Interview of Vice Governor Nikola Fabris for the magazine "World of Banking and Investment"


Nikola Fabris: The future is in digital currencies

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Cryptocurrencies have become a reality, and an increasing number of individuals are trading with them. Therefore, a legislative framework needs to regulate trade and all other aspects. They do not have the essential money functions, i.e. they have a very limited role as a means of payment and are not a measure of value. Based on previous developments, they do not have the function of a custodian of values. Therefore, I personally do not perceive private cryptocurrencies as money but as a kind of speculative securities, says prof. Dr Nikola Fabris, Vice Governor of the Central Bank of Montenegro (CBCG), in a conversation for "World of Banking and Investment".

One of the prominent experts in the blockchain industry, the founder of the cryptocurrency Ethereum, Vitalik Buterin, was granted Montenegrin citizenship. Montenegro is working to establish a legislative framework that will allow the best use of this technology. Asked about the future of cryptocurrencies in this area, our interlocutor said their trading carries numerous risks, so they have not become widely accepted.

"The most significant risks are related to large fluctuations in their prices, the possibility of manipulating their value by large investors, and the fact that there is no institution behind them and no real value. On the other hand, what I believe has a future and will develop more and more in the future are digital currencies that central banks will issue. It is in line with the growing trend of non-cash transactions, driven by financial innovation and accelerated by the coronavirus pandemic. Also, I expect that blockchain technology will find its place in the future.

Digitalisation has accelerated the consolidation of the banking sector in the region and broader. What is the interest in such processes in Montenegro? How harder is it for a smaller market to survive in light of the enlargement of the banking sector?

Consolidation processes in Montenegro's banking sector were quite pronounced in the previous period. They resulted from the merger of some banks and the two banks' license loss. Thus, Montenegro's banking sector has reduced from 15 to 11 banks. In a small market, it is not easy to ensure the successful functioning of large banks. We expect that consolidation will reduce operating costs, which should lead to more efficient operations and cheaper financial services. However, we should not overlook that sometimes mergers can lead to side effects in the form of reduced competition.

Serbia recorded a 9.1 percent inflation in March, while it was 9.7 percent in Montenegro. In the meantime, the National Bank of Serbia increased the reference interest rate to two percent. What instruments does the CBCG have to curb inflation?

Montenegro has renounced most monetary policy instruments by choosing a monetary euroisation regime. The only essential monetary policy instrument available to the CBCG is the reserve requirement policy. However, this instrument is not effective in fighting inflation. Fiscal policy instruments may exert some influence on inflation, but bear in mind that this is not the fiscal policy's primary role. It basically means that Montenegro "imports” inflation from the Euro area, which is corrected for specific domestic structural imbalances.

How justified is the fear of starting an inflationary spiral?

I think that danger is quite realistic. The Russian-Ukrainian war affected the growth of prices for many products and services. It led to the highest inflation globally since the oil shocks of the 1970s. Unfortunately, I am afraid that inflation expectations are already beginning to form and that the spiral over wage growth is slowly starting, then giving impetus to price growth again.

As the end of the war is not in sight, there are certainly no indications that the effect of the primary causes of inflation will cease. Moreover, the canal through food prices will extend to next year, regardless of the end of the war, because it is likely that this year's sowing will be significantly smaller, so there will be less supply of cereals and food products next year.

In your opinion, what are the most significant short-term or long-term macroeconomic risks caused first by the pandemic and then by the global geostrategic crisis?

Currently, macroeconomic risks are very pronounced. The most pronounced short-term risk is undoubtedly the inflation growth acceleration, i.e., the inflation expectations growth and the risk of its moving from short-term to long-term risk. Then there is a high risk of a significant slowdown in growth and recession, and the expected increase in reference interest rates may further slow economic growth. Global supply chains are already under threat, and one cannot rule out their further collapse. The risk of high fluctuations in energy prices and their limited supply on the market is also very pronounced in the short term. All of this can lead to significant financial market volatility, especially in the capital markets.

Geopolitical risks will be long-term, which even after the end of the war may lead to a new form of the Cold War and sanctions, i.e. trade war, which will limit the movement of capital, goods and services. Slowing economic growth and rising public debt financing (as a result of increasing reference interest rates) may jeopardise the fiscal position of many countries. Furthermore, too rapid a rise in prices can lead to price bubbles in some markets, such as the real estate market. Finally, the risk of a new pandemics wave must not be completely ruled out.

The Fed has increased the reference interest rate by half a percentage point. It is the most significant change since 2000, and it was introduced due to growing inflationary pressures. The ECB also made moves. How would this affect the lending interest rates?

The ECB will undoubtedly increase the reference interest rate in the coming period. The reference interest rate growth increases the public debt financing, the provision of liquid funds, and investments for the real sector. Since the euro area and EU countries' public and real sectors have not recovered from the pandemic, the ECB is looking for the most opportune moment for this decision. It is practically a kind of settlement between inflation and economic growth.

When the reference interest rate increases by a percentage, all variable rate loans linked to the ECB reference interest rate will increase. It will probably lead to a gradual adjustment of fixed interest rates, but only on new loans. It is expected that the ECB reference interest rate increase will not be sudden but gradual, so we may expect a minor correction.

What is the danger of NPL?

A particular NPLs growth occurs as a consequence whenever there are difficulties in the real sector's functioning. The pandemic, followed by the Russian-Ukrainian war, led to numerous challenges in the real sector's functioning. However, although some NPLs growth can be expected, no threat to financial stability should be expected as banks are well-capitalised and highly liquid.