Interview of Governor Radoje Žugić to Daily “Pobjeda”
Governor Radoje Žugić on the use of ECB instruments
For liquidity 250 million
The concluding of an arrangement with the European Central Bank (ECB) gave the Central Bank of Montenegro (CBCG) for the first time an opportunity to provide additional funds to support systemic liquidity in the event of market disturbances caused by the pandemic shock.
The CBCG measures to support citizens and the economy introduced so far have yielded promising results. The CBCG continues to monitor the further development of the situation closely and with due attention. As it was the case before, we will devise adequate measures if needed, strictly taking into account legal competencies, and preserving the financial system’s stability, Governor Radoje Žugić told Pobjeda. He pointed out that the just-approved bilateral ECB repo line of 250 million euros, supported by the German Bundesbank, best confirmed the proactivity of the CBCG.
- By concluding this arrangement, if market disturbances caused by Covid-19 pandemic shock occur, the CBCG has an opportunity to provide additional funds to support systemic liquidity. Therefore, for the first time, Montenegro has a chance to use one of the available ECB instruments, for which we thank the ECB management led by President Christine Lagarde. This chance was preceded the CBCG work lasting several months, first through a regional and then through a bilateral initiative towards with the ECB. In addition to this arrangement, this May the CBCG provided a liquidity line of 100 million euros with the Bank for International Settlements, the world’s oldest financial institution, said Žugić.
POBJEDA: Are these arrangements sufficient to provide quick liquidity?
ŽUGIĆ: If we add the available required reserves level of 178 million euros and the CBCG capital to the CBCG repo lines with the ECB and BlS of 350 million euros, the result is a significant amount. This amount confirms that, without an issuing function, we have the most complete framework for providing quick liquidity compared to all euroized and dollarized countries in the world. To conclude, the system can absorb the potential liquidity shock that exceeds the one from October 2008 multifold. In this way, the CBCG neutralized the most significant lack of euroization - the absence of the lender of the last resort function.
POBJEDA: In your opinion, did the CBCG adequately react to the crisis brought by the Coronavirus pandemic?
ŽUGIĆ: I believe that the CBCG reacted timely and adequately and contributed significantly to mitigating the economic consequences of the pandemic, using all the available instruments. The CBCG activities from the previous period contributed to the strengthening of the banking sector, which at the end of 2019 was well-capitalized, liquid and with positive trends concerning the most critical business indicators. Owing to such position, banks welcomed the implementation of crisis measures readily. Over the past six months, the CBCG implemented four packages of measures, acting to preserve banks’ liquidity and increase their lending potential, to transfer liquidity from the financial system to the economy and citizens, and long-term systemic resolution of permanent creditworthiness decline effects. The first set of measures included a moratorium on loan repayments, which was binding on banks from March to May. Its objective was to provide liquidity of 155 million euros to citizens and the economy, providing them with a higher income and the possibility of settling other obligations. Some 65,000 clients claimed this right. The second still applicable instrument includes a framework for long-term loan restructuring. The CBCG decision treats these loans as new ones, thus relieving banks of the additional burden of provisioning costs. This instrument resulted in creating conditions for loan restructuring under more favourable conditions. This measure gives significant results, which supports its quality design. In two months, banks managed to restructure more than half of loans they restructured cumulatively by the end of 2019. We expect this measure to contribute fully to the real sector’s recovery in the coming months. This is mainly as this part of the decision on interim measures is “matched” with the third package of Government measures concerning the subsidized interest rates for restructured loans in tourism, agriculture and forestry.
According to the second set of measures, banks are allowed to temporarily increase their exposure to one person and/or a group of related parties over the prescribed limits. This measure provided rapid liquidity for several large companies. Intending to strengthen the banks’ capital buffers to absorb potential losses, the CBCG prohibited banks from paying dividends, except in the form of own shares. Both measures are still in force.
As for the third set of measures, the required reserve ratio of banks was reduced by two percent, by which the CBCG freed 70 million in liquidity, increasing the banks’ lending potential. The CBCG then “halved” the liquidity reserve withdrawal price, providing affordable access to additional sources of bank liquidity if needed. Both measures are still in force. It has also ensured the implementation of a flexible moratorium on loan repayment focusing on liquid positions of legal entities and individuals whose cash flow has been affected by the crisis (approved for 3,146 debtors).
