Interview of Vice-Governor Nikola Fabris to ND "Vijesti"


The Central Bank Vice-Governor’s numerous recommendations for the state’s better performance in 2021

Safe corridors for more tourists, expenditure cuts, tax collection...

Fabris on the economy in 2020 and two scenarios for 2021, who should receive state aid and what kind of state aid should be continued due to the crisis, how to deal with public debt ... He points to the need of making social cards

In 2021, the Government should create measures helping the economy. These measures will target those activities that have suffered the most damage due to the Coronavirus pandemic - tourism, transport and trade sectors and agriculture. They should be aimed at economically viable businesses severely affected by the crisis, not those in trouble due to mismanagement.

Measures should include subsidising interest rates, salaries, restructuring tax liabilities...

The Vice Governor of the Central Bank (CBCG) for Financial Stability and Payment Operations, Nikola Fabris, stated this was in the interview with “Vijesti”.

“Depending on the pandemic development, these measures should be coordinated with the CBCG. They also need to be coordinated with measures concerning the possible new moratoriums and new loan restructuring facilities if the pandemic situation becomes unfavourable,” said Fabris.

The Vice Governor also recommended additional money for the Investment and Development Fund (either through recapitalisation or a guarantee for external borrowing) due to the increased credit support to the endangered economy. The support to citizens should be directed to the most vulnerable and socially endangered groups.

“Social assistance should be directed only to those categories that are in a state of real need. Therefore, it is necessary to start drafting social cards,” he stressed.

Fabris pointed out that it was essential to have a well-balanced health and sanitary measures programme that would make the country more open to foreign tourists than in 2020.

“It would also be important to negotiate ‘safe corridors’ with the countries from which the largest number of tourists come. These corridors should mean a relatively simple procedure for tourists entering Montenegro and for returning to their home country without the obligation of quarantine or self-isolation,” Fabris pointed out.

He added that they forecasted tourism revenues from 11 to 12 percent based on record 2019. If these estimates were not realised, increased measures supporting tourism would be needed, including additional amounts to subsidising salaries and interest rates and restructuring tax obligations.

The early December projection indicates that the economic decline in 2020 would most likely be around 17%. Still, Fabris notes that this is conditional because not all data for the last quarter of that year were available.

He emphasised that the Montenegrin economy’s growth in 2021 would depend on the further Coronavirus pandemic development...

“We have developed two scenarios. They should be conditionally accepted because projections are usually based on past experiences. Pandemic is the one-off event in which non-performing loans will grow. Still, we should not expect the financial system to be endangered, there are no similar experiences,” said Fabris.

The Vice Governor pointed out that the priority issue that the Government should work on in 2021 is to stop the public debt growth and its gradual reduction. As a part of the deficit rehabilitation and debt reduction, particular focus should be on reducing expenditures with a high share in total costs (gross wages, unproductive consumption, etc.) and the tax debt collection. 

He explained that due to the crisis, the banking sector suffered a profitability drop and a drop in loans. Due to the potential risk, it is not excluded that banks tighten the borrowing approval conditions.

The CBCG announced once this year an estimate that the possible economic decline in 2020 was around 17%. What is the real decline, and what are the 2021 forecasts?

The early December forecast still indicates a most likely decline of 17 per cent in 2020. I note that many data for the fourth quarter (October, November and December) was not available during the projection preparation. Thus, it should be accepted conditionally. We have developed two scenarios for 2021 that should also be accepted conditionally. Forecasts are usually made based on past experience. Pandemic is the only event during which non-performing loans grow. One should not expect the financial system to be endangered, there are no similar experiences. At present, the duration of the Coronavirus pandemic is unknown. It is also unknown whether the vaccine would be widespread next year and how effective it would be. Moreover, it is unknown what the measures of Montenegro’s most important partners (primarily countries in the region and EU member states) would be.

The first optimistic scenario assumes that the pandemic will significantly weaken next June due to the vaccine development, acquired immunity, and improved knowledge about life and work in the pandemic conditions. Under these assumptions, the projection indicates that the Montenegrin economy could achieve relatively high growth in 2021 of around 7.5 percent, mostly resulting from low primary 2020 basis. I note that this is a significantly lower GDP level compared to the 2019.

The second scenario assumes that the pandemic will continue next year, with similar intensity as in 2020. An additional assumption in this scenario is that there will be no economic lockdown (as was the case in Q2 2020). There would be more liberal conditions for entering Montenegro compared to the previous tourist season. In this scenario, the GDP growth rate would be around four percent, mostly due to the low base from 2020.

