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Interviews - 2010

Interview with the Governor of the Central Bank of Montenegro, Mr. Radoje Žugić, M.Sc. to "Bankar", december 2010

Interview with the Governor of the Central Bank of Montenegro Mr Radoje Žugić to "Reuters", 06.12.2010



~We shall act in accordance with principles of a free and open market and the freedom of entrepreneurship and competition. The Central Bank now has a somewhat changed role – the interim measures recently passed by the Council of the Central Bank have the same aim. Some banks remain unsatisfied with the level of relaxation and they show their discontent. The entire accountability rests with the Governor and his closest associates. The Central Bank of Montenegro will continue revising the reserve requirement policy and it shall initiate the development of a framework for the implementation of the monetary policy instruments. The segregation of responsibilities among the Central Bank, the Ministry of Finance and other financial regulators renders the managing of risks and uncertainties more difficult. The Central Bank shall develop instruments for monitoring financial stability, perform ongoing assessment of contingent risks, and actively prepare for crisis management.

~The work of the Financial Stability Council will largely contribute to the financial stability maintenance. I believe that we have all learned lessons from the crisis, including banks, so that we stand ready for new challenges, including a potential credit growth. A much better situation is the one in which banks increase their foreign borrowing instead of withdrawing deposits from the country and investing them abroad. Montenegro does not need a credit arrangement with the IMF. All the analysis made by the Central Bank so far indicate that a credit line arrangement to be used for funding the fiscal deficit, if required, to be concluded with the IMF or any other international financial institution would be viable and economically justifiable. There is room for an additional Eurobond issue in the following year to be used primarily for the repayment of a part of the existing debt carrying unfavourable interest rate, that is, higher than the one to be achieved with the sale of Eurobonds.

Your mandate as the Governor of the CBM has practically just begun. Still, could you share your first impressions of the institution you are now heading? What do you see as the main challenges as the Governor and could you tell us whether there have already been any pressures?

In accordance with the constitutional provisions, the Central Bank of Montenegro is governed by the Council and managed by the Governor. The greatest challenges for the Governor is to ensure a smooth and ongoing attainment of the objectives and the exercising of functions of the Central Bank, in particular the following: fostering and maintaining the financial system stability, in particular fostering and maintaining a sound banking system and safe and efficient payment system; contributing to the achievement and maintenance of price stability and supporting the achievement of economic policy of the Government of Montenegro, acting thereby in line with the principles of a free and open market and the freedom of entrepreneurship and competition.

The Central Bank of Montenegro operates in the euroised economy being a small and open market, having no issuing function, and having a limited number of monetary instruments at its disposal, so our standards have to be stricter than international ones. Therefore, we must require a higher level of discipline and higher standards. Monetary policy and instruments within the authority of the Central Bank could significantly contribute to the recovery from the financial crisis, but not without a joint effort with all other market participants. In the current circumstances of curbed recession and the announced (estimates) of economic growth, the Central Bank has a somewhat changed role. It reflects in taking measures to provide for a controlled lending activity revival and creating an environment to allow for a reduction of interest rates. The interim measures that have been recently passed by the Council of the Central Bank have this aim.

Some banks are unsatisfied with the level of relaxation and they display their discontent. We, however, consider that the Central Bank’s action at this stage is quite sufficient. These are temporary measures that will be the subject to ongoing follow-up in order to prevent any imbalances at the financial market.

We cannot allow the existence of any imbalances at the financial market. In addition, we must actively work on further banking consolidation, yet taking account, by using available measures and instruments, to control the volume of lending and lending multiplication after the economic revival in order to avoid another facing controversies of whether the Central Bank has acted timely and properly to curb and prevent a financial crisis.

Besides the personal pressure concerning the accountability for responsible performing of the entrusted tasks and duties, there were no other pressures. There have been constructive exchanges of opinions and arguments, of course, as will there be many more in the future, but these are always with a view to finding optimum solutions. Therefore, the entire accountability rests with the Governor and his closest associates. We are aware of that, so this makes the basis for the fulfilment of our obligations, as well as for the strict observance of the constitutionally defined independence of the Central Bank of Montenegro.

What does the new Central Bank of Montenegro Law bring with regard to stability, soundness of, and confidence in the banking system, including the accountability of the Central Bank of Montenegro for monetary and financial stability?

In exercising its constitutional function of being accountable for monetary stability, the Central Bank of Montenegro will implement all available measures and instruments in order to foster and preserve monetary stability. To that end, the Central Bank will continue revising the reserve requirement policy, as being the key monetary policy instrument available, and it will also develop a framework for the implementation of the monetary policy instruments set out in the new Central Bank of Montenegro Law – open market operations and the exercising of the function of the lender of last resort, including other monetary policy instruments, as required.

As far as the accountability for financial stability is concerned, our great advantage is that the Constitution clearly defines the responsibility of the Central Bank for financial stability. However, the limited possibilities of the Central Bank for exercising this function should also be taken into account since the regulation and supervision of certain financial market segments are within the authority of other institutions. The segregation of responsibilities among the Central Bank, the Ministry of Finance and other financial regulators renders the managing of risks and uncertainties more difficult considering that corrective measures affect individual parts of the financial market regulated by the relevant authorities.

