%, corporate income tax - 9% (one of Europe’s lowest). Moreover, the local authorities have finally decided to support small-scale businesses. They are planning to create special business zones, where entrepreneurs will be able to rent a piece of land with infrastructure at low cost. It is even planned to exempt from taxes all businesses that are less than 3 years old.
In general , international rating agencies are positive about Montenegro’s economic perspectives: In March 2011 Moody's Investors Service upgraded the country’s rating to  Ва3, thus changing the forecast from negative to stable, S&P rates it as "ВВ". Montenegro’s rating is the 3rd highest among all the Balkan countries (after Slovenia and Croatia).


Risky investments. Montenegrin mirage?
Western media keeps reporting that Montenegro’s “investment heaven” is nothing but a mirage. For example, according to the survey conducted by Euromoney magazine, Montenegro is one of Europe’s 3 least reliable countries in terms of investments. According to the expert team of Nord FX (TOP 3 of Masterforex-V Academy’s rating of FX brokers ), the romance between Montenegro and its investors is nearly over.
There are many reasons for pessimistic forecasts:
·         global financial crisis
·         no development potential within the framework of the current economic model
·         “bubble” economy (foreigners invested in fixed property, later the money flew into the country’s construction, banking sector and trading, thus contributing to higher living standards and simultaneously making a “bubble)”.
So, what are the major risks and further development restrictions? Let’s mention some of them:
Short tourist season. It is not a secret that the local population lives mainly on tourism. The trouble is that the tourist season in Montenegro is relatively short – only 3 summer months. The local authorities even start considering the creation of gambling business. Once again, Russia and Ukraine contributed to that idea by closing their own gambling industry. For example, the Russian group “Korston” has already bought a hotel in Budva in order to open a casino and to start tours for gamblers. However, it is not only about the short season. Montenegro’s tourist industry is in stagnation: hotels, sports clubs and restaurants are not enough.
Lower demand for dwelling property. Some experts say the country’s housing market temporarily fell prey to the crisis, thus anticipating a recovery in the near future. Pessimists say that this source of income has been exhausted. These are their arguments:
·         The demand for Montenegro’s dwelling property was artificially expanded by Russian investors and local realtors. According to Suncana Planina, 60-70% of the property is bought by Russians.
·         Housing prices cannot grow forever. In Montenegro they have already reached the limit after coming close to Italian and Spanish prices. Over the last 5 years they have grown by 70-400%.
·         Investors start withdrawing their capital.



Much lower investment activity. During the first half of 2011 the investment inflow was 44.7% lower than during the same period of 2010. Moreover, almost no major investment project has been finished so far.
All in all, it is rather difficult to conduct a business in Montenegro. There are a number of reasons for that, including heavy taxation, disregard of law, bureaucracy, non-liquid banks with low lending activity, corruption, shady economy etc.
These and many other factors make Montenegro a risky area for investors.
Moreover, the country’s manufacturing industry is almost dead. Today’s major Montenegrin businesses can be counted on the fingers of one hand: an aluminum plant, metallurgical works, а thermal power-station, a bauxite mine and… that is probably all. Some of them are on the verge of bankruptcy.
In fact, the country’s manufacturing industry is represented by light industry, including small-scale businesses. Nevertheless, most products are imported. The country lives on foreign investments, tourism and the export of aluminum (over 50% of the country’s entire exports). In January-May 2011 the country’s production declined by 10.7%, mainly because it is noncompetitive.
Poor quality of life. Many Montenegrins live in poverty, especially in the north of the country:
·         The average pension is €272, the average salary is €476.
·         The rate of unemployment is 11.7%.
·         The buying power of the local population is low.
·         The GDP per capita is $9 900, which is the 2nd poorest value among all the other former Yugoslavian republics (for comparison sake, in Slovenia - $28 400, Croatia –$17 500). Only Bosnia and Herzegovina’s GDP per capita is lower - $6 600.
The bottom line: It appears that Montenegro’s economic growth in recent years was mostly artificial, which suggests instability and risks. According to The Global Competitiveness Index 2011-2012, Montenegro has lost 11 positions down to the 60th place. The only positive thing is that it has managed to avoid accumulating substantial public debt.
Market Leader and Masterforex-V Academy would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:
Can Montenegro become really attractive for foreign investors?



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