---

24/05/2023

I leave a stable and liquid banking system to my successor

PDF link

The joint efforts of supervisors and commercial banks have preserved Montenegro’s banking system stability. The banking system is stable, liquid and well-capitalised. After 2022, during which specific banking operations indicators recorded the historically most favourable values, the positive trends continued in 2023. In the first four months of this year, key balance sheet positions (i.e. assets, capital, deposits and loans) recorded respective year-on-year growth of 15.8, 22.5, 19.1 and 10.1 percent.

I see budget deficit restraining and public debt repayment as the two most significant fiscal challenges requiring a more robust fiscal adjustment, stated CBCG Governor Radoje Žugić in an interview with the daily “Pobjeda”.

He supports the International Monetary Fund (IMF) position that it is necessary to implement more robust and faster fiscal adjustment and abandon the practice of creating new spending without prior fiscal sustainability impact analysis.

Žugić believes that the banking system is the Montenegrin economy’s healthiest part and points out that the CBCG is a rare Montenegrin institution continuously receiving positive marks in the European Commission’s progress report.

POBJEDA: In the coming days, Montenegro will host a noteworthy event gathering high-ranked World Bank and IMF officials. What exactly is it about, and how are the preparations for this event going?

ŽUGIĆ: The annual meeting of the World Bank and the IMF Belgian-Dutch constituency will be held next week in Luštica. Organising this significant international event, gathering senior World Bank and IMF officials and delegations from the Constituency’s 16 member countries led by finance ministers and central bank governors, continues our successful and fruitful cooperation with these financial institutions.

The topic of the meeting, which will be opened by the World Bank and the IMF executive directors together with Montenegro’s President and Prime Minister, is Policy Adjusting in Times of Multiple Crises, and one of the speakers will be Bo Li, Deputy Managing Director at the IMF. With our colleagues from the Ministry of Finance, we are working hard to organise the upcoming event and present Montenegro in the best light.

POBJEDA: What is the situation in the Montenegrin banking market, i.e. what is the situation in the system? Does every bank operate soundly? Are there banks in Montenegro with problematic operations?

ŽUGIĆ: The previous six-year period I served as Governor was very challenging. Multiple crises hit the world – pandemic, energy and geopolitical – causing enormous uncertainty, increased risks, and the possibility of their adverse impact on financial stability. Despite the aforesaid and owing to the supervisors’ and commercial banks’ joint efforts, Montenegro’s banking system stability has been preserved. The banking system is sound, liquid and well-capitalised. After 2022, during which specific banking operations indicators recorded the historically most favourable values, the positive trends continued in 2023. In the first four months of this year, key balance sheet positions (i.e. assets, capital, deposits and loans) recorded respective year-on-year growth of 15.8, 22.5, 19.1 and 10.1 percent.

All banks in the system operate regularly. The banks also strongly support the country’s economic recovery, confirmed by the data on new loans, which in 2022 were 31 and 61 percent higher compared to 2021 and 2020, respectively. Comparative data show that entrepreneurs in Montenegro borrow at the lowest interest rates in the region although lending interest rates did grow during the previous period due to leading central banks’ monetary policies, still significantly lower compared to the growth of Euribor as a reference interest rate.

I believe that the banking system is the healthiest part of the Montenegrin economy. The evaluations of numerous international financial institutions have supported this claim. I will only mention the IMF, which pointed out that the banking system was operating well, that banks’ liquidity, solvency and asset quality ratios were strong, and that, inter alia, the CBCG measures helped to avoid a more severe recession and mitigate the adverse effects of the pandemic. Furthermore, the Asset Quality Review (AQR) findings, carried out following the European Central Bank methodology and by an independent international auditor, confirmed our banking system’s stability.

Let me remind you that the CBCG is one of the rare Montenegrin institutions continuously receiving positive marks in the European Commission’s Progress Report.

