Radoje Žugić, Governor Of The Central Bank Of Montenegro, CBCG

The only correct answer when it comes to the containment of the budget deficit is strong fiscal consolidation, with accompanying structural reforms. It is likewise necessary to consider strengthening fiscal stability through Montenegro’s entry into an arrangement with the IMF, as well as avoiding the practise of creating new spending without preceding analysis of the impact on fiscal sustainability

Like most other central banks, the activities of the Central Bank of Montenegro, CBCG, over the past three years were impacted significantly by the COVID-19 pandemic, and subsequently the war in Ukraine. Decisions were taken in an uncertain environment and under the conditions of growing risks, primarily resulting from external shocks that spilled over onto the domestic market.

“During the pandemic, the Central Bank of Montenegro implemented 12 packages of measures, which distinguished us as the central bank with the most comprehensive set of anti-crisis measures in the region and across Europe,” says Central Bank of Montenegro Governor Radoje Žugić.

The measures were directed towards preserving the liquidity of the economy and citizens, as well as the credit potential of banks, and they had a positive impact. A balance was achieved between supporting the economy and the population while preserving the health of banks and, as a consequence, the country’s financial stability. Among those confirming the success of the measures implemented were both the International Monetary Fund (IMF) and the European Commission.

Unfortunately, notes the governor, the macroeconomic situation globally remains very complex and challenging. “It is characterised by pronounced geopolitical uncertainty, constricted supply chains, high and rising inflation and harsher financial conditions, which has resulted in the worsening of economic prospects and the limiting of the capacity of states, the economy and households to service debts. Under such circumstances, there is a rising probability of risks being materialised and impacting negatively on financial stability.”

How has Montenegro so far dealt with these disruptions and the expected imbalances in the country’s fiscal policy and external indebtedness?

– Although Montenegro’s public debt, expressed as a percentage of GDP, has a downward trend in 2022, its high level is concerning. The biggest challenges in the fiscal sphere are containing the budget deficit and repaying public debt, particularly under worsening conditions of financing on the international market.

The only correct response is strong fiscal consolidation, alongside accompanying structural reforms. This year’s budget envisages an additional increase in expenditure on the basis of social benefits, pensions and earnings, which will cause the deficit to grow compared to 2022, and that’s despite expected income increases exceeding 200 million euros (primarily due to projected increases in income on the basis of VAT).

This kind of situation requires coordinated and joint action by governments and central banks, particularly when it comes to containing high inflation and providing economic growth support

It is necessary to create new measures to increase budget revenue without burdening the economy and without populist moves, in order to compensate for the negative effects of previously adopted measures that led to reductions on the revenue side and increases on the budget’s expenditure side (particularly social benefits without previous confirmation of real social needs). It would thereby contribute to optimising the fiscal space and gradually reducing the public debt. I also think it’s necessary to consider strengthening fiscal stability via Montenegro’s entry into an arrangement with the IMF and avoiding the practise of creating new spending without preceding analysis of its impact on fiscal sustainability.

How did these circumstances reflect on the stability of the banking sector and financial system?

– Despite the noted challenges, the Montenegrin banking sector remains stable, highly liquid and well capitalised, representing the healthiest part of the domestic economy. Preliminary data for 2022 show that all key balance sheet positions achieved annual growth, with assets up by 20.2%, capital by 12.3%, deposits by 24.3% and loans by 9%. The banking sector provided support to businesses and the population, as well as additionally strengthening financial system stability. The timely and adequate actions of the CBCG, in cooperation with commercial banks, mitigated the negative impact of uncertainty caused by the pandemic and other external shocks, and also prevented risks in banking operations materialising.

Is it time for banks to be more tightly supervised and to better monitor growth in the percentage of NPLs in total loans?

– The supervisory work of the CBCG is based on the principle of risk, which means that operational priorities are set in accordance with the riskiness of certain areas of banking operations. Credit risk remains the dominant form of risk and, as such, is in the focus of supervisory work. In accordance with that, supervision deals continuously with nonperforming loans, implementing adequate and timely measures at the level of individual banks, but also the system as a whole. Compared to the previous period – when their share of total loans reached as high as 25% at the level of the system – the quality of managing NPLs has improved significantly, resulting in a relatively low level of NPLs by year’s end 2022, despite the lifting of temporary measures linked to the pandemic. Specifically, the share of NPLs in total loans stood at 5.72% at the end of 2022, which is lower compared to the percentage of 6.17% at year’s end 2021. I would like to remind your readers that a new regulatory framework has been in force since 1st January 2022, which also implies a stricter definition of non-performing loans. Alongside the aforementioned, loans that were overdue by more than 90 days at the end of 2022 represented 2.61% of all credit approved and stand at a markedly lower level compared to the total level of NPLs, which shows that repayment irregularity is not the dominant reason why loans are classified as being in the nonperforming category, but rather the quality of borrowers’ financial information.