Finally, with the new August decision on the temporary measures, relying on the third package of Government measures, the CBCG defined the fourth set of measures that introduces a one-year absolute moratorium on repayment of obligations applicable to bank borrowers in tourism, agriculture, forestry and fisheries until the end of August 2021. This measure provides support to the sectors most affected by the crisis to ease the pressure on their liquidity and solvency. Prolonging the moratorium until the end of the next tourist season will enable entrepreneurs from these sectors to create a critical accumulation of liquidity before they start repaying loans. There is great interest in this instrument. At the same time, within the fourth set of measures, banks received an opportunity to treat loans approved or restructured to users of these four sectors from 1 September 2020 to 31 August 2021 as loans from classification category “A”. This measure stimulates loans approval and restructuring since banks will not requir additional capital on this basis.
More robust defence mechanism than in 2008
POBJEDA: How did the pandemic affect the banks’ operations? Are there any dangers to household and corporate deposits?
ŽUGIĆ: With a solvency ratio of 19.56 percent (almost twice the legal minimum) and 1,920 million euros of liquid assets, our banking system is stable, solvent and liquid. Still, due to the increased allocation of impairments and loan loss provisions arising from deteriorating macroeconomic parameters and the adverse effects of the moratorium on the interest income collection, the profit at the system level declined by almost a half, from 4.95 percent at end-2019 to 5.17 percent at end-July 2020. Banks continued with an active lending policy and approved 376 million euros in loans for 16,844 clients, so that from 20 March to 15 August 2020. Despite the fact that the new loans decline by 30.3 million euros compared to last year, if we take into account the lending demand decline by 38 percent, the restructuring of existing loans, and the fact that 45 percent of the loan portfolio was frozen for three months during the moratorium, we believe that banks were proactive in supporting the real sector.
The stability of the financial system and deposit security has strengthened with the fast liquidity framework created by the CBCG through repo lines with the ECB and BIS. Together with the CBCG reserve requirement, these lines can absorb potential strong shocks of sudden liquidity withdrawals and/or the deposits outflow. If we take into account the fact that most banks have formally agreed on liquid support from parent banks in case of adverse shocks and the measure banning the payment of dividends, we can say that the CBCG has provided a relatively strong defence mechanism against adverse shocks than the one available during the 2008 crisis.
Advantages of Euro
POBJEDA: There opposition often assesses that we should introduce our currency. In your opinion, is it better to keep the euro or introduce our currency and why?
ŽUGIĆ: Monetary policy decisions in the 1990s were misused to finance the budget deficit, the “social peace” which Montenegro could not influence. It has led to one of the highest and longest hyperinflations in the world with an average salary of ten German marks in that period.
The introduction of the German mark and consequently the euro brought numerous benefits. In the short term, we have reduced the inflation rate to single digits and today, observing the multi-annual average, it corresponds to the average rate in the euro area. Thus, we have gained stability and predictability, which are a condition for economic development and use of resources. We introduced a discipline in fiscal policy because it was no longer possible to monetize the fiscal deficit. A strong currency enabled the rapid development of the financial system (an economic growth driver today) as the financial system would be a heavy burden in the conditions of an unstable currency. Given that foreign investors prefer to operate with a strong currency, we had a high FDI inflow. According to this indicator, we are among the leaders in the group of European economies in transition. Without the euro, this certainly would not have happened. We do not have currency risk in trading with the most important foreign trade partners, and companies and citizens do not pay commissions for currency exchange. There is no longer a possibility of abuse. I do exaggerate saying that our accelerated development coincided with the introduction of the euro. Of course, this regime also has its limitations, and the key one is the absence of a lender of last resort function. We managed to solve this issue, as I explained. We cannot imagine anyone proposing the abolition of this regime, since it would result in a return to the money printing, inflation and hyperinflation, devalued savings and low wages, economic and general setbacks of the 1990s.
Banks approved 376 million of loans for 16,844 clients from 20 March to 15 August 2020
The CBCG activities from the previous period contributed to the strengthening of the banking sector, which at the end of 2019 was well-capitalized, liquid and with positive trends.