POBJEDA: How do you assess the current state of Montenegrin public finances, given that we can hear diametrically opposite assessments and opinions in public, from those threatening us with “bankruptcy and the Greek scenario” on the one hand to those optimistic statements about “spectacular results and never better economic parameters” on the other hand? What is needed to strengthen the country’s fiscal and economic stability in this and the following years? What are the main challenges along the way?

ŽUGIĆ: The Ministry of Finance data referring to the growth of income this year compared to the plan and last year’s achievement instil a certain optimism, which should nevertheless be viewed with caution, primarily due to the tremendous external uncertainty and due to our fiscal sector’s vulnerability. First, I refer here to the high public debt level and the upcoming obligations to service it, which may be made more difficult due to tightening borrowing conditions on the international market.

As I see it, budget deficit control and public debt repayment are the two biggest fiscal challenges requiring more substantial fiscal consolidation. We support the IMF’s position that implementing a stronger and faster fiscal adjustment and abandoning creating new spending without prior fiscal sustainability impact analysis is necessary. It is necessary to devise budget revenues increasing initiatives to preserve business conditions to remedy the adverse effects of previously adopted measures that increased consumption. It is the only way to reduce debt and stabilise public finances.

As for economic stability, it is necessary to strengthen the real sector’s resilience and improve its competitiveness. We have repeatedly spoken about the need to change our economy’s development model towards greater diversification and finalisation in production. Furthermore, a more substantial commitment to structural reforms in the labour market, pension system, healthcare and education is needed, which will largely contribute to the improved business environment and the economy’s competitiveness.

POBJEDA: On 19 April, the Parliament adopted amendments to the Central Bank Law, according to which the Parliament will appoint the Governor through a public competition instead of the former procedure of appointing on the country President’s proposal. How do you see this legal solution, considering that Montenegro’s former President Milo Đukanović proposed you be reappointed as the CBCG Governor last September, and that proposal was sent to the Parliament Speaker Danijela Đurović?

ŽUGIĆ: Under Article 50a of the Law on CBCG, as a member of the Council whose mandate has expired, I am obliged to perform the Governor’s function until a new one is appointed. The fact that the future Governor will begin the mandate in a credible and strong institution and with a sound banking system representing the healthiest part of our economy confirms the successful and professional work of me as Governor and the entire CBCG team, of which I am incredibly proud.

POBJEDA: Should the country enter into an arrangement with the IMF this year? Is there a need for it? In that case, would the IMF set the conditions for reducing public spending?

ŽUGIĆ: In a situation of deteriorating financing conditions and numerous internal and external risks, I believe all borrowing options should be considered, and a prudent debt management policy be pursued. Therefore, I think the authorities should consider an arrangement with the IMF, especially since its contracting would mean borrowing on much more favourable terms than market ones. In addition, more intensive cooperation with the IMF would represent a specific type of guarantee to investors that the conditions in Montenegro will not change. Given that this instrument is mainly conditioned by implementing a “tighter” policy, it is expected that the emphasis will be on structural reforms aimed at resolving long-term vulnerabilities and reducing unproductive spending.

Issuing bonds on the domestic market could increase interest rates

POBJEDA: For a long time, the Ministry of Finance has been announcing the possible bonds issued on the domestic market, which could be purchased by citizens and businesses, taking into account the high level of deposits in banks and low deposit interest rates. What is your opinion on issuing government bonds on the domestic market? Could this cause adverse consequences and a possible outflow of deposits from Montenegrin banks?

ŽUGIĆ: The preparation for the eventual issuance of local bonds should be very serious because, in addition to its good sides, this idea carries certain risks with it. The advantages are developing the domestic capital market and strengthening the state budget’s liquidity. At the same time, citizens could secure more interest than term savings as potential buyers of these securities.

On the other hand, by reducing banks’ deposits, the issuance of local bonds could increase interest rates, as recent Croatian experience has shown. It would increase borrowing costs for citizens and the economy and could indirectly impact the country’s economic activity slowdown.