The government of Montenegro has begun the process of obtaining an $85M loan from the World Bank. The loan will be used to support the government budget, which is underfunded because government outlays have not been cut in harmony with the recent economic downturn.
Montenegro issued a 200M€ Eurobond last September. The World Bank loan is being explored as an alternative to another EuroBond issue. A loan from the World Bank could be obtained at a lower interest rate than another EuroBond issue. The September EuroBond, Montenegro’s first, was issued as a 10yr bond at 7.85%.
The World Bank loan will reportedly be linked to requirements to strengthen the supervisory role of the Central Bank of Montenegro. It is currently expensive for the government of Montenegro to borrow money through bond issues, because the credit rating agencies are not comfortable with the strength of Montenegrin banks. Moody’s rates Montenegro’s government bonds at Ba3, while Standard & Poor rates Montenegro’s sovereign debt at BB. In the bond rating world, Ba3 and BB are known as “Non-investment grade speculative” bonds. In common slang, they are known as junk bonds.
To improve our national credit rating, we must:
- Reduce government debt
- Increase economic growth
- Improve stability of the banking system
The situation does appear to be on-track for improvement. Prime Minister Igor Lukšić recently met with the WorldBank’s Vice-President Philippe Le Houérou. Mr. Le Houérou stated that he was “glad to see that the government has a clear strategy and vision and also a good team for managing key challenges.”