With a view to further fostering and preserving financial stability, the Central Bank of Montenegro will develop instruments for the financial stability monitoring; it will assess contingent risks in areas within its competence and actively prepare for crisis management, in particular by adopting the contingency plan; it will analyse the impact of macroeconomic trends in the country and the region; it will monitor and analyse the situation in all financial market segments in order to timely identify all potential causes of instability; it will also take appropriate measures within its authority and intensively cooperate with other relevant financial market regulators.

The work of the Financial Stability Council will largely contribute to the maintenance of financial stability. The Council was established under the Financial Stability Council Law and it started operating in October this year. It was established with a view to monitoring, identifying, preventing and mitigating potential systemic risks in the financial system of Montenegro as a whole. This body will contribute to the Central Bank ensuring, in joint effort with other authorized institutions, that the financial stability becomes a “public good”.

To what do you ascribe such a high growth of assets of banks in Montenegro that have multiplied numerously over the 2005-2008 period? Looking back, was such a growth properly controlled? What should be done in order to avoid the repeating of expansive lending and banking activities?

There were numerous causes of excessive bank lending in the pre-crisis period, starting from the initially low base, extremely high demand for loans, large capital inflow, overheating of demand and all the way to inadequate risk management in the banking system.

Now, looking back from this point in time, it could be said that the response should have been provided earlier although the Central Bank was the first institution to implement countercyclical measures. Moreover, it should be taken into account that the landing would have been even softer if it hadn’t been for the global financial crisis that could hardly be anticipated at the time of the greatest credit boom in 2006 and the first three quarters of 2007, that is, until the passing of the first set of measures by the Central Bank of Montenegro.

Now when a decline in lending activity is more apparent, our primary objective is to restart controlled lending, making it unlikely for a similar situation to repeat in the near future. I also believe that we have all learned the lesson from the crisis, including banks, so that we stand ready for all new challenges, including a potential credit growth.

The problem of borrowing by Montenegrin banks? Should it be prevented by the Central Bank measures?

Total bank borrowing at this moment amounts to 697 million euros. Considering the fact that foreign banks prevail in Montenegro (nine of eleven banks are foreign-owned), same as in all countries in the region, borrowing from parent banks is not unusual. Nonetheless, many countries in the region strived to discourage borrowing from parent banks in the pre-crisis period through their reserve requirement policies and other instruments, but nowadays such barriers have been abolished and these countries strive to attract more money.

In the existing circumstances where one of the key challenges is to restart lending activity, it is much more favourable if banks increase their foreign borrowing instead of withdrawing deposits and investing them abroad. The Central Bank will certainly closely follow the situation and in case of excessive foreign borrowing influencing an increase in lending, we will take corrective measures.

What do you think of a possible arrangement with the IMF since the Government officials have recently mentioned the option of precautionary arrangement with this institution?

State borrowing is not currently an option because the Government is nearing the end of the fiscal year in which it shall meet all its obligations both to domestic and foreign creditors. That is why it is rather certain that Montenegro does not need a credit arrangement with the International Monetary Fund at this moment. There is room for concluding a precautionary arrangement, but since Montenegro exited recession and with expected moderate growth in 2011, I see less need for such an arrangement. However, if necessary, a conclusion of a borrowing arrangement with the IMF or some other international financial organisation should be fully considered. In parallel, all other alternative borrowing options should be properly considered, as required, whether from other financial institutions or at the international capital market. To wit, when considering the concrete forms of borrowing and institutions from which to borrow, in addition to taking into account the price of assets viewed in the charged interest rate, other parameters should also be considered, such as the repayment schedule, asset availability, the fulfilment of specific requirements, and the like. All analysis prepared by the Central Bank so far indicate that a credit line arrangement to be used for funding the fiscal deficit, if required, to be concluded with the IMF or any other international financial institution would be viable and economically justifiable.

The state of Montenegro has recently sole Eurobonds of total value of 200 million euros. Should Montenegro sell another issue of Eurobonds in 2011?

The sale of Eurobonds was very successful and the fact that demand exceeded the offer by almost three times (no economy in transitions has ever done that) speaks of investors` great confidence in Montenegro. As the country has exited recession at the beginning of the fourth quarter of the current year and with expectations of a moderate growth in 2011, it should be expected that investors` confidence in Montenegro will be even greater. Thus there is room for an additional Eurobond issue in the upcoming year, but it should be primarily used for the repayment of a part of the existing debt carrying unfavourable interest rate, that is, higher than the one to be achieved with the sale of Eurobonds. However, a new Eurobond issue is a matter of the Government’s decision and I believe that the Government will first fully consider all other borrowing options.

Have the crisis in Ireland and the one before that in Greece affected Montenegro in any way, do you expect any problems and have you prepared any special measures in such an event? Have any of the developments in the European Union in the past period made you suspect the future of the Euro? Is it possible that some countries will leave the Euro area?

