Montenegro’s sovereign rating has improved in recent years, but the country’s average public-debt cost increased from 2.22% in 2022 to 3.30% in 2025, reflecting higher European interest rates, refinancing conditions and a larger debt stock. According to data presented by Marko Pešić, head of investment banking at Hipotekarna Banka, Montenegro’s average public debt increased from approximately €4.13 billion in 2022 to €4.88 billion in 2025, while annual interest expenditure rose from €91.83 million to €161.07 million.
The implied average interest rate increased by 1.08 percentage points, or around 49%, despite improvements in Montenegro’s sovereign credit assessment.
Credit upgrades reduce risk premium but not total borrowing costs
Montenegro’s sovereign rating improved from the B category to B+ on the Standard & Poor’s scale, while Moody’s upgraded the country from B1 to Ba3 in September 2024, marking its first upgrade in a decade. Further improvements followed in 2026. S&P affirmed Montenegro at B+ and changed the outlook to positive in February 2026, while Moody’s maintained the Ba3 rating and upgraded the outlook from stable to positive in March 2026.
Montenegro remains below investment grade. Moody’s Ba3 rating is three levels below Baa3, the lowest investment-grade category, while S&P’s B+ rating remains four levels below BBB-. The country therefore continues to be classified as a speculative-grade sovereign, limiting access to some institutional investors such as conservative pension funds, insurers and fixed-income portfolios restricted to investment-grade securities. A rating improvement within speculative grade can increase investor demand, but the largest changes in borrowing conditions usually occur when a sovereign approaches or crosses the investment-grade threshold.
European interest-rate cycle increased refinancing costs
The increase in Montenegro’s debt costs since 2022 has largely reflected changes in European monetary conditions. At the beginning of 2022, the European Central Bank’s deposit rate was still negative. By the end of that year, ECB rates had increased significantly as policymakers responded to inflation pressures linked to energy prices, supply-chain disruptions and Russia’s invasion of Ukraine.
Montenegro uses the euro without being a member of the eurozone, which reduces currency risk on public debt but means the country follows ECB monetary conditions without participation in decision-making or access to all euro-area liquidity mechanisms. Higher euro benchmark rates increased Montenegro’s new borrowing costs even as its own credit indicators improved. Investors price Montenegrin bonds based on euro benchmark rates combined with sovereign risk premiums, liquidity premiums, term premiums and new-issue considerations.
Eurobond refinancing increases pressure on interest expenditure
A major challenge is the replacement of older low-cost debt issued during the period of exceptionally favourable European financing conditions. One example is Montenegro’s €750 million Eurobond maturing in December 2027, issued in 2020 with a 2.875% coupon. Replacing this instrument with debt priced between 4.5% and 5% would increase annual interest expenditure on the same principal amount by approximately €12 million to €16 million.
Montenegro’s 2024 international bond issuance reflected the higher interest-rate environment. The government issued $750 million of seven-year notes with a 7.25% dollar coupon. A cross-currency swap converted the exposure into approximately €687.8 million with an effective euro interest rate of around 5.88%, reducing direct dollar exchange-rate exposure.
Investor demand remained strong, with the order book exceeding $4.7 billion, more than six times the issued amount. Investment funds purchased approximately 92% of the transaction, while banks accounted for around 4%, and pension and insurance investors approximately 3%. By investor location, buyers from the United States represented 47%, the United Kingdom 29%, and continental Europe 22%.
2025 Eurobond lowered refinancing pressure but raised coupon costs
Montenegro returned to the euro market in March 2025, issuing a record €850 million seven-year Eurobond with a 4.875% coupon. The transaction refinanced most of the €820 million in obligations falling due during 2025, including a €500 million Eurobond issued in 2018 with a 3.375% coupon.
Replacing the older bond with financing at 4.875% increased annual interest costs by approximately €7.5 million on the equivalent principal amount. The maturity extension reduced short-term refinancing risk, with the new bond extending obligations until 2032. The 2025 bond later traded above its issue price. In July 2026, the bond price reached around 101.7% of face value, with a yield of approximately 4.67%, below the original coupon.
