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29/04/2021

Governor Dr. Radoje Žugić on operating during the Coronavirus pandemic

CBCG - National bank with the most extensive measures in Europe

During the year, eight packages of measures were adopted aimed at mitigating the consequences of the pandemic. They sought, inter alia, to delay and facilitate the repayment of obligations through moratorium and loan restructuring. In this way, the banking sector “ceded” liquidity to the population and the economy, the Governor explained.

The total of eight packages of measures singled out the CBCG as the national bank with the most comprehensive measures in Europe and the most extended deadlines concerning the benefits for loan beneficiaries, said Governor Radoje Žugić in an interview to Pobjeda.

He reminded of two current moratoria, the first being for aggravated activities (valid until 31 August). The second one is for natural persons who lost their jobs due to the crisis, for those whose salaries have been reduced by at least ten percent, and for employed natural persons whose employers did not pay net wages more than three months before the moratorium application due to the pandemic’s adverse impact (valid until 31 December).

When defining measures preceded by a detailed analysis, it was important not to jeopardise the balance of supporting the economy and the population and preserving the banking system’s health and, consequently, financial stability. Therefore, we continuously, independently and through previous communication with the Government, monitor the implementation of our measures and the real economy and financial system developments. If necessary, we make corrections and/or supplement measures to mitigate the adverse effects on citizens and the economy. At the same time, we preserve the stability of banks that will play a significant role in the long-term recovery of the economy ahead of us - said Žugić.

POBJEDA: What measures did the CBCG take to help the economy and citizens during the pandemic?

ŽUGIĆ: Owing to the proactive action and intensive regulatory and supervisory activities of the CBCG from the previous period, the banking system was ready to face the global crisis caused by the pandemic. When it emerged, the banking sector’s vulnerabilities from the previous period had been remedied. Banks were well-capitalised, liquid, profitable and with positive trends in the most important business indicators.

All this provided a quality basis for an adequate response. In the previous year, we implemented eight packages of measures to mitigate the pandemic consequences. They aimed, inter alia, at delaying and facilitating the repayment of liabilities through a moratorium and loan restructuring. In this way, the banking sector “ceded” liquidity to the population and the economy. We enabled all natural and legal persons affected by the current situation to temporarily postpone the payment of liabilities to banks. It provided them with a higher income and the possibility of settling other liabilities. We also allowed banks to treat restructured loans as new loans. It relieved banks of the additional burden of reservation costs creating the conditions for restructuring loans to citizens and the economy under more favourable conditions. We took special care to direct support to those categories of the population and economy most severely affected by the pandemic.

We also used the monetary instrument at our disposal and reduced banks’ required reserves rate by two percent. It “pumped” 70 million euros of liquidity and increased the banks’ lending potential. The CBCG also “halved” the prices for withdrawing liquidity from the required reserves, providing affordable access to additional sources of banks’ liquidity in case of need.

In parallel, we worked on systemic liquidity boosting through communication with the European Central Bank (ECB) and the Bank for International Settlements (BIS). We provided (up to EUR 350 million) additional funds made available to Montenegro should more serious Coronavirus-caused pandemic shocks appeared. Today, we can state that our measures prevented the spiral of adverse events from starting and mitigated the very severe consequences of the pandemic on Montenegro’s economic life. We managed to provide the banks’ liquidity to the real sector and the population while preserving the stability of the banking sector that makes up 80 percent of the total financial system.

POBJEDA: Did the pandemic affect the banks’- If yes, how?

ŽUGIĆ: After numerous challenges in the previous year, the banking sector entered 2021 as stable, liquid, and well-capitalised. At the end of Q12021, assets amounted to about 4.6 billion euros, 1.7 percent more than the same period last year. As at 31 March 2021, the solvency ratio, as a relative indicator of capital adequacy, was 19.3 per cent, almost twice the prescribed minimum. All banks meet the prescribed minimum daily and ten-day liquidity ratios. Deposits were also preserved and amounted to 3.6 billion euros at the end of March, which is 2.8 percent more year-on-year.

In 2020, the banking system recorded a remarkable profit decline of 54 percent compared to 2019, primarily due to growing impairment costs resulting from potential expected losses that banks projected in extraordinary business conditions and due to decreased net fee and commission income. The share of bad loans in total loans increased slightly. After abolishing temporary measures, it is realistic to expect that reduced economic activity and rising unemployment will worsen this important parameter that affects capital adequacy mainly. Furthermore, this will harm banks’ revenues through increased value adjustments and/or provisions for expected credit losses. The slight growth of non-performing loans is not a concern for now. Still, we are monitoring and analysing the banking system’s situation and developments with increased intensity and dedication, using all available tools.

POBJEDA: What do the IMF and the World Bank think about the situation in Montenegro’s finances and financial sector?

