Interview of Governor Radoje Žugić to Daily “Pobjeda”
Governor Radoje Žugić on the situation in the banking sector, risks and recommendations
Government to request a rescheduling of loan for the highway
The Central Bank forwarded to the Government the recommendations for conducting economic policy in 2021, including the rescheduling of loans for the highway construction. Bearing in mind that the initial plan was to complete the highway in 2019 and start the loan repayment in 2021, it is logical to ask for a loan rescheduling. Thus, Montenegro lost two years of toll collection. It is necessary to consider the possibility of obtaining compensation for that through loan rescheduling, said Governor Radoje Žugić in an interview with Pobjeda.
The CBCG prepared this year’s recommendations in a reduced form to recognise the situation’s specificity due to the Coronavirus pandemic. They focus on crucial measures in crisis conditions and which implementation should not be delayed due to potentially adverse long-run effects. The document points out that all recommendations not implemented in previous years remain, says the Governor. He especially emphasised the recommendation concerning the change in the economy’s structure towards diversifying production and increasing the output finalisation degree.
He says it is necessary to focus on those activities in which Montenegro has comparative advantages and increase competitiveness.
We stressed the need for preparing a new fiscal strategy as soon as possible. Moreover, we recommended establishing a fiscal council, suggested restrictive new guarantees issuing policy (with mandatory collateral), the fiscal rules revision, providing subsidies for agriculture, improving statistics, etc. We also proposed preparing a specific programme of the economy’s functioning amid uncertainty under the pandemic influence, with fewer business restrictions to the extent that would not jeopardise public and individual health. The emphasis should not be on businesses closing but on promoting safe business protocols, with control and sanctioning of disrespect, points out Žugić.
POBJEDA: Are there any indications that problems in the banking sector could appear next year?
ŽUGIĆ: The banking system entered 2020 as highly liquid, well-capitalised, with renewed profitability and a relatively low level of non-performing loans. Thus, all operating parameters were much better than before the 2008 crisis. Owing to this, banks showed a high degree of resilience to the crisis caused by the Coronavirus pandemic, which affected the employment and income of individuals and legal entities that are bank clients. In addition to financial and business consolidation, banks improved risk management systems and human and organisational capacity for treating non-performing loans in the previous period. The proactive approach of the CBCG contributed to mitigating the pandemic effects on banking operations and maintaining stability during this challenging period.
Despite the adverse pandemic effects, the banking system remains stable, liquid, highly capitalised at the end of 2020, with preserved profitability and moderate non-performing loans growth, ready to continue its role as the leading intermediary in Montenegro’s financial market. The prolonged pandemic duration carries the danger of further deterioration of banks’ operating ratios in 2021, primarily concerning the non-performing loans’ growth and, consequently, the adverse effect on banks’ operating results. Despite the above, high capitalisation and liquidity are the best guarantees of preserving the banking system’s stability.
POBJEDA: Does any bank show vulnerability. If so, in what part?
ŽUGIĆ: The banking system as a whole is stable. Over the previous period, there were three sensitive banks in the system. As an epilogue of the measures taken, bankruptcy proceedings were opened in two of them. The third bank managed to meet the imposed supervisor’s requirements in the previous period and is in the regular operating regime. Under our functions, we continuously monitor the operations of all banks in Montenegro, which is a prerequisite for determining the situation in each of them and timely taking all necessary measures under the law.
POBJEDA: How do you assess the initial work of the new Government? What is the current cooperation of the CBCG with it, considering the initial criticism and the Government’s assessment that the supreme monetary institution did not perform the banking supervision properly?
ŽUGIĆ: To achieve the goals established in Article 8 of the Central Bank of Montenegro Law, without jeopardising its autonomy and independence, the CBCG may cooperate with the Government and other state bodies. It may also take measures to improve cooperation. We are working hard to improve this cooperation, as we did with all previous governments. We have already made clear that the CBCG had done everything to establish contacts between government representatives and the IMF. We ensured their presence at the World Bank and the IMF’s Annual Meetings, so let us not speak of a lack of willingness to cooperate with the CBCG. We prepared recommendations for economic policy and participated in the procedure of Eurobonds issuing. We also cooperate through the Financial Stability Council’s work.