Debt stock growth adds to interest burden
Montenegro’s average public debt increased by approximately €750 million between 2022 and 2025, rising from €4.13 billion to €4.88 billion. The higher debt volume combined with increased borrowing costs to push interest expenditure higher. By March 2026, gross public debt reached approximately €5.13 billion, equivalent to around 59.9% of projected GDP. The government expects gross debt to temporarily increase to approximately 68% of GDP in 2026, mainly due to pre-financing preparations for the €750 million Eurobond maturity in 2027 and the creation of a liquidity reserve.
The government’s medium-term framework projects net public debt at 56.4% of GDP in 2026, with gross debt expected to decline to approximately 59.9% of GDP by 2029 after repayment of the 2027 Eurobond.
Pre-financing strategy creates additional interest costs
Pre-financing requires the government to pay interest on newly issued debt while holding funds in deposits or low-risk instruments, creating a negative carry. The strategy reduces refinancing risk by ensuring funds are available before major maturities.
The 2026 budget allows up to approximately €710 million for debt repayment, capital expenditure and reserve building, with around €383.6 million in obligations scheduled to mature during the year. The larger refinancing challenge remains the €750 million Eurobond maturity in 2027, followed by the €500 million 2.55% Eurobond due in 2029 and the swapped dollar bond maturing in 2031. The 2029 bond carries a 2.55% coupon, issued in 2019 when European borrowing costs were significantly lower.
Euro-denominated debt limits currency exposure
Approximately 99.7% of Montenegro’s public debt is denominated in euros after hedging, limiting direct currency mismatch between government revenues and debt obligations. Euroisation does not remove sovereign risk. Montenegro cannot create euros to service debt, and the central bank cannot act as a conventional sovereign lender of last resort.
Debt servicing depends on taxation, government deposits, official-sector financing, asset sales and continued access to capital markets.
EU accession prospects influence credit outlook
Montenegro’s rating outlooks also reflect economic growth expectations and progress towards possible EU membership in 2028. S&P expects net general-government debt to average around 52% of GDP between 2026 and 2029, while the government projects average real economic growth of approximately 3.1% during the same period.
EU accession could improve institutions, increase access to European funds and strengthen regulatory and banking frameworks. EU membership would not automatically provide euro-area status or ECB support, and investors will continue assessing Montenegro based on fiscal capacity, institutions and market liquidity.
Fiscal risks remain linked to deficits and economic structure
Montenegro’s economy remains exposed to tourism concentration, external deficits and infrastructure constraints. The current-account deficit widened to 17.1% of GDP in 2024 and remained elevated in 2025, reflecting weak goods exports, high import dependence, foreign investment flows and tourism revenues.
The government’s medium-term framework projects a budget deficit of 3.7% of GDP in 2026, narrowing gradually to 3.2% by 2029. The primary deficit is expected to decline from 1.7% to 0.6%, while the current budget remains in surplus.
Debt-financed infrastructure projects, including transport, energy and environmental investments, can support future growth if implemented efficiently, while delays or cost overruns could increase debt without creating equivalent economic returns.
Future borrowing costs depend on market access
Montenegro’s international bond market remains relatively small compared with larger European sovereign markets, creating a liquidity premium. A stronger rating can increase demand, but a significant reduction in borrowing costs also requires regular issuance, transparent fiscal reporting, predictable debt-management policies and a smoother maturity profile.
The country’s improved credit profile has already influenced market pricing. The 2025 Eurobond coupon of 4.875% was nearly one percentage point lower than the euro-equivalent cost of the 2024 dollar issuance, while the secondary-market yield later declined to around 4.67%.
The next major test will be refinancing the €750 million 2027 Eurobond. A reduction of 50 basis points on that amount would reduce annual interest costs by approximately €3.75 million, or more than €26 million over a seven-year maturity, before issuance expenses. Montenegro’s stronger rating outlook is reducing sovereign risk premiums, but refinancing older low-cost debt in a higher-rate environment continues to increase the average cost of public borrowing.
