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10/10/2017

Dynamic Economic Growth

Montenegro has entered a phase of more dynamic economic growth. The rate of 4.2%, according to which the Montenegrin economy grew in the first half of this year, is encouraging and confirms the projections of the Central Bank of Montenegro (CBM), which is one of the few institutions that didn’t change the envisaged growth rates. Growth was achieved in most sectors compared to the same period of the previous year, and was dominant in the sectors of tourism, construction and transport

It is realistic to expect that annual growth will be within the limits projected by the CBM, i.e. in the range from 3.8% to 4.2%. If such a scenario is achieved, we will end this year as the region’s GDP growth leader.

According to your assessment, how much do external and internal factors favour the continuation of positive trends in 2018?

Our expectations regarding movements in the economy over the next year are positive, despite factors that can have the opposite direction of influence. Here I’m primarily thinking of the possible impact of fiscal consolidation measures on aggregate demand. However, I must point out that these measures, although unpopular while at the same time essential, are created very carefully, in order to balance increases in the fiscal balance, while preserving the standards of the population and the competitiveness of the economy. The deadlines for the implementation of these measures also contribute to mitigating their possible negative impact on aggregate demand by having mild positive effects from investments, which are strongly driven, primarily in the construction and tourism sectors.

When it comes to the banking sector, financial risks have been reduced as a result of strong reductions in the level of non-performing loans and the continuous improvement of all parameters. Here I’m primarily referring to credit risk, as the dominant risk facing the banking sector, and thus I expect a stable financial system to contribute to economic growth. Moreover, there is a clear reduction in uncertainty on the international market, especially when it comes to the European region, so it is realistic to expect positive spillovers on all countries of the Balkan region, and therefore on Montenegro as well.

Our preliminary projections indicate that in the next year we can expect real growth at a rate of around four per cent, which is an extremely positive result, given the strong fiscal consolidation that is underway.

What are the most important recommendations that the Central Bank has forwarded to the Government of Montenegro regarding the implementation of the stabilisation policy in the next year?

The Central Bank regularly – for many years now and in accordance with our legal obligation – prepares and submits recommendations to the Government for conducting economic policy as it relates to four segments: fiscal policy, the financial system, the real sector and statistics.

The CBM’s recommendations for 2018 are largely focused on measures whose implementation would intensify the recovery of the real sector, and would do so primarily through impacting on the improvement of the competitiveness of the economy. We placed special emphasis on the priority sectors of the economy and stimulating new employment. Thus we have, within measures aimed at increasing the competitiveness of the workforce, proposed a measure that would ease the problem of youth unemployment, while at the same time reducing the grey economy. Both of these problems represent a serious barrier to future growth and undermine the competitiveness of the economy. Alongside this measure, we suggested that it would be useful to prepare comprehensive analysis of the regulatory framework, in order to overview the possibility of changing the policy on earnings in Montenegro, while respecting the risks that may arise from the fiscal area.

When it comes to maintaining stability and stimulating economic growth, there is increasing talk about the advantages of a holistic approach, which implies the synergy of structural reforms, monetary and fiscal policies. How present is this approach in the current Montenegrin economic policy?

One of the important factors of economic growth is a stable, predictable and stimulating business environment. It is totally certain that such an environment is created through the coordination of monetary and fiscal policy, alongside adequate structural reforms. In Montenegro we have a Financial Stability Council, whose work is presided over by the CBM, along with the participation of the Ministry of Finance, the HOV Commission and the Insurance Supervision Agency, and this body applies this approach in its work.

One of the topics of the recent session of the IMF and the World Bank that you attended was also the impact of possible rises in interest rates on the U.S. and European markets on public debt and the cost of borrowing in developing countries. How would you assess the possible risks of these changes at the level of financial stability in Montenegro?

It is certain that when the European Central Bank ends its non-standard measures of monetary policy, a certain increase in interest rates will occur, which could impact on increasinf the costs of borrowing. At this moment, however, there are no announcements suggesting that a significant increase in interest rates could occur in the near future.

On the other hand, in the case of our country, following strong economic growth, the positive results of fiscal consolidation and the recent improvement of the credit rating, we expect a reduction in the interest rate as it relates to the country's borrowing, and on the basis of reduced country risk. Bearing this in mind, we do not expect risks to financial stability on this basis.