The Irish crisis has not affected Montenegro because Ireland is not a significant foreign trade partner of Montenegro, nor it is a significant investor, and there are no Irish banks in Montenegro. We do not expect any repercussions from this crisis in the upcoming period either, as we have not experienced any from the Greek crisis. In case of any potential problem, the Central Bank of Montenegro is ready to apply all available instruments in order to preserve monetary and financial stability, and we are currently working on the Central Bank crisis management plan.

The European Monetary Union is conceived as a system that practically has no exit option. The costs of leaving the Euro area, including the damage for the Euro and the remaining Member States, would be so high that, in my opinion, no government would conclude that it is rational to leave the Euro area or to exert pressure on any other Member State to do so. It is least likely that something like that would do the states currently being in the most difficult position (like Greece and Ireland) since their debts would remain euro denominated and their national currencies would depreciate so severely against the Euro that this would render the financing of debts even more difficult and push these countries deeper into recession. It is highly unlikely that something like that would do the strongest economy such as Germany because the Deutsche Mark would strongly appreciate against the Euro, thus making the German export expensive and uncompetitive and making Germany lose a good portion of the EU market. Not to speak of the pressure for the conversion of euros (outside the Euro area) into deutsche marks, as the latter would be the hardest currency, including the costs to be incurred by Germany.

In addition, potential abolishing of the Euro would also entail huge costs for countries in the Euro area because enormous amounts of euros would return to the Euro area. The abolishing of the Euro would also mean growing uncertainty leading to a psychological growth of pessimism in the Euro area, investors refraining from investing, household spending that would shrink in such an environment, eventually leading to the Euro area countries falling in a crisis deeper than the recent global financial crisis. Something like this would mean the end of the EU and I believe that everyone is aware of that.

Finally, let me remind you that at the time of Euro introduction, the EUR/USD exchange rate was 1:1. Not long afterwards the U.S. Dollar appreciated against the Euro by somewhat more than 15%, and today the Euro is around 30% stronger than the U.S. Dollar, thus the Euro is 50% stronger if compared to the record U.S. Dollar minimum.





~ Bad loans as high as 17 pct in Oct

~ Central banker says bad loan problem will ease in 2011

~ Sees foreign interest in acquiring banks


By Petar Komnenic



PODGORICA, Dec 6 (Reuters) - Bad loans in Montenegro have continued to rise this year, but the central bank governor said on Monday he expects an improvement in 2011 as the economy in the European Union applicant country revives.

Montenegro shared in the global credit boom in the mid 2000s and the financial crisis led to a sharp increase in non-performing loans.
Radoje Zugic, who was appointed in October, told Reuters in written answers to questions that the level of loans that had not been paid in more than 90 days was between 16 and 17 percent in October.

"We don't expect the number of bad loans to grow further especially because of forecast growth next year," he wrote.

In October 2009 the bad loan rate was 13 percent.

The International Monetary Fund upgraded its 2010 growth estimate for Montenegro in November to 0.3 percent from minus 1.8 percent, but said 2011 growth would be 3 percent, down from 5 previously forecast.

Unlike neighbouring Bosnia, Kosovo and Serbia, Montenegro has not turned to the IMF for a loan. Instead the government successfully issued a debut 200 million euro ($265 million) Eurobond in September.

Zugic said there could be need for a precautionary arrangement with the international lender in the future.
In so far as it is necessary, concluding an arrangement of a possible IMF loan or with another international financial institution deserves full consideration," he said. But "as the economy continues to grow there will be less need for that."

With the region's smallest population at about 670,000, Montenegro enjoyed economic growth of 8.7 percent on average between 2006-08, but was then hit hard by the world crisis.

The economy shrank by 5.7 percent last year and banks were wary about making new loans.
"We are not satisfied with banks' credit activity," Zugic said, echoing complaints from government officials. The amount of loans to businesses and consumers in Montenegro "has fallen by 143 million euros", he said

In 2009, the mostly Western European-owned banks had made loans in Montenegro totalling 2.4 billion euros, according to central bank data.

Total bank borrowing by bank subsidiaries from their parent companies outside Montenegro is around 700 million euros, he said.
"The central bank is going to monitor banks' borrowing abroad and if it grows -- to the extent it can impact credit activity -- we will undertake corrective measures," he said.
Leading foreign-owned bank subsidiaries in Montenegro include OTP , NLB [LJUBB.UL] and Hypo Group.

Zugic was appointed governor after the government shortened the mandate of his predecessor who had taken a tough line against Prva Bank, in which Prime Minister Milo Djukanovic has a small share and his bother is the largest shareholder.
"The central bank nowadays is maintaining control over major banks including Prva Banka with an aim to determine business parameters and introduce measures that would provide safety for all clients in those banks," Zugic said.

Montenegro has unilaterally adopted the euro and the central bank has a supervisory role overseeing banking activities.
"Banks in Montenegro are liquid. There is general interest for acquisition of some banks within the system, but because of confidentiality I can not talk about it," he said.
Prva Banka has said it is looking for foreign partners, and some say an Italian bank could be a good match as the country just across the Adriatic has growing energy investments in Montenegro.



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