Press Releases 2010 - October
04.10.2010 - Public announcement following the Financial Stability Council Meeting
CENTRAL BANK OF MONTENEGRO
Podgorica, 4 October 2010
Public announcement following the Financial Stability Council Meeting
The first constitutive meeting of the Financial Stability Council (FSC) was held. The meeting was chaired by Mr. Ljubiša Krgović, the President of the Central Bank of Montenegro Council, and it was attended by the Council members Mr. Igor Lukšić, as the Deputy Prime Minister and the Minister of Finance, and Mr. Vladimir Kavarić, as the President of the Insurance Supervision Agency Council.
The Rules of Procedure of the Financial Stability Council were adopted at the meeting. In addition, the FSC agreed on specific activities aimed at the adoption of the National Contingency Plan for the Financial System Crisis Management and it also agreed on the manner of collection and exchange of data and the submission of information to the Financial Stability Council.
The Council was introduced to the Financial Stability Report that had been prepared by the Central Bank of Montenegro. The Report states that small and highly open economies like Montenegro are susceptible to the transfer of external shocks. It indicates that the global recovery has started, but that it is highly unbalanced and still much slower in the regions of importance for Montenegro. In 2010, Montenegro’s GDP may be expected to range from -0.5% to 1.5%. The Report concludes that economic growth will have a positive impact on financial stability, while a potential continuation of recession would represent a serious risk, especially for the banking system.
Negative trends on the real estate market remain present and they hinder the construction industry, which reflects in a further decline in its activities and irregular settlement of liabilities to the banking sector.
Inflation is low and it does not pose a serious threat to financial stability. Although the external trade imbalance reduced, it is not the result of improved competitiveness of the Montenegrin economy, but reduced activities in the first half of the year due to the crisis. The current account deficit is financed through capital flows, so there is no threat of the balance of payments crisis in Montenegro. Potential medium term risks that could have negative influence on the current account deficit are deterioration of conditions in the aluminium industry (KAP) as well as unexpected negative trends in tourism industry.
The fiscal deficit will most likely amount to some 4.5% of GDP in 2010. Although Montenegro is among moderately indebted countries, the public debt is on an increase. Risks are less obvious in a short-term, whereas they will be much more apparent in the medium- and long-term. All these indicators point to the conclusion that further fiscal adjustments and a balanced budget are required in 2012.
The impact and negative effects of the global financial crisis over the past two years have also seriously reflected on the financial system of Montenegro. However, it was noted that the banking system consolidated in 2010. The extended effects of the crisis contributed to an increase in past due and non-performing loans (NPLs) both in 2009 and 2010. Until the end of Q2 2010, the share of past due and NPLs was more than triple the amount in the pre-crisis period, but they have been trending downward as of July. With regard to risks in the Montenegrin banking system, credit risk is far more present than any other risk. Liquidity risk is also present, yet to a small extent, but only in case of an extreme shock this risk could appear in a certain number of banks. Total level of market risks remains low. A high percentage of clients` outstanding liabilities to banks represent a matter of concern as they could increase the banks` losses to the detriment of their capital. An encouraging fact is that several banks have recapitalized in the first half of the current year.
Developments in the capital market have reflected in an ongoing downtrend of the stock exchange indices, yet having no major direct effects on financial stability, but they indirectly affect corporate and household wealth which, in turn, influences financial stability.
The insurance market is a small, yet a growing segment of the Montenegrin economy. Although the market experienced losses in 2008 and 2009 which, in addition to the growth slowdown, were due to amended to technical reserves policies and an increase in gross premiums, there are no threats that it could jeopardize financial stability of the country. It is recommended that this segment should further the implementation of international solvency standards.
The Financial stability Council supports the joint efforts of the Ministry of Finance and the Deposit Protection Fund (DPF) in obtaining 30 million euros worth credit line from the European Bank for Reconstruction and Development (EBRD) to be used for the strengthening of the DPF`s financial capacity to respond to potential risks in the banking system.
The final conclusion is that certain financial stability risks exist, but their total level remains moderate.