ŽUGIĆ: At the recent meetings with the IMF and the World Bank senior officials, they commended the Government and the CBCG activities for mitigating the Coronavirus crisis consequences. It was pointed out that the CBCG anti-crisis measures were created and implemented in a timely, adequate, and robust manner, taking the proper steps towards building a solid and credible institution. Concerning the financial sector, it was pointed out that the system showed good resilience during the crisis and that the banking sector’s indicators were stable. They point to the potential non-performing loans growth after the withdrawal of measures, and the need for caution and constant monitoring by the CBCG.

POBJEDA: What is the state of public debt?

ŽUGIĆ: Through the Recommendations for Economic Policy in 2021, we stressed the urgent need to prepare a fiscal consolidation programme. If implemented decisively and systematically, it would contribute to the deficit and public debt reduction. We recommended to the Government launching an initiative with creditors to restructure public debt parts. Along with refinancing, it is a mechanism ensuring its long-term sustainability in the context of expected pandemic duration, weakened economic growth, and reduced public revenues. To ensure public debt sustainability, we also suggested establishing a fiscal council, fiscal rules reform, formulation of a medium-term budget framework and public administration reform.

POBJEDA: What internal economy measures has the CBCG implemented?

ŽUGIĆ: In 2020, the CBCG reported a 5.1 million euros net profit, resulting from the active and continuous implementation of internal economy measures and rationalisation of all categories of administrative and operating costs. It has been the most significant net profit in the last 10 years. It is essential to point out that it was recorded with the unchanged pricing policy for the CBCG services. It is also important to note that the CBCG directed more than 10 million euros to the state budget through the profit distribution under the CBCG Law over the past ten years. Since its establishment, it transferred to the Ministry of Finance over 32 million euros.

Since the enactment of the new CBCG Law in 2010, the CBCG increased its share capital by 16 million euros and reached the statutory amount of 50 million euros last year, solely due to positive operations without state budget funds, although the CBCG Law prescribes that obligation. With the profit distribution for 2020, the share capital was increased by an additional two million to 52 million euros, strengthening the CBCG capital position as a precondition for supporting its financial independence. A part of the profit was directed to the state budget.

POBJEDA: How did external auditors assess the CBCG operations?

ŽUGIĆ: For the first time since the CBCG establishment, the IMF prepared an external analysis of the institution’s control mechanisms this February. It disclosed that the CBCG had robust operational control mechanisms for key functions (including reserve management, vault operations, finance and controlling, operational risks, internal audits). An external audit conducted following international standards with a transparent financial reporting framework supported this assessment. The external audit of the financial statements of the CBCG for 2020 was successfully and qualitatively completed. The external auditor Deloitte gave a positive opinion, stating that “the financial statements provide an accurate and objective view, in all material respects, of the financial position of the CBCG as of 31 December 2020 and its financial performance and cash flows for the year then ended, following International Financial Reporting Standards.” In the last two years, the external auditor of the financial statements has not had any recommendations to the CBCG management for improving financial operations.

Along with the Ministry of Science, the CBCG is one of the few institutions that received an assessment of good progress in the European Commission’s Progress Report for 2020 based on the already fulfilled European Commission’s recommendations for 2021, we expect a similar result this year. We are completing the asset quality review process (AQR). Moreover, we have previously adopted 40 bylaws to implement the law on credit institutions and the law on resolution of credit institutions.

Finally, the latest European Commission’s report on the quality of Montenegro’s Economic Reform Programme for 2021 noted that the CBCG had taken strong financial sector’s measures supporting the real sector liquidity to mitigate the crisis impact. These included a moratorium on loan repayment and restructuring. At the same time, monitoring activities were quality, including monitoring the effects of the measures. Good progress was made in strengthening supervision, including the functioning of a professional Supervisory Committee to support supervisory decision-making and increasing off-site control capacity.

The most favourable highway loan conditions in the region

POBJEDA: How do you comment on the events surrounding the highway loan?

ŽUGIĆ: In its several advisory missions and analyses, the IMF identified the lack of basic infrastructure in the Western Balkans countries as a significant obstacle to more robust economic growth. Due to this shortcoming, they assess that each country in this region has lost an average of 3-4 percentage points of annual GDP per capita. They further recommend, with which I absolutely agree, that the Western Balkans countries finance major infrastructure projects using international sources and use domestic financial resources to develop the private sector. As for the contract itself, we received the most favourable loan conditions in the region at the time. The loan was used to build our country’s durable goods. Unlike loans used for current consumption, these assets generate certain income with a negative impact on the public debt structure and quality.

All analyses have shown that this project will be economically viable in the medium term, with a strong multiplier effect on tourism and the integration and development of the north. Moreover, we must not neglect the security aspect of the project.