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05/09/2016

Thirty-second meeting of the FSC was held today. The meeting was chaired by Milojica Dakić, Governor of the Central Bank, and attended by all members of the Council: Raško Konjević, Minister of Finance; Branko Vujović, President of the Council of the Insurance Supervision Agency and Zoran Đikanović, President of the Securities and Exchange Commission.

At today's meeting, the Council discussed the current situation regarding financial stability in Montenegro, the risks and vulnerabilities of the overall economic system, which were present during the first half of 2016. In an analysis prepared for the Council, trends and events that have affected the situation in the Montenegrin economy were addressed, both from domestic and from international environment.

The event that had affected the most trends in the international environment was a referendum in the UK. The outcome of the British referendum on leaving the European Union was a surprising signal to financial markets, globally, which have reacted negatively. Also, based on the increase of the uncertainty, prospects for the global economy for 2016 and 2017 were, to a certain extent, exacerbated. It is expected that the uncertainty will affect reducing investments and increasing the funding risk of less developed markets.

To this end, at the international market, the key central banks of the world, the ECB and the FED, have retained the same course of monetary policy and did not change interest rates. In addition, the ECB has introduced an increase in new measures to help member states to intensify the recovery.

Impact of the international environment and transfer of risks and uncertainties in the Montenegrin economy is moderate.

In addition to situation in the international environment, the state of economic activity was also discussed, as well as the level and intensity of risk, sources of risk and financial stability vulnerability from the local environment.

Domestic environment is characterized by different trends in basic economic sectors, compared to 2015. In the first six months of 2016, there was a drop in industrial output of 5.3%. In the first six months of 2016, according to preliminary Monstat data, retail trade turnover (at current prices) grew by 3.9% compared to the same period last year. In the first six months of 2016, number of tourist arrivals increased by 5.6% compared to the same period in 2015, while the overnights stood at 5.5%. According to preliminary Monstat data, construction in the first six months of 2016 recorded an increase in the value of construction works by 22.5% and growth in effective working hours by 10.9%, compared to the same period of 2015.

The annual inflation rate in June stood at -1%. As a result of these tendencies in price movements, the CBCG has revised the expected inflation rate for December 2016. For the end of 2016, inflation is projected to range from -0.1% to 1.3%, with a central tendency of 0.4%.

Weak recovery of the real sector, which recorded modest growth rates in key economic sectors, still represents the highest risk in the first half of 2016. Weaker recovery than the potential one is recorded in the liquidity of the real sector, where there has been an increase in the value of debt based on frozen accounts of legal entities and entrepreneurs. The total amount of this debt amounted to 584.6 million euros at end-June 2016, which is 11.3% more at the annual level. Credit risk in the banking sector recorded a declining trend, but the level of non-performing loans of 11.72% in total loans remains high.

The Council discussed the situation in the fiscal sector, where there has been a growth in revenues as well as increase in budget expenditure in the first half of the year. Present were higher allocations of funds for loans' repayment while the budget recorded deficit. Also the level of tax debt burdens the public finances.

At the end of the second quarter of 2016, the national debt (gross) amounted to 2.36 billion euros or 62.7% of GDP. Percent of gross government debt is also exceeded the value of the Maastricht criterion of 60% of GDP. External debt accounted for 2.03 billion euros, representing a decline of about 190 million euros. Domestic debt accounted for 327 million euros or 6.4 million euros more compared to March 2016.

Based on these indicators, the increase of the fiscal risk is evident due to the pressure of public debt.

The first two quarters of 2016 were marked by an increase in the current account deficit by 16.1% compared to the same period in 2015. High level of import dependence is still evident in trade with foreign countries, but there is still moderate inflow of foreign direct investments, which amounted to 335.6 million euros, of which equity investments amounted to 140.8 million euros, while the inflow in the form of intercompany debt amounted to 64.1 million euros.

The banking system is stable, solvent and liquid. The insurance market is characterized by positive trends and stable development, while the situation at the capital market is unchanged.

The Council assessed that the financial system is stable in the first half of 2016.