Interview of the Vice Governor Nikola Fabris, PhD, to the daily "Pobjeda"


We expect interest rates to stagnate in the coming period

Non-performing loans reached 5.5 percent at end-May. It is realistic, after the moratorium expiration, to expect their additional, but not dramatic growth, especially not the one that could pose a threat to financial stability, says Fabris.

While there is a significant business risk, we expect interest rates to stagnate or have a very slight downward trend, said the Vice Governor of the Central Bank (CBCG) Nikola Fabris in an interview to Pobjeda.

He says that the coronavirus pandemic has led to an increase in the risk of banks' operations, and that in such conditions, the risk premium increases, which often leads to an increase in interest rates.

Fortunately, such a scenario did not happen in Montenegro and in the last year we have even had a tendency of slight decline in interest rates of 0.15 percentage points. While there is a significant business risk, we expect interest rates to stagnate or have a very slight downward trend, Fabris said.

POBJEDA: How did the crisis caused by the coronavirus affect the operations of the banking sector?

FABRIS: Measures taken in the previous period have contributed to the banking system to be prepared for the current crisis, and these banks today represent the healthiest segment of the Montenegrin economy. This is best witnessed by key indicators of the banking system. At the end of the first quarter, the solvency ratio was 19.3 percent, which is almost twice as much as the legally prescribed minimum. Deposits and loans reached a record level and recorded high growth rates in the previous year. The growth of loans is eight percent, whereas the growth of deposits is nine percent. Liquid assets of banks exceeded 1.1 billion euros, increasing by 20 percent in the last year. The balance sheet total of banks increased by 5.3 percent on an annual level.

POBJEDA: What is the current situation with non-performing loans, what is their level? Do you expect their further growth after the moratorium expiration?

FABRIS: In a situation when a large number of companies are facing serious difficulties in doing business and when the number of unemployed increased significantly, the growth of NPLs was inevitable, but still significantly lower than our expectations. At end-May, NPLs reached 5.5 percent. It is realistic, after the the moratorium expiration, to expect their additional, but not dramatic growth, especially not the growth that could pose a threat to financial stability.

POBJEDA: We are halfway through the year, what are your projections for economic growth in 2021 at the moment? What do you expect from the tourist season?

FABRIS: It is very ungrateful to give projections given the high degree of uncertainty and the absence of past experience that we could rely on when giving projections, as well as the absence of a large number of statistics related to the second quarter. This is evidenced by very different projections of international financial institutions. The UN projects growth of 5.5 percent, the Joint Vienna Institute 6.5 percent, the European Commission and the World Bank 7.1 percent, the EBRD 8.5 percent, and the IMF 9 percent. Our projection at the moment is GDP growth of about 7.5 percent, and it will be adjusted after receiving all the data for the second quarter.

When it comes to tourism, the number of tourists increased since the second half of June. If the pandemic in the region does not worsen during the summer months, we can expect a high number of tourists, significantly higher than the initial expectations. However, we should be aware that the pandemic has brought a change in the structure of guests, so we will be missing one segment of tourists with higher purchasing power, which means that revenue growth will be slightly lower than the growth in the number of tourist overnights.

POBJEDA: How do you assess the measures taken by the Government so far in order to reduce the effects of the pandemics for the economy and the population?

FABRIS: The government has so far implemented four packages of measures to overcome the crisis, three in 2020 and one package in the current year. Three packages had a short-term aim of overcoming the liquidity issues of business entities, and providing social assistance to the most vulnerable, while one package of measures, in addition to short-term financial incentives, aims to restructure the economy by 2024.

I believe that measures aimed at resolving the vulnerability of the economic system of Montenegro should be accompanied by structural reforms in order to ensure sustainable economic development. It is necessary to improve the institutional framework in terms of building a consistent, predictable and stimulating tax system, easy setting up and closing a business, flexible labour market, reducing the informal economy. I would especially like to emphasize the policies aimed at supporting innovative start-up companies, the development of the IT sector and activities based on green technologies, which are aimed at diversification of the economic structure. To this end, it is necessary to take timely actions and direct the available administrative and institutional capacities for access to the EU funds on the basis of the 2021-2027 Economic and Investment Plan for the Western Balkans. The countries of the Western Balkans are provided with approximately nine billion euros in credit support and 20 billion euros in guarantees. The aim of this plan is to encourage the long-term recovery of the countries of the Western Balkans, in the context of green and digital transition, infrastructural connectivity, and approaching the level of economic development of the EU. Finally, I would like to point out the need to support the diversification of supply quality in already developed industries such as tourism, agriculture and energy in order to increase the competitiveness of the basic economic sectors.

As we have already recommended to the Government, it is necessary to implement structural reforms that will enable sustainable, climate-friendly tourism, but also more resistant to external shocks, create a guarantee fund to support micro, small, medium enterprises and entrepreneurs, intensify all EU accession activities that were at a standstill due to the pandemic. It is necessary to consider the possibility of creating a national committee for structural reforms, form a fiscal council, provide support to agriculture in order to diversify the economy, reduce regional disparities and stop migration, adopt a reindustrialization strategy, and promote energy efficiency.

POBJEDA: How do you see the situation in public finances?

FABRIS: High level of public debt is a key systemic risk in Montenegro. It is also one of the most important reasons for the deterioration of the credit rating, which may increase the price of government borrowing in the medium term. The increase in public debt is a result of relatively weak international competitiveness, high consumption against the low accumulation and dependence on foreign capital inflows. However, one should be aware of the fact that part of the public debt growth is also a consequence of the decline in economic activity, therefore, having in mind the projections of GDP growth for this and the next year, it is realistic to expect its decline.

The budget deficit was recorded for the twelfth year in a row, with the average deficit from 2009 to 2020 amounting to 5.3 percent of GDP, and the deficit for 2020 is by far the highest in that period. Deficit for 2021 was projected at the level of three percent of GDP, which will be rather challenging target, especially having in mind the level of deficit in the first five months. The delay in the adoption of the budget and the agro-budget is not good because it made it impossible to implement the planned fiscal policy and goals, and negatively affected the development of agriculture.

In the context of the current coronavirus pandemic and its economic effects, it is necessary to resolutely implement measures of responsible and well-balanced fiscal policy, aimed at solving structural economic issues with the aim of bringing Montenegro into a relatively "safe zone". It is necessary to adopt a comprehensive debt management strategy in the medium term, because although Montenegro did not have problems with debt repayment so far, the question is how long such a situation will last. Also, the lack of fiscal strategy, as an umbrella document for defining fiscal policy, is a major shortcoming in defining fiscal policy goals and guidelines.

The incentive measures should not be prematurely withdrawn

POBJEDA: How can domestic companies survive and develop in these conditions?

FABRIS: This is a great challenge for every country, including Montenegro. How to survive in a very unfavorable economic environment as a result of the pandemic. It is very important that there are no incentive measures withdrawn ahead of time, as well as to ensure macroeconomic and fiscal stability, improve the business environment, raise the level of competitiveness, invest in knowledge, innovation and digitalisation. We need to diversify the economy, to pursue environmentally responsible policies, to do everything possible to accelerate the EU accession, to make better use of our comparative advantages in tourism, agriculture, energy, food and other industries, to intensify activities against the informal economy that acts as unfair competition.

Currency hedging deserves support

POBJEDA: How do you comment the Ministry of Finance intention to replace the dollar-denominated highway loan for the euro-denominated loan with one of the European banks?

FABRIS: If it is an intention, as announced, to replace the existing loan with a more favorable one in terms of lower interest rate and exclusion of currency risk, then it is a measure that deserves full support.