Can you tell us more about the prepared set of laws (Law on the Central Bank, Law on Amendments to the Banking Law and the Bank Rehabilitation Act), and the effects of their implementation?

The CBM has intensive activities when it comes to improving the regulatory framework that governs banking operations. These activities aim to harmonise Montenegrin legislation in this area with the applicable European directives and other regulations that regulate the operations of financial institutions. With the adoption of this set of legal regulations and a significant number of bylaws, the most recent EU directives regulating the areas of banking, insurance, securities transactions, leasing, factoring, microcredit and credit guarantee operations will be implemented.

The objectives that will be achieved through the reform of banking laws are primarily reflected in further strengthening stability and the development of the financial system as a whole, as well as raising the supervisory capacity with a high degree of harmonisation of the legislation with the European acquis. This creates the conditions for Montenegro to satisfy the requirements of negotiating chapter 9 in Montenegro's EU accession process. No less importantly, the new legal solutions will strengthen the resilience of banks, but also the real sector, to potential risks that Montenegro is exposed to, as a small and open economy.

The level of financial stability that has been achieved is also followed by significant improvements in the performances of the banking sector. How much has this been contributed to by the implementation of the Law on the Voluntary Financial Restructuring of Debt?

Due to the lack of effects of the implementation of the Law on Voluntary Restructuring of Debts towards Financial Institutions (ZOSFR), adopted in 2015, the CBM began preparing amendments to it last year, with the intention of further improving the process of voluntary financial restructuring. Amendments to this law were adopted in June this year and provided additional incentives for both banks and clients, i.e. debtors, while at the same time administrative procedures were reduced, coverage of loans that can be restructured was extended, while freeing up part of the collateral from mortgages for restructured loans has been enabled. Alongside incentives, penalties were introduced for banks that refuse, for unjustified reasons, to restructure loans applicable for restructuring in accordance with this Law.

The implementation of amendments to the ZOSFR, from June to to this day, has had significant effects. By the end of October, at the level of the system, twelve restructuring contracts amounting to €10.5 million had been signed. This, alongside other activities, contributed to a decrease in the level of NPLs, with a fall from 9.27% recorded at the end of May, i.e. before the implementation of this law, to 7.4% at the end of September.

We have announcements and positive expectations that restructuring agreements of additional significant amounts will be realised in the coming period.

How would you assess the overall state of the banking sector?

I consider that the banking system represents the most developed part of the Montenegrin economy. The system is stable and secure, although certain continuously decreasing vulnerabilities are present at the individual level. The financial result of banks at the aggregate level is positive, while liquidity and solvency have improved and their levels are still significantly above the mandatory minimum.

Banks’ assets, in amounts of over €4 billion, exceeded the 2016 GDP level. Liquid assets exceeded the total of €1 billion, while NPLs recorded a huge decline, from the level of over 25 per cent in 2011 to the current level of 7.4%, which is significantly below the regional average.

How willing and able is the banking sector when it comes to supporting the growth of economic activities in the country?

After years of stagnation and decline, credit activity was reinvigorated this year. In the first nine months of this year, the level of approved loans increased by 13.3% compared to the end of the previous year. Nevertheless, data show that lending was largely focused on the retail sector, so there is scope for intensifying banks’ support to the real sector.

In this direction, the CBM maintains continuous communication and cooperation with all banks in Montenegro, in order for us to act together in the direction of developing the banking sector and strengthening financial stability and, indirectly, strengthening the economy. A strong, healthy and profitable banking sector, with healthy competition and without cartelisation, is the best support for the development of the economy as a whole.

Ambiance

One of the important factors of economic growth is a stable, predictable and stimulating business environment

Banking system

I consider that the banking system represents the most developed part of the Montenegrin economy

Credit activity

After years of stagnation and decline, credit activity was reinvigorated this year

Glosa

Our preliminary projections indicate that in the next year we can expect real growth at a rate of around four per cent, which is an extremely positive result, given the strong fiscal consolidation that is underway

Glosa

The CBM’s recommendations for 2018 are largely focused on measures whose implementation would intensify the recovery of the real sector, and would do so primarily through impacting on the improvement of the competitiveness of the economy