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27/03/2017

34th Financial Stability Council session was held today, presided by Radoje Žugić, Central Bank Governor and the Council President. All other members of the Council attended the session, those being Mr Darko Radunovic - Minister of Finance, Mr Branko Vujovic - Insurance Supervision Agency President, Mr Zoran Djikanovic - Securities and Exchange Commission President. Mr Predrag Marković – Deposit Protection Fund Director attends the sessions, at call.

Both the Financial Stability Council 2016 Annual Report and current issues from Deposit Protection Fund activities were discussed at the session today.

2016 Annual Report includes review of activities for the previous year as well as current policy topics concerning financial stability. Also, financial stability risk indicators in Montenegro for 2016 were sorted out and the expert evaluation on the level of those was done. Based on these estimations, financial stability systemic risk was evaluated as moderately stable, with certain risks having a negative impact on specific system vulnerabilities.

The Report, inter alia, stated that the financial system was stable during the previous year and the systemic risk level moderate, with illiquidity and insolvency risk of the real sector being present, which all had impact on increasing the pressure in fiscal sphere. Credit risk in banking sector, although still present, recorded downtrend.

The banking system as a predominant part of financial system in Montenegro is relatively stable. Financial risks are decreasing but are still present at the individual level. Financial result of banks on an aggregate level is positive, while liquidity and solvency improved and their levels are still significantly above the minimum level prescribed by the law. When compared to a previous year, almost all positions from the banks’ balance recorded the uptrend, those being: total assets, deposits, loans and capital. The banks, even during 2016, had prudent real sector lending policy, relying mainly on their own liquid funds. Significant part of the new lending was focused on restructuring and refinancing of the existing loans, which had a positive impact on corporate recovery. Bank deposits exceeded the approved loans, confirmed by the data that 85% of deposits is used for corporate lending. Total loans and receivables during 2016 recorded a positive trend with a slight increase of 1.27% when compared to a previous year. Asset quality parameters during 2016 recorded an improvement, which had a positive influence on system stability. The share of non-performing loans in total loans was reduced but still noticeable (10.3% at end-December 2016) and this very fact makes banks to be cautious when it comes to new lending. Lending interest rates, although having a slight downtrend, are still high and represent a barrier for more dynamic corporate recovery.

When the 2016 international environment is the issue, a modest GDP growth was recorded in the countries which are the main Montenegrin trade partners, excluding Russia, which recorded a modest drop in two previous years. For Montenegro, as a small and open economy, a significant impact in international climate is achieved through capital flows, i.e. foreign direct investments varying in volume, but still being significant, making 10% of the GDP. In 2016, in spite of the high previous year base, uptrend in tourism is also recorded, which had a positive impact on the achieved corporate growth rate. 

Investment consumption was positive and is a result of a significant capital investment volume. Continuation of such trend is expected directly through positive influence that investment have on employment and GDP, decrease of a real sector risk in mid-term.

Price stability in Montenegro has not been jeopardized although a deflationary trend in certain prices was recorded. Aluminium prices recorded a continuous decrease during previous years, while fuel prices fell by December 2016, when they recorded 3.3% growth. An increase in fuel prices is expected in the upcoming period due to excise duties, as well as for the expected growth in crude oil prices in the world market. Inflation in Eurozone amounted to 1.1% and does not represent the additional risk.

In the fiscal sector sphere, current budget deficit and government debt exceeds the law prescribed limits, and for that reason the Government of Montenegro reacted by defining and implementing fiscal consolidation measures, reducing the level of these categories in 2016 compared to 2015. Higher budget revenues were achieved in the previous year while, on the other hand, budget expenditures were reduced through public consumption restrictions. Even though the measures taken gave good results, further fiscal adjustments were needed in order to diminish the existing risks in this sphere and reach a desirable fiscal stability level. According to Ministry of Finance estimations, the government debt level and current account deficit will record a decrease as of 2019.

Stability is slightly strengthened in insurance sector with indicators pointing out to positive growth rates with obvious domination in mandatory forms of insurance. There is a large space for further development in this sector, which would have positive effects on system stability in the upcoming period.

During 2016, capital market indicators in Montenegro were under a great influence of the transaction related to treasury bills issuance amounting to EUR 80.4 million. More dynamic trade with financial and non-financial sector shares was not noted while market capitalization recorded negative growth rates when compared to a previous year.

The Council also discussed information on current issues from the Deposit Protection Fund competence and supported solutions to improving business efficiency in this institution.