What problems will the Montenegrin economy face in 2021? Which is it the best way to solve them?

In 2021, it will continue to be under the global pandemic influence, which will adversely affect numerous activities, employment trends, and many citizens’ social position. The following can be mentioned as possible measures that would mitigate the pandemic adverse consequences:

the 2021 budget should provide money for implementing the third package of measures. Support should be targeted at those activities that have suffered the most from the Coronavirus pandemic. These are, first of all, service activities - tourism, transport and trade, and agriculture. Simultaneously, the measures must be optimally targeted, i.e. the support has to be directed towards businesses that have really been affected by the pandemic (and not internal weaknesses or poor management), and which are economically and financially viable. These measures should include subsidising interest rates, wage subsidies and tax liabilities restructuring. Depending on the pandemic’s development, the measures should be coordinated with the CBCG and measures referring to possible new moratoriums and new facilities for credit restructuring if the epidemiological situation is unfavourable. It would also be necessary to provide additional funds for the Investment and Development Fund (either through recapitalisation or a guarantee for external borrowing) to increase credit support to the vulnerable economy. Support for citizens should be directed to the most vulnerable and socially vulnerable groups. Social assistance should be aimed only to those categories that are in real need. Therefore, it is necessary to start drafting social cards. Funds should be provided for subsidies related to the inability to work due to illness, self-isolation and quarantine, and activities where it would be possible to prohibit or significantly restrict activities’ performance. Funds for the child allowance approval should be approved for the most vulnerable families with many children. Finally, it is crucial to have a well-balanced health measures programme that would make the country more open to foreign tourists than in 2020.

The 2020 tourism income was estimated to be by almost 90 percent lower than in the record 2019. The Government recently referred to the CBCG forecast of some 85 per cent. Is that a final assessment?

Our projection is that revenues from tourism in 2020 will amount to between 11 and 12 percent of revenues generated in 2019 when tourism revenues recorded a record.

The number of tourists and overnight stays will be slightly higher than the revenue projection because tourist spending has decreased, especially when it comes to accommodation prices.

The income from tourism in 2021 will undoubtedly be far from the one in previous years. How to offset that money?

It is not realistic to expect that lost revenue can be offset by some other channels. It requires measures that would minimise the adverse effects of the expected tourism revenues decline, primarily in tourism and for the whole economy.

If the planned revenues were not realised, additional measures to support the tourism industry would be needed. These will include additional amounts for subsidising salaries, subsidising interest rates, and restructuring tax liabilities. In coordination with the CBCG, a new package of measures will be needed through a possible new moratorium and further relief for loan restructuring depending on the pandemic severity. Also, tenants of beaches and other (state-owned) tourist facilities should be reduced rents (optimally in the percentage of tourist revenues decrease compared to 2019). It is also necessary to increase credit support to this sector through IRF credit lines. It would also be essential to agree on the so-called “safe corridors” with the countries from which the largest number of tourists come. These corridors should imply a relatively simple procedure for tourists entering Montenegro and a relatively simple procedure for returning to their home country, without quarantine or self-isolation. The long-term measures would primarily require changing the economy’s structure (what the CBCG has been suggesting for years as part of economic policy recommendations) in terms of diversifying, not relying too much on fewer sectors increasing the product finalisation degree. The focus should be on those activities in which Montenegro has a comparative advantage and increasing its competitiveness. It is necessary to continuously pursue a policy of combating the non-observed economy because it represents a significant tax revenue loss.

Has the country entered a zone to be considered critical concerning its public debt? The Ministry of Finance estimated that it would exceed 100 percent of the gross amount. Can there be growth in 2021?

The level of public debt is currently one of our biggest challenges. At the moment, we cannot say with certainty what will happen to public debt in the next year, given that the budget has not been adopted. We do not know the planned public revenues and public expenditures timeline.

Can there be a further deterioration of the country’s credit rating? What would be the consequences?

Given the public debt trend and economic activity levels, this scenario cannot be ruled out. So far, it has been shown that the credit rating primarily impacts the price at which the state borrows. Since the necessary budget funds are provided for 2021, no significant negative consequences should be expected if such a scenario occurs.

What did the CBCG recommend to reduce public debt?

