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06/06/2018

The Council of the Central Bank of Montenegro held the twenty-seventh session today, chaired by the Governor Mr Radoje Žugić.

The Council discussed and adopted the Business and Implementation Policies of the Central Bank of Montenegro for February, March and April 2018, in which it was concluded that the activities of the Central Bank during this period were realized in accordance with the planned commitments established by the Central Bank's Work Program for 2018. It is estimated that positive trends from the previous year continued in 2018, wherefore the financial system, dominated by banks, has been significantly improved.

The Council adopted the Central Bank of Montenegro Annual Report for 2017, the Financial Stability Report for 2017 and the Price Stability Report for 2017, as well as the Report on Microcredit Financial Institutions Operations for the First Quarter of 2018.

In the Central Bank of Montenegro Annual Report for 2017, it is stated that the Montenegrin economy achieved growth in 2017 in relation to 2016. According to preliminary MONSTAT data, the annual real GDP growth based on quarterly estimates was 4.4%. During the previous year, the banking system of Montenegro was profitable, adequately capitalized and highly liquid, while in the one-year comparative period, key balance positions recorded growth. Total assets of banks increased by 10.34%, loans increased by 11.78%, total bank deposits by 13.77%, while total capital increased by 5.87%. Liquid assets of banks recorded annual growth of 13.92%, and all asset quality parameters improved in 2017.

In the part of the Annual Report related to the implementation of CBCG policy, it was estimated that the activities of this institution in 2017 were aimed at preserving the stability of the financial system by encouraging and maintaining a sound banking system and safe and efficient payment transactions. Accordingly, the banking system was continuously supervised by the CBCG during 2017, while at the same time significant activities were undertaken in the area of harmonization of domestic regulations with the EU regulations. The Council assessed that the operations of the Central Bank were based on high standards of transparency and the principles of social responsibility. Regarding the CBCG's financial performance, net profit in 2017 amounted to 2.73 million euros.

In the Financial Stability Report for 2017, it was stated that the level of systemic risk that affects the stability of the financial system can be assessed as moderate, facing the financial challenges at the individual level. It was concluded that inadequate international competitiveness is the main cause of systemic vulnerabilities and that the level of public debt still represents a risk.

It was pointed out that the banking sector is currently the most stable segment of the economic system, which is significantly reflected in the stability of operational indicators and asset quality, as well as the deposits' trend that rose to 3.27 billion euros in 2017 (which is historically the highest level) and make up the largest share of banks' liabilities (78.1%). Total liquid assets of banks grew by 13.9% to 1.06 billion euros in 2017. Their share in terms of assets and deposits also increased to 25.3% and 32.7%, respectively, and remains high. "These liquid assets, in the context of structural restrictions on the growth of the Montenegrin economy, are currently the best security reserve for banks against the risk of deterioration in asset quality and/or outflow of deposits." It was noted that the level of non-performing loans, although in significant decline, continues to be a leading systemic challenge in the banking sector. The share of non-performing loans, although reduced from 10.3% to 7.3% in 2017, is still relatively high, which adversely affects the banks' preference towards risk, that is, the level of lending activity and lending terms.

In the Price Stability Report for 2017, it was stated that the previous year was characterized by positive annual inflation rates, which is primarily the consequence of the rise in oil prices at the world market as well as the higher prices of certain food products. In December, annual inflation measured by consumer prices was 1.9%, while inflation measured by the harmonized consumer price index (HICP) was 2.9%. The average growth in consumer prices was 2.4%.

A comparative analysis shows that similar trends are present in the region and the Euro area. Annual inflation in all countries of the region was positive: Serbia (3%), Macedonia (2.4%), Slovenia (1.9%), Albania (1.8%), Croatia (1.3%) and Bosnia and Herzegovina (1.2%). In the Euro area, the annual inflation rate amounted to 1.4% in December 2017 and was 0.3 percentage points higher than the annual rate from December 2016.

The Central Bank's survey showed that most banks and businessmen expect inflation in the range from 1.5% to 3% in 2018. According to the expert assessment of the Central Bank, inflation will range from 1.9% to 3.9% at the end of 2018.

In the Report on Microcredit Financial Institutions Operations for the First Quarter of 2018it was emphasized that this sector is characterized by stability, growth of key balance sheet positions: assets, loans and receivables and capital and improvement of almost all asset quality indicators. The financial result of the seven MFIs is positive at the system level. In the first quarter of the current year, compared to December 2017, total balance sheet grew by 2.66%, growth of total loans and receivables was 3.83% and growth of restructured loans and receivables amounted to 12.22%. On the other hand, the MFI sector recorded a slight decline in interest rates.

The Council discussed and adopted the Macro prudential Policy Framework. This document defines the mandate of the CBCG to guide macro prudential policy, as well as its basic and transitional goals, potential indicators, and instruments for achieving goals. The adoption of this document further focuses on the activities of the CBCG in case of materializing of systemic risks that could jeopardize financial stability in Montenegro.

At today's meeting of the Council, the Proposal of the Decision on the Credit Registry was adopted, which main goal is to improve this CBCG service. Namely, the entry into force of the Decision, as of January 2019, will create conditions for significant improvement of the content, availability and quality of the data of the Credit Registry. Also, as of January next year, leasing, factoring and receivable repurchase companies will be reporting for the needs of the Credit Registry, which significantly increases the existing database of legal persons’ indebtedness in the financial sector. It was concluded that the upcoming improvements will contribute to a better and more reliable risk assessment of individual debtors performed by banks.

At today's meeting, the Council adopted the Deposit Protection Fund Annual Report for 2017 and reviewed other current issues from under its competence.