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28/03/2011

The eleventh meeting of the Council of the Central Bank of Montenegro, chaired by the Governor Mr. Radoje Žugić, was held today.

The Council adopted the Governor’s February 2011 Report containing the information on the situation concerning liquidity of the Montenegrin companies. The Governor’s Report examines the CBM policy, providing for the positive assessment of its implementation in accordance with the planned dynamics. The Report also contains an overview of the macroeconomic environment and financial system stability, as well as the financial operations of the CBM.

Available data of the Central Bank indicate the estimated 2010 growth between 1% and 2%, which is in line with forecasts made by all relevant international financial institutions. It was noted that the crisis still affects the Montenegrin economy and that it is too early to talk about a full economic recovery because there are still some risks in the system. The attention was dedicated to the expectations about price movements in the upcoming period, primarily taking into account the impact of external factors.

When analysing liquidity of the Montenegrin companies, the discussions involved several structural aspects of frozen accounts, starting from liquidity risk, giving comments on the concentration of frozen accounts in the system. It was concluded that the information has to be supplemented with mutual claims and data on liquidated legal persons or those under liquidation/bankruptcy proceedings in order to get a clear picture of the actual liquidity position of the companies.

The Council discussed the banking system condition. It was noted that, although still very modest, the banking system recorded an increase in lending activity for the first time after more than a year. Deposit potential in banks is on an increase, having a positive effect on the systemic liquidity which was described as satisfactory.

Other positive trends in banks which were noted are declines in past due loans, non-performing assets and restructured loans, and a slight decline in lending and deposit effective interest rates on retail loans, as well as an increase in deposits, indicating a continued return of confidence in the banking system.

The Council concluded that credit risk is still rather significant and that there is an unfavourable maturity match of investments and sources of funds. Therefore, the banking supervision will continue with ongoing monitoring of banks` business activities and assessing of their capital adequacy in accordance with the assumed risks.

A set of secondary legislation governing the international reserves management was adopted at the meeting, thus ensuring further harmonization with the Central Bank of Montenegro Law passed in July 2010.

The international reserves cover all claims on non-residents which are available to the Central Bank of Montenegro. The aforementioned secondary legislation enables the Central Bank to manage international reserves in a manner which is in line with the monetary policy and which provides undisturbed fulfilment of Montenegro’s obligations to other countries, still adhering to the principles of liquidity and safety of investments.

The legislation also establish the investment strategy for managing the international reserves, the forms and principles of the international reserves, ensuring a more prudent approach in the international reserves management, in accordance with the Central Bank of Montenegro Law. It also sets a framework for limiting risk exposures in the international reserves management, those being credit risk, liquidity risk, interest rate risk, currency risk and operational risk.

The adopted secondary legislation specify that the Central Bank may open accounts with foreign central banks, international financial institutions or foreign banks to deposit its funds, purchase and sell in the FX market currencies other than euros, purchase and sell gold, securities, and banknotes and coins.

The legislation also regulate the manner of the international reserves management, division of authorities and responsibilities, which is also the recommendation communicated by international financial institutions and a standard central bank practice in the EU Member States and many other countries. To that end, in order to ensure integrity, limit risks and provide an efficient control over the international reserves management, a specific hierarchical organizational structure is established in the Central Bank, with precisely determined competences (the Council of the Central Bank, the Governor, the Investment Committee and employees authorized for managing international reserves).