As every year, the CBCG has prepared recommendations to the Government for conducting economic policy. The key recommendations for fiscal policy that will certainly affect the movement of public debt include:

To strengthening public finance viability, Government needs to prepare a new Fiscal Strategy following the Law on Budget and Fiscal Responsibility, the umbrella document for creating fiscal policy guidelines for the coming period. As a part of the new Plan of Measures for Deficit recovery and public debt reduction, particular emphasis should be put on reducing expenditures with a high share in total costs (gross wages, unproductive consumption, etc.) tax debt and collection of. It is necessary to create and implement a medium-term budgetary framework to improve cost efficiency. It would have more binding medium-term expenditure limits (introduce spending limits), including a general expenditure limit, and an obligation to reconcile and justify any changes in expenditures. It is necessary to establish the Fiscal Council as an independent body for fiscal supervision. Launching an initiative with creditors to restructure public debt is required, especially the highway construction part. Fiscal rules should be created, or the existing ones revised, to avoid pro-cyclicality and ensure consistency in implementation. To preserve fiscal sustainability, refraining from further planning and creating new large capital expenditures in the budget for financing public investments is necessary until the public debt sustainability risk reduces and the public finances significantly improve. It is essential to implement a restrictive policy of approving new guarantees and provide them with adequate collateral in their approval. Given the high degree of uncertainty, establish a significant amount of fiscal reserve. The Ministry of Finance should create a detailed database of all companies with state-owned capita. It should implement the OECD principles of corporate governance in these companies and strengthen their financial supervision. Implement public administration reform to optimise it. Creating a new medium-term strategy and optimisation plan is necessary with concrete measures based on which an Action Plan will be made and implemented efficiently and without delay. The Ministry of Finance should establish a separate organisational unit that would deal with managing all fiscal risks.

Interest rates dropped, but still above the desired level

What are the consequences of the corona crisis on Montenegro’s banking sector? How will it affect citizens and the economy in 2021?

The Corona crisis has evidently resulted in particular non-performing loans growth and a significant decline in the banking system’s profitability. There was also a decline in demand for loans. Through the measures we have taken during the previous years, the banking system has been significantly strengthened. It is quite ready to face this crisis. Through five sets of measures, we have eased considerably the most severely affected companies and citizens. Significant funds have thus been pumped into the economy. We do not expect substantial negative consequences for citizens and the economy. Still, we cannot rule out that banks will tighten the conditions for approving loans to some extent, in conditions of significantly increased risk and a high degree of uncertainty, primarily concerning required loan collateral.

How do you assess the interest rate policy of commercial banks? Is there room for reduction?

Despite the long-term interest rates declining trend, they are still higher than the level that could be assessed desirable. However, it is encouraging that interest rates for the economy dropped significantly in recent years. Thus, at the end of November, the weighted average effective lending interest rate for the corporate sector was 4.6 percent. For profitable companies, it was even lower. The interest rates trend next year will predominantly depend on economic recovery because the business risk growth harms interest rates. Factors that will additionally influence the interest rates trend are the loans demand, international financial markets’ trends, reference interest rates’ trend, the level of non-performing loans, etc. Given that 2021 brings a lot of uncertainty, it is difficult to predict the interest rates trend next year. At this moment, it seems most realistic that they will not change significantly compared to 2020.

Dealing with public debt

What are the priority issues that the Government must address in 2021?

The year 2021 will undoubtedly bring many challenges, and I would list three key ones. The first refers to stopping further public debt growth and taking measures for its gradual decline. Given that the pandemic will undoubtedly continue, the second challenge relates to adopting an adequate program to support the economy. The third challenge relates to finding the right balance between protecting the health and restricting certain economic activities.

Deteriorating the economy’s conditions would be a problem for banks

What are the biggest challenges for the financial system in the country?

In the previous period, the banking system has strengthened significantly. Liquid assets of banks amount to almost a billion euros. At the system level, the liquidity ratio was 1.98 at the end of November, nearly doubling the statutory minimum. At the end of September, the latest available data showed that the solvency ratio of 19.3 percent, almost doubling the statutory minimum (10 percent). Through four sets of measures, we significantly relaxed the economy and citizens. We enabled them to reduce the burden of their obligations until the economic situation stabilises. An independent asset quality review of banks’ assets is underway, which should show us whether there are any hidden vulnerabilities in the banking system. Yet, we have repeatedly noted that the banking system and the real economy operate on the connected vessels principle. Therefore, potentially the banking system’s biggest challenge may be the real sector’s deteriorated situation, reflecting on the (irregular) settlement of credit obligations.

We do not expect significant adverse consequences for citizens and the economy. Still, we cannot rule out that, in conditions of significantly increased risk and a high degree of uncertainty, banks might tighten the conditions for granting loans to some extent, primarily concerning the required loan collateral.

In the long run, it is necessary to change the growth model, i.e. to have export consumption as essential support instead of relying on domestic consumption. It is critical to focus on the activities in which Montenegro has comparative advantages and increase competitiveness.