Country risk: Former Yugoslavia face higher risks – Croatia, Montenegro, Serbia exposed


Jeremy Weltman
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The CEE region has coped well with managing the coronavirus pandemic, but will be severely tested by falling tourism, rising debts and political instability.

Croatia faces a tough climb to regain its position, as the former Yugoslavia states confront higher risks

Controlling borders and the well-coordinated government management of the crisis has worked well for the former Yugoslavian states, but risk experts do not believe it is cause for celebration even if a second wave is avoided.

Euromoney’s country risk survey shows Slovenia, Croatia and, to a lesser extent, Serbia performing well before the crisis, but other countries lagging as the transition from communist rule proves difficult.

Slovenia and Croatia are now EU members and Slovenia is on many economic indicators comparable with EU countries. But Bosnia and Herzegovina, Kosovo and Metohija, and North Macedonia are on the edge of survival, both economically and politically, notes Milos Vulanovic, an associate professor at the EDHEC business school and a contributor to the survey.

“The latter three have operated for more than two decades in a state of frozen conflict and permanent crisis, so little will change”, he remarks. “But potentially the hardest hit economically will be Montenegro and Croatia, primarily due to their heavy dependence on tourism.”

Vanja Piljak, a lecturer in finance at the University of Vaasa, agrees Montenegro and Croatia are most exposed because of their tourism dependency.

Croatia has certainly been brought down in the survey, falling seven places to 65th out of 174 countries, pushing it back down towards the bottom of the third of five risk categories, sandwiched between the Philippines and Panama in the global risk rankings.

“Tourism and travel is the single-most important sector for Croatia, accounting for about 25% of GDP,” says Piljak, who also points out that its government debt was already high at 73.2% of GDP in 2019. 

She also notes the increased risk of combined negative economic outlook and financial markets instability undermining bank stability and access to credit for small and medium-sized enterprises across the region.

Forecasts from the IMF point to deep recessions; with real GDP declining by a whopping 9% this year in Croatia, 8% in Slovenia, 5% in both Bosnia-Herzegovina and Kosovo, 4% in North Macedonia and 3% in Serbia.

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Montenegro a default risk

Montenegro, forecast to endure a 9% decline in real GDP, is even riskier than Croatia, lying 112th, two places below North Macedonia. It is a high risk, tier-4 borrower, on a par with Cameroon and Turkmenistan.

“Officially, tourism generates more than 20% of income for these countries, but unofficially [it is] much more”, says Vulanovic. “This summer much of this income inflow will not be there, resulting in big holes in those countries’ official accounts and also hitting businesses and individuals.

“The only way out of this situation is taking on additional debt. Croatia has easier access to funds as an EU member, but Montenegro, a country that unilaterally euro-ized its economy, has little choice.”

Montenegro is a cash-strapped country, not least because of the questionable construction of a highway costing about a third of annual GDP, and it is likely to become the first country in the region to reach a 100% debt-to-GDP ratio. 

“This is not sustainable in the medium term and would make it a candidate to default on some of its obligations if the markets show an unwillingness to refinance the debts,” warns Vulanovic.

There are low scores for all of Montenegro’s political risk indicators, including government stability. The country has been ruled for more than three decades by president Milo Đukanović, a politician who became prime minister straight after college and has remained in office ever since.

“In December last year he pushed for a controversial law on freedom of religion, stipulating the property of the Serbian Orthodox Church would be nationalized, which led to street protests,” says Vulanovic.

“The virus provided a perfect reason for the government to stop these protests, implementing various restrictive measures to contain Covid-19. But the political crisis escalated further with the arrest of bishop Joanikije on May 12 as an anti-Covid measure, which caused clashes between the police and protestors.”

The protests are expected to continue with even more people participating. And with a parliamentary election expected to be called for September, debt levels approaching 100% of GDP and a big decline in revenues, Montenegro is likely to be the country in the region that suffers the most from the crisis triggered by the coronavirus.

Serbia’s political risks

Most of the countries in the region, including Serbia, introduced strict measures early on, going into lockdown and imposing self-isolation for new arrivals into the country when the first cases were identified. Many have now lifted most restrictions.

“Serbia had weekend curfews and bans on leaving their homes for those aged 65 and over. It also introduced several measures to help middle and small businesses cope with the crisis, under condition they would not fire more than 10% of their employees,” says survey contributor Sanja Vico, research officer at the European Institute of the London School of Economics and Political Science (LSE) and associate of the South Eastern Europe Research Unit at the LSE.

However, she points out that these policies can be both good and bad for the economy. Keeping the unemployment rate under control is vital and reopening businesses stimulates the economy.

“However, it is unclear if the sudden move from rather draconian, but mostly necessary measures, to their lifting is reasonable and has been carefully thought through or rushed,” she says.

The uncertainty and a possible second wave could undermine trust in the government, especially as there is insufficient reasoning given for the policy shift, highlighting a lack of transparency in decision making.

Serbia it should be noted scores poorly (less than five out of 10) for various political indicators in Euromoney’s risk survey, including transparency.

“One of the reasons for lifting most of the measures may be to hold elections scheduled for June 21,” says Vico, who notes an important political implication of the pandemic.

“Holding general elections in these circumstances does not make for a good political outlook,” she says. “Primarily this is because media coverage on Covid-19 has overshadowed other important issues that are vital for the country’s long-term trajectory.

“It has also provided a disproportionately larger spotlight for the ruling party and its leader, who was appearing regularly on the news providing Covid-19-related briefings.”

Serbia has received the largest amount aid from the EU, despite China’s and Russia’s support receiving more attention from the traditional, pro-regime media and featuring more prominently in the president’s speeches.

“This can be partially understood as spinning public opinion, given that the EU enlargement to the countries of the western Balkans has become increasingly uncertain due to both external (‘enlargement fatigue’) and internal reasons (the rule of law, corruption and democracy), though the EU is still the key trading partner of Serbia; around 70% of Serbia’s trade is with the EU,” says Vico.

“Serbia’s EU trajectory is important not only because of its economy but also for strengthening its democracy, both of which are also crucial in tackling the so-called ‘brain drain’ – the emigration of mainly younger and highly educated people – which in turn may pose another strain on the economy.”

Darja Zlogar, head of the economic studies department at the Centre for International Cooperation and Development in Slovenia has downgraded Serbia due to the increased economic risk stemming from recession created by the global coronavirus pandemic lockdown.

“After a successful year in 2019, this year Serbia faces recession with real GDP falling by at least 5% (following last year’s growth of 4.2%). The budget balance is seen worsening to at least -9% of GDP (from -0.2% of GDP in 2019), the current account deficit will rise to -7% or -8% of GDP, with the unemployment rate increasing by five percentage points to around 15%.

“Financial risk was high even before the recession”, she says, “However, it is worth mentioning that the external debt will rise, relative to GDP and exports of goods and services.”

Like Vico, she also mentions political risk, noting Serbia faces an election, with the president and his party tightening their grip on power – including the media – during the state of emergency.

“The opposition is weak and public dissatisfaction is visible. Political risk remains high also because of unresolved relations with Kosovo,” she says.