Radoje Žugić, Governor of the Central Bank of Montenegro, CBGS

The key balance sheet positions of 13 banks that operate in Montenegro are recording growth, both in a comparative one-year period and since the end of 2018, says Radoje Žugić, Governor of the Central Bank of Montenegro. Measures were taken at that time against two banks, which have since resulted in the revoking of their operating licenses and the launching of bankruptcy proceedings.

Data for the period of nine months shows that total assets rose 11.6% over a one-year period, while total loans were up 8.9%, total deposits 9.7% and total capital 19.4%. Likewise, the share of non-performing loans also continued to fall, so NPLs stood at 4.67% at the end of September 2019. The share of loans overdue by more than 90 days in total loans stands at 2.9%, representing a level that’s comparable to the pre-crisis period. In addition to the aforementioned, banks’ net profit for the first nine months of this year amounted to almost 49 million euros.

The IMF and the World Bank recommended that the Central Bank undertake a comprehensive review of the quality of financial sector assets, so-called Applied Quantitative Research (AQR). What could this control show you that you don’t already know on the basis of your regular supervision?

– The IMF and the World Bank recommended that Montenegro implement an independent analysis of the quality of banking system assets back in 2016. However, the CBCG’s assessment at the time, which was acknowledged by the international community, was that we should first take steps to strengthen the banking system and banks’ balance sheets. To this end, the CBCG, in coordination with banks, developed supervisory plans and brought a series of decisions directed towards reducing NPLs and strengthening the capital positions of the banks. In the meantime, we also resolved the issue of three sensitive, non-systemic banks in such a way that two went into bankruptcy, while a third took a leap and succeeded in raising the level of its own funds while maintaining a liquid position.

Regardless of the constant fall in the average weighted active interest rate, which stood at 6.17% in September this year, I consider that it is still high and that it represents an expensive input for the real sector

Today, when we have a resilient banking system with indicators showing that banks have recovered from the negative impacts of the 2008-2012 crisis, we consider that conditions have been created to implement AQR.

It’s difficult to predict what AQR will show, but if we look back at the experiences of regional and EU countries, they show that it has not happened to date that, following an AQR process, individual banks, even very reputable ones, haven’t been confronted by a need for additional capital, while some banks saw growth in poor quality loans. It would be irresponsible not to expect something similar in our case, although not on a large scale, because – as I noted previously – the balances of banks in Montenegro have recovered compared to 2015, with non-performing loans having decreased significantly, while capital reserves have strengthened.

Given that this type of checking is relatively expensive, how much could it burden banks financially and organisationally, impacting on their operational results for this year?

– It is planned for the implementation costs of AQR to be shared between the CBCG and banks. With the intention of ensuring the highest level of transparency and the credibility of the process, we’ve launched the procedure of engaging a reputable international consultant who will be tasked with implementing the AQR process in accordance with the ECB Guidelines from May 2018. This cost, which isn’t negligible, will be covered by the CBCG. On the other hand, we expect banks to cover the costs associated with engaging reputable auditors and appraisers who will help them implement all working blocks of the AQR.

It is very difficult to estimate the total cost, as the final figure will depend primarily on the criteria for selecting external consultants and appraisers, which are in the phase of finalisation. With an awareness that the implementation of the AQR would mean the exerting of pressure on banks’ human and material capacities, we informed them of this intention in a timely manner, thus providing them with additional time to prepare.

How would you assess the current economic situation in Montenegro?

– The economy has been growing over the last six years, which testifies to a stable and favourable macroeconomic environment. A growth rate of 5.1% was achieved in 2018, which is primarily a result of strong investment activity, but also growth in domestic demand and private consumption. Along with the significant advancement of the banking sector, positive trends have also been observed in the fiscal sphere, thanks to the decisive implementation of fiscal consolidation measures. Economic growth and reduced unemployment have contributed, among other things, to the growth of budget revenues, which – in synergy with the effects of implementing fiscal consolidation measures – has resulted in a reduction of the budget deficit, which is projected to reach a level of below 3% of GDP this year. Moreover, the Government of Montenegro aims to reduce public debt to below 60% of GDP in 2022. Certainly contributing to this will be the recently completed Eurobond issuance, with which funds were secured to refinance part of the public debt in 2020, at the lowest interest rate to date.

