Radoje Žugić, Governor Of The Central Bank Of Montenegro

The Montenegrin economy recovered relatively quickly from the negative impact of the 2008 global financial crisis. With the discovery of a vaccine, we expect this crisis to be remedied in the foreseeable future. When that happens, it is realistic to expect the fastest recovery in the service sector, i.e. tourism and complementary activities, which were hardest hit during the crisis

The Coronavirus Pandemic has had a negative impact on the Montenegrin economy’s economic indicators, says Central Bank of Montenegro Governor Radoje Žugić.

According to the latest CBCG projections, the Montenegrin economy will contract by about 17% this year. This is a consequence of a reduction in the volume of activities in most sectors, especially those that are sensitive to external shocks, such as tourism, transport, trade, agriculture etc., as well as the lengthy duration of the pandemic. Developments in these sectors will also impact negatively on the labour market, with a decline of employment, or rather a growth of unemployment. This year will also be characterised by a low inflation rate (around 0%), which is the usual companion of a recessionary environment.

What are the strengths and weaknesses of Montenegro’s macroeconomic position at present?

– Montenegro has an inadequate economic structure that is predominantly dependent on tourism and complementary activities. This makes it vulnerable and very sensitive to external shocks, which was confirmed by the current situation. As a result of the fact that we don’t have a sufficiently diversified economy, nor sufficiently developed activities characterised by a high degree of product finalisation, Montenegro has a deficit in its balance of payments. On the other hand, huge comparative advantages exist for the development of agriculture, the processing industry, wood processing, production based on base metals etc. A new growth model should be based on encouraging precisely these activities, the implementation of which would remedy the vulnerabilities of the real sector, strengthen the competitiveness of the economy and reduce dependence on imports, thus improving the country’s balance of payments.

The weak side of our macroeconomic position is represented by vulnerable public finances, which – on the one hand – face falling revenues as a result of the decline in economic activity, and – on the other hand – the need for increased allocations in order to remedy the consequences of the pandemic.

It should nonetheless be emphasised that the Montenegrin economy is flexible and will recover rapidly following a reduction in the impact of external shocks. The fact is that interest in investing in our country among foreign investors was strong during the crisis, which is evidenced by the fact that the net inflow of foreign direct investments in Montenegro for the first nine months of 2020 is at a higher level compared to the same period of the previous year (by 52 %).

How liquid is the banking sector and how ready is it to support companies’ exit from the crisis?

– On the basis of the latest available data, from the end of November, total liquid assets amount to more than a billion euros and represent over 20% of total assets. The surplus, i.e. the surplus of liquid assets in relation to that which is considered due liabilities, amounts to over 550 million euros.

The aforementioned indicates banks’ high potential to place new loans with citizens and the economy, without the risk of jeopardising the liquid position of banks. It is important to noted that in the period since the outbreak of the epidemic, or from March until the end of October 2020, banks in Montenegro approved new loans to businesses amounting to a total of almost 400 million euros, which is only 6.9% less than in the comparative period of the previous year. Apart from this, through five packages of anti-crisis measures adopted by the CBCG, citizens and the economy were able to utilise four moratoriums.

Through the first moratorium alone, the liquidity of citizens and the economy increased by over 150 million euros. Likewise, through the fourth package of measures, the aim of which was to help overcome the impact of the crisis on the hardest hit sectors of the economy, i.e. tourism, agriculture, forestry and fisheries, through several forms of assistance (moratorium, restructuring and the approval of new loans with the treatment of newly approved), on the basis of the latest statistics from the end of October 2020, benefits were provided in the total amount of 166 million euros, which represents 58% of total loans approved for the noted sectors. The fifth package of measures is directed towards easing the financial situation of individuals who lost, or will lose, their jobs as a result of the pandemic and whose earnings have been reduced, or will be reduced.

All of the aforementioned indicates that banks, as they were in the previous period, are ready and able to secure the necessary funds for the economy to overcome the crisis and to finance development projects.

What business results do you expect from the banking sector and what are the key factors determining such results?

– At the end of October this year, net profits of 27.3 million euros were achieved at the level of the banking system, which is down 49.5% compared to the comparable period of the previous year. The dominant reason why profits decreased is the formation of additional reserves for expected credit losses in accordance with the IFRS, which represents a deductible item in income statements. The noted cost is 19.5 million euros, or 265% higher compared to the comparable period of the previous year.

