EU Aspirant Montenegro Looks to Europe to Escape China’s Embrace

Misha Savic

23 Apr 2021, 11:59 AM IST

(Bloomberg) -- European Union candidate Montenegro is seeking to expand ties with the bloc, including possibly refinancing a Chinese loan it took to build its first highway that once threatened to wreck its public finances.

After the country of 620,000 underwent a historic power shift last year, Prime Minister Zdravko Krivokapic’s government has appealed for EU support to refinance the debt, which equaled a fifth of the economy when it was taken in 2014. A previous government borrowed the funds under China’s Belt and Road initiative in defiance of warnings that it would subject Montenegro to undue influence from Beijing.

Now the smallest former Yugoslav republic is seeking to extend the soon-to-expire grace period on the $944 million, 20-year loan from the Export-Import Bank of China, reduce the 2% interest rate and covert the denomination to euros, which Montenegro uses as its currency, Finance Minister Milojko Spajic said.

“Europe is by far the most important for us,” Spajic said in a phone interview. “If we would get the financing at current market conditions, we would most likely be able to get it at significantly improved terms, given the favorable conditions in the euro markets.”

Spajic, 33, is working to retool public finances after Krivokapic’s government ended the 30-year rule of President Milo Djukanovic’s party. The new plan included the sale of 750 million euros ($900 million) in bonds after the new government took power in December.

After comments from Montenegrin officials seeking EU help in refinancing, the yield on those bonds has jumped. It was trading at 4.423% at midday on Wednesday from 2.95% when it was issued in December.

Spajic said a two-and-a-half year delay in the completion of the 40-kilometer (24 mile) highway section hasn’t helped, and work should finally finish at the end of November. The government is in talks with the European Commission on ideas of how to finish the project to link the port of Bar with northern neighbor Serbia, crucial to spur the mountainous Balkan state’s economy.

Montenegro is fully capable of paying the loan, he said. “It’s much easier to repay the loan if you have an operating highway.”

Tourist Season

Spajic is aiming to squeeze the budget deficit to 3% of gross domestic product this year, from more than 10% in 2020. That task has been complicated by the 15% contraction suffered by the economy during the pandemic, one of the worst drops in Europe.

While growth is forecast to rebound this year to more than 9%, that will depend on tourism, which makes up a quarter of the economy. The government hopes visitors to its mountains and Adriatic shores will bring at least 700 million euros, or 65% of pre-pandemic revenue.

Under Djukanovic, Montenegro joined NATO, distanced itself from Russia. However, most sources of foreign investment haven’t matched the country’s political direction, said Spajic, a former Goldman Sachs credit analyst who worked in Japan, Singapore and the U.S.

“Infrastructure is built by China, tourists are coming from eastern Europe, such as Russia and Ukraine. Investment is coming from Turkey, Azerbaijan,” he said. “We want to have deeper ties with Brussels. That’s what’s important for us. I mean both with NATO and the EU.”