The CBCG work quality is best illustrated by independent assessments of the international public, primarily the European Commission and the IMF. They confirmed the great work and reforms of the CBCG that included some unpopular but necessary decisions made during 2019 and 2020.
According to the EC, the activities taken after the bankruptcy of two small banks in early 2019 increased supervision and improved credit risk protection. The IMF assessed that the two banks’ resolution went without a negative spillover to the fiscal and real economy. The successfulness and efficiency of these procedures were confirmed by the fact that one national bank from the region used our supervisors’ expertise and elements of our communication strategy during the liquidation of one bank.
POBJEDA: How was the progress assessed in Chapters 9 - Financial services and 4 - Free movement of capital?
ŽUGIĆ: The EC Progress Report for 2020 noted good progress (4 out of a maximum of 5 convergence criteria) achieved in Chapter 9 Financial services. It refers to the harmonisation with the acquis communautaire in banking. In addition to adopting fundamental laws on credit institutions and bank resolution, the CBCG improved a set of acts on the credit register, reporting, and minimum standards for credit risk management in banks. It also adopted regulations on macroprudential measures related to cash households loans. The CBCG established a Supervisory Committee as a permanent advisory body to the Governor. The internal organisation of the CBCG has also improved, thus strengthening its institutional and supervisory capacities. It also established the units for monitoring the credit institutions’ operational risk, strengthened off-site inspection units, established the Directorate for Resolution of Credit Institutions and the Resolution Fund.
The convergence speed and our work’s seriousness are evidenced by the fact that the CBCG has already fulfilled the EC recommendations for next year. We have just adopted extensive bylaws enabling the application of laws on credit institutions and bank resolution. In parallel, we conduct a comprehensive asset quality review (AQR) of the overall banking system. If we consider this, we expect a similar, probably better result and, indeed, assessments in the next EC annual report.
Concerning the recommendations for Chapter 4 - Free movement of capital, in 2020 the CBCG submitted the Draft Law on Comparability of Fees Related to Consumer Payment Accounts, Transfer of Consumer Payment Accounts and Basic Services Payment Accounts and the Draft Law on Interbank Fees and Special Business Rules Regarding Payment Cards to the Parliament. Moreover, the CBCG prepared a Proposal for Amendments to the Payment System Law, which is fully compliant with the PSD2 regulations. The EC’s comments have recently arrived, so this systemic law will soon be forwarded to the Government and the Parliament for adoption. Next year, the CBBG will start introducing instant payments, which will improve payment efficiency significantly and in the long run.
Borrowing is a good economic move
POBJEDA: In your opinion, are the criticisms of 750 million euros debt justified?
ŽUGIĆ: The CBCG does not comment on the recent State’s borrowing’s legal or political aspect. Still, it observes this transaction from a solely economic point of view. In that sense, we assessed the Eurobonds issue as a good move, since it provided the funds necessary to repay debts and finance public spending in 2021. It ensures fiscal stability and contributes to preserving financial stability in the coming period.
Amendments to the Law on the Central Bank of Montenegro would be a big step backwards
POBJEDA: The new Government, as they say, is preparing amendments to the Law on the Central Bank of Montenegro to create space for your removal?
ŽUGIĆ: As far as I know, the Prime Minister referred this topic to the Assembly. In any case, I am afraid that possible amendments to this law would be a big step backwards. We should consider that the 2017 amendments to this law harmonised the national regulatory framework concerning national central banks’ status and position with the acquis communautaire fully. This created the legal preconditions for the CBCG to become a member of the European System of Central Banks upon Montenegro’s accession to the European Union.
Caution and prudent monitoring
POBJEDA: Will the CBCG introduce additional measures to mitigate the Covid-19 effects on citizens and companies? If so, what is it considering?
ŽUGIĆ: During 2020, despite the narrowed choice of monetary instruments, the CBCG implemented five packages of measures to mitigate the Coronavirus effects on citizens and the economy. The period ahead is highly uncertain and calls for even greater caution, more intensive monitoring of all signals from the market, and devising new ways to deal with the crisis. This is precisely how the CBCG will behave, expecting that vaccination, which has already started in some countries would remedy the crisis in the foreseeable future. It is crucial and challenging to find a balance between providing the necessary support to the economy and preserving the stability of the banking sector, which makes up over 92% of the total financial system assets.
Over the next year, the CBCG will introduce instant payments, which will significantly improve payment operations’ efficiency.