Montenegro has seen an improvement in its sovereign credit profile, yet this has not translated into lower borrowing costs. From 2022 to 2025, the average cost of public debt in the country increased from 2.22% to 3.30%, despite a favorable shift in its credit rating and enhanced investor confidence in its economic stability.
This paradox stems from how sovereign borrowing is priced. While a higher credit rating can decrease the risk premium demanded by investors, it does not negate other factors influencing total borrowing costs, such as European benchmark interest rates and global market conditions. As such, even with a stronger rating, overall debt expenses can rise if underlying interest rates increase significantly.
Marko Pešić, head of investment banking at Hipotekarna Banka, highlighted this trend with data on Montenegro’s public debt. The average public-debt stock rose from approximately €4.13 billion in 2022 to €4.88 billion by 2025, leading to an increase in annual interest payments from €91.83 million to €161.07 million during the same period.
The average interest rate on Montenegro’s debt climbed by 1.08 percentage points, or about 49%, even as its credit rating improved from B to B+ according to Standard & Poor’s. Moody’s also upgraded Montenegro from B1 to Ba3 in September 2024, marking its first upgrade in ten years.
Both ratings agencies have since maintained a positive outlook for Montenegro. In February 2026, S&P affirmed the B+ rating and assigned a positive outlook, while Moody’s retained the Ba3 rating with a positive outlook as of March.
Despite these upgrades, Montenegro remains below investment grade. Moody’s Ba3 is three notches below the lowest investment-grade rating of Baa3, and S&P’s B+ sits four notches below BBB-. This classification limits access to many conservative investment funds that cannot hold lower-rated securities.
The implications of remaining within speculative grade are significant; while an upgrade can enhance demand for bonds, it does not fundamentally alter the types of investors participating in the market. The most substantial shifts typically occur when a country approaches or achieves investment-grade status, which opens up additional indices and fund eligibility.
Montenegro’s improving credit rating may reduce the premium on its bonds but does not eliminate the liquidity and refinancing challenges tied to being a small non-EU sovereign with a concentrated economy and limited domestic capital markets.
The increase in average debt costs since 2022 primarily reflects trends in European interest rates. The beginning of 2022 saw negative deposit rates from the European Central Bank (ECB), but by the end of that year, rates had risen sharply due to inflationary pressures stemming from energy prices and geopolitical tensions.
Although Montenegro uses the euro without being part of the eurozone—thereby minimizing currency risks—it also means that it adopts ECB monetary policy without direct representation or access to all euro-area liquidity mechanisms. Consequently, rising euro benchmark rates lead to higher borrowing costs for Montenegro despite improvements in credit fundamentals.
An example illustrates this dynamic: if a sovereign borrows at a zero benchmark rate plus a 300-basis-point spread for a total yield of 3%, an improved rating might narrow the spread to 200 basis points but still result in a total yield of 4.5% if the benchmark rises to 2.5%. This scenario mirrors Montenegro’s experience as it transitions away from low-cost borrowing instruments issued during favorable economic conditions.
A notable instance is Montenegro’s €750 million Eurobond set to mature in December 2027, issued during the pandemic at a coupon rate of 2.875%. Replacing this bond with one yielding between 4.5% and 5% would increase annual interest payments by approximately €12 million to €16 million.
The government’s recent issuance of $750 million in seven-year notes with a dollar coupon of 7.25% reflects new market realities, converting exposure into around €687.8 million at an effective euro rate of about 5.88%. This transaction attracted over $4.7 billion in demand, indicating continued investor interest despite higher funding costs compared to previous years.
In March 2025, Montenegro returned to the euro market with a record €850 million seven-year Eurobond at a coupon rate of 4.875%, nearly one percentage point lower than previous dollar transactions. This issuance refinanced much of the €820 million due in obligations throughout that year while extending maturity profiles and reducing short-term refinancing risks.
The refinancing process has resulted in increased annual coupon burdens as older bonds with lower coupons are replaced by new issues at higher rates. For instance, replacing a €500 million bond priced at 3.375% with one costing 4.875% could raise annual interest costs by about €7.5 million on an equivalent principal amount.
As of March 2026, gross public debt is projected at approximately €5.13 billion or about 59.9% of GDP, expected to rise temporarily to around 68% due to pre-financing strategies aimed at managing upcoming obligations effectively.
This pre-financing approach incurs costs but serves as insurance against potential market shocks or political crises that could escalate borrowing expenses significantly if left unaddressed until maturity dates approach.
The current budget allows for approximately €710 million in funding for debt repayment and capital expenditure against roughly €383.6 million scheduled for maturity during the year ahead.
Montenegro’s medium-term framework forecasts net public debt at around 56.4% of GDP in 2026 while projecting gradual reductions in budget deficits over subsequent years.
The country’s economic growth prospects remain intertwined with EU accession ambitions set for potentially around 2028, which could enhance institutional frameworks and access to European funds while mitigating political risks.
However, Montenegro’s economy continues facing challenges related to tourism dependency and external deficits, evidenced by a current-account deficit widening to 17.1% of GDP in 2024 amidst weak goods exports and high import reliance.
Fiscal policy constraints are evident as well; projected budget deficits remain significant through the medium term despite some positive trends in primary balances and current budgets maintaining surpluses.
Montenegro’s bond market dynamics reflect unique liquidity premiums due to its relatively small size compared with larger European sovereigns, resulting in fewer maturities and less secondary-market activity that may deter some investors during periods of heightened stress.
The ongoing rise in interest expenditure highlights that while improvements in Montenegro’s credit rating have generated value, they do not offset the elevated costs associated with current borrowing environments shaped by broader monetary policies across Europe.