Despite all the challenges, the banking system has remained liquid, solvent and ready to continue supporting the economy. However, we are aware that challenges for the financial sector are yet to come

The formation of the mentioned reserves is a consequence of the conservative approach of banks, bearing in mind that there has been no significant growth in non-performing loans in the period since the outbreak of the epidemic, which at the end of October accounted for 5.69% of total loans and was 0.97 percentage points higher than at the end of 2019. It is to be expected that the banking sector will operate at a profit at the end of 2020, but in a reduced volume compared to the previous year. Regardless of the reduced profitability, the system is stable as a whole.

What impact has the crisis had on the insurance sector?

– The operational indicators of Montenegrin insurance companies for the first 10 months of 2020 indicate that the functioning of this sector hasn’t been endangered to date. With the aim of ensuring business continuity, insurance companies relatively quickly adjusted their operating processes to the new circumstances. During the first 10 months of the year, total gross premiums amounting to 79.2 million euros were invoiced, which is 0.8% less compared to the same period of the previous year, which was actually a record of the insurance market according to all parameters.

The insurance market is thus stable, and – according to the data for the first three quarters of this year – all insurance companies are solvent, liquid and profitable. However, stressful periods like this one are challenging for all market players.

Where do you see the role of the central bank in this situation?

– Through its regulatory and supervisory activities, the Central Bank contributes to maintaining financial stability, which is its dominant jurisdiction, and also contributes indirectly to preserving macroeconomic stability.

Given that the banking sector’s assets account for over 90% of the assets of the financial system, it is clear that a stable and secure banking sector is synonymous with the stability and security of the financial system. Furthermore, the banking system’s performance is one of the components when it comes to forming the country’s credit rating. If all of the aforementioned is taken into account, the extent to which the Central Bank contributes to creating a positive and secure environment for investors and creditors, residents and non-residents, is clear.

Under the conditions of the pandemic’s strong impact on macroeconomic stability, the CBCG has implemented well-profiled measures in a timely manner, in close coordination with the Government of Montenegro and banks, managed to preserve financial system stability and secure additional liquidity to the real sector and population, with which it provided a strong contribution to preserving macroeconomic stability. Since the outbreak of the Coronavirus Epidemic, the Central Bank has implemented five packages of measures aimed at preserving the liquid positions of clients by redirecting liquidity from the banking system towards the economy and citizens, preserving the liquidity position and the growth of banks’ credit potential, as well systemically resolving the long-term effects of the lasting reduction in the creditworthiness of clients.

How prepared were banks to offer their services online?

– One good side, and probably the only good side, of the pandemic is its positive impact on financial literacy, primarily of the population, and then also of the economy in Montenegro. Physical isolation and the subsequent need of clients, or customers, to seek contactless payment options, as well as the reduction in costs and fees for electronic banking that banks offered during the crisis, had an unequivocal impact on this process.

One good side, and probably the only good side, of the pandemic is its positive impact on financial literacy, primarily of the population, and then also of the economy in Montenegro

There was a significant increase in the number of mobile banking users during the year, and the strongest impact of the pandemic was observed in the number of payment transactions undertaken by mobile payments, which by the end of April 2020 had increased by 49% compared to January 2020, including an increase of 73% among private individuals and 12.2% among businesses. In the January-April 2020 reporting period, the evident increase in the number of new mobile payment users totalled 14.73%. Standing out in particular is growth in the number of new users among private individuals, who agreed with the payment service provider on the use of an application installed on their mobile phone, which increased by 15% from January to the end of April.

Cumulatively, the number of payment transactions with the payment service of credit transfers – initiated electronically, or internet-based payment transactions, increased by 15.1%, with growth in the number of internet payment transactions totalling 47.4% among individuals and 11.51% among businesses.

What could be brought in the long run by the accelerated flow of digital transformation in the financial sector?

– Technologies are removing barriers in the banking industry and opening the door for the entry of new financial service providers. It is evident that the stark lines between industries are slowly disappearing and that competition coming from FinTech start-ups, internet giants and non-banking industries is forcing banks to speed up their operations and adjust their business models in order to remain competitive in the digital arena, which is really extremely active. Likewise, digital transformation brings numerous benefits to the client. One of the key roles and responsibilities in this process is played by central banks, which must create an environment for the faster acquiring of knowledge and the strengthening of financial literacy.