The level of the projected growth rate in 2019 will be predominantly influenced by two factors – the continuation of a strong investment cycle and the continued implementation of fiscal consolidation measures, along with the additional strengthening of financial stability. The aforementioned would – with the acknowledging of certain assumptions and in line with CBCG projections – result in GDP growth of 3.2% in 2019. Although this marks a slowdown compared to 2018, which is expected due to the extremely high base from the previous year, this growth rate would still be among the highest in the region.

We are awaited by a large and demanding project that’s related to the modernisation of payment operations, primarily through the introduction of instant payments

To what extent can external imbalances impact on small, open economies like Montenegro’s?

– An external imbalance, in the form of a relatively high current account deficit, has been present in Montenegro for a longer period of time. On the one hand, it is an indicator of the insufficient level of competitiveness of the economy, and it is evident that we need to address this more in the coming period. On the other hand, a high current account deficit in small and highly open economies, such as that of Montenegro, is inevitable while significant investments are underway.

The construction of a highway, large numbers of hotels and other major investment projects inevitably leads to the growth of imports. However, on the other hand, when these projects are finalised, they should generate additional revenues, which should lead to a reduction of foreign trade imbalances.

What kind of public policy measures are available, primarily to the government, in which the Central Bank could provide expert support?

– The CBCG’s key contribution in implementing public policy measures stems from its constitutional and legal responsibilities for preserving the stability of the financial system. Moreover, through the document “Recommendations to the Government of Montenegro for Economic Policy”, the CBCG provides a contribution to the Government’s economic policy through the identifying of key sectors and the proposing of measures that, when implemented, would activate economic potentials, improve competitiveness and the business environment and, ultimately, improve macroeconomic stability.

How is the structure of bank loans and what does that say about the current juncture for the Montenegrin economy?

– The total loan portfolio in banks amounts to approximately three billion euros and accounts for 66.2% of total bank assets. Total loans and receivables in a comparative one-year period are growing at a rate of almost 9%. The ratio of loans and receivables to deposits amounts to 86.4%, which means that the system has a deposit potential that’s around 480 million euros more than total approved loans.

Comparing the participation rates of loans to individuals and businesses, loans to private individuals are dominant in the system and record higher growth rates in the comparative one-year period, which – if we take into account the size of the deposit potential and the high liquidity of the banking sector – indicates that room exists to more strongly support the economy.

Regardless of the constant fall in the average weighted active interest rate, which stood at 6.17% in September this year, I consider that it is still high and that it represents an expensive input for the real sector, and thus for countering the weaknesses of the real economy.

Do you consider that prerequisites still exist to maintain relatively low interest rates in 2020?

– When it comes to domestic factors, conditions have been fulfilled for the further continuation of relatively low interest rates, and here I’m primarily referring to the stability of the banking system, the tendency of reducing NPLs, a high level of deposits etc. The only uncertainty that exists at the moment is how international reference interest rates will move, i.e. whether there will be a turnaround in the European Central Bank’s monetary policy. Even if the ECB decides to start raising interest rates, it is expected that this will be gradual and will not leave the negative zone in 2020.

 What are the CBCG’s internal priorities for the coming period?

– Driven by the aim of contributing to an even stronger financial system, we have set quite ambitious goals for ourselves in the period ahead. Apart from the aforementioned AQR, the priority tasks relate to the further harmonising of regulations with EU directives, as well as strengthening the supervisory function, which has – to a large extent – already been achieved through the strengthening of staffing capacities, then through the formation of a Supervisory Committee and a separate organisational unit for the indirect (off- site) control of banks. We have also significantly strengthened our staffing and regulatory capacities in the area of preventing money laundering and the financing of terrorism.

We are also awaited by a large and demanding project that’s related to the modernisation of payment operations, primarily through the introduction of instant payments. Alongside this, in the period ahead we will focus specifically on the social responsibility segment of our operations, so financial education and inclusion will be areas to which we will pay particular attention.