The CBCG provides its own contribution to limiting excessive NPL growth through the continuous increasing of regulatory expectations, via the harmonising of the domestic regulatory framework with the European acquis and the best banking practices. With the aim of protecting clients from rising EURIBOR rates, and at the initiative of the CBCG, banks prepared programmes to protect clients with loans that have a variable interest rate, which included informing clients about emerging events and their possible ramifications, as well as the possibility of annexing existing loan agreements and switching to a fixed interest rate. These programmes resulted in reducing the share of loans with a variable interest rate in total loans at the level of the system.

Do you expect interest rates in the country to rise?

– The rising cost of capital on the international market, as a consequence of high inflation and EURIBOR rises, naturally spills over onto the domestic economy. With this in mind, I expect interest rates to increase slightly and moderately in the period ahead. This would have a certain impact on loan demand among businesses and the population. The economic situation globally will also influence the perception of risk among banks. Whatever the case, banks have sufficient funds available to cope with the economy’s recovery and growth.

How strong and deep are the technological changes in the banking sector; and how do you view these changes?

– The technological revolution is bringing powerful changes to every industry, and that’s especially so in the financial sector. Banks are compelled to use modern technology in order to be able to withstand increased competition and respond to the growing demands of clients. The results of recent research that was coordinated by the CBCG show that 47% of financial institutions in Montenegro are currently working on the development of new digital or fintech products or services.

The CBCG carefully monitors banks’ operations, as well as movements on the domestic and global financial markets, in order to respond proactively in the direction of preserving financial stability, protecting clients and reducing potential credit risk

When it comes to users of digital banking and payment services in Montenegro, research shows that only 32.1% of retail clients and 45.3% of companies in Montenegro use online banking, which highlights the great untapped potential of using cheaper and faster technologies. The research also showed that, as a rule, private individuals who switch to using digital services don’t return to old ways of doing business, but rather adopt new technologies.

Speaking in another interview, you stated that the CBCG recognises its role in promoting cooperation between fintech companies and banks. How is Montenegro’s potential when it comes to the development of fintech solutions?

– The CBCG is recognised as a leading institution for the support of fintech, from the establishment of the fintech hub – a regulatory innovation centre – as a platform for dialogue with the fintech sector, via the organising of international fintech conferences and hackathons, and the deepening of cooperation with the IT sector and the academic community, to initiating the drafting of the National Fintech Strategy, which is underway and was preceded by research indicating the great potential for fintech development in Montenegro. It was simultaneously observed that sufficient fintech accelerators and private investors don’t exist, while only a few educational institutions offer specific qualifications or courses in digital financial services. This research also confirmed the existence of a series of initiatives, tax breaks and mechanisms that are insufficiently interconnected to be able to help the development of fintech in a systemic way. The strategy will address these specific issues and offer possible solutions for the best possible interconnecting of the fintech ecosystem.

In a regulatory sense, we tried to assimilate the legal framework governing the field of payment transactions with that of the European Union, so this coming October will see the launch of the implementation of amendments to the Law on Payment Transactions that incorporate the PSD2 directive, thereby also creating regulatory conditions for the accelerated development of fintech. This directive enables banks to share data – in a secure and standardised way, and with the approval of the client – with authorised fintech companies that will use said data to create new financial products, such as payment initiation or account information services. We know from our communication with the private sector that several Montenegrin companies are working on, or have already designed, solutions that they will offer to domestic banks or are already offering actively on the markets of the EU.

You have again been nominated to retain the post of central bank governor. What would be your most important target in the period ahead?

– In the very challenging time that’s ahead of us, the most important factor will be preserving financial stability and fortifying banks’ resilience in the face of external shocks. We must simultaneously deal with structural challenges, such as those caused by climate change, which will undoubtedly influence financial and macroeconomic stability. The aforementioned goals related to the development of the fintech market in Montenegro will continue to be in the focus of our activities, alongside intensified activities related to the financial education of Montenegrin citizens.