Interview of the Minister of Finance, Milorad Katnic, for Dan

Fewer are the reasons for satisfaction with the manner of investments funds functioning. There are exceptions, but funds operation was, to the greatest extent, focused on attaining the interest of the management companies, their owners and managers. In most of the cases, the envisaged companies restructuring and corporative governance strengthening did not take place. The minority shareholders, except sporadically, were the passive owners, being focused on benefiting from sales or purchase of shares. At the time of the general share price boom, all problems and negative processes were less visible. Nowadays, many stakeholders have addressed to the government to resolve problems in funds and companies from their portfolio, as well as the problems of minority shareholders and workers. The government can neither resolve nor should it be held liable for resolving these issues, said Milorad Katnić, Finance Minister to an interview to “Dan He said that the government’s obligation, in the first place, is to establish adequate regulation and create conditions for its full implementation.

In cooperation with the Securities Commission and other entities, the Ministry of Finance will fully commit in fulfilling this task. The Government has recently adopted the Amendments to the Law on Shareholder Companies Financing, and the new Law on Investments Funds is pending. Basic change will tackle the regulation of the joint investments funds transformation procedure, open investments funds establishing, management companies licensing, and definition of the role of shareholders in managing funds, fees etc. The public will be soon informed on these proposed solutions.

Is there any sense in forcing banks to approve new credits, having in mind the fact that every forth one is currently uncollectible?

Forcing is senseless and it may only cause negative results. Banks are encouraged to explore qualitative projects and clients, and cash held on their accounts, at the same time represents their expense and loss. Criticizing and forcing banks to approve more credits may only cause anxiety and instability. Such environment is harmful for both the financial market development and the issuing new credits, consequently impeding the economic growth rebound. The government should efficiently apply new legal solutions in the banking sector area, aimed at improving the contracts enforcement procedure, quality of financial reporting and corporative culture, ownership rights transfer and security, credit rating, etc. Aforementioned project are our focus of work aimed at strengthening the environment enabling the issuing of the greater number of credits, under more favorable conditions.

How are you explaining the statements that the banking sector is stable, if every forth loan is overdue? How can the State Development bank contribute to this situation?

The leading indicators imply that the banking sector is significantly stable compared to the previous period. I’m primarily referring to the liquidity and solvency ratio trends exceeding the prescribed minimum. Liquidity ratio, determining a company's ability to pay off its short-terms debts obligations within maturity, amounted at 2,18 at the end of the third quarter 2010, being both significantly higher compared to the end of the previous year (1,93) and the same month of the previous year (1.66). In the first three quarters of 2010, bank’s daily and decade liquidity ratios were above the prescribed minimum. In economy everything has a cost, thus the price has to be paid sooner or later. The data on excessive share of overdue credits is indicating that the credit growth was unsustainable in years prior to the crisis. In the light of the above we are facing with the high level of overdue credits, banks losses and increased precaution in issuing new credits. The negative effects of the crisis have only aggravated the overall stance, generating the decline in the value of property, hindering the implementation of numerous projects and increased illiquidity of the economic and households sector.

In my opinion, if the Development Bank were established several years ago, today, it would be a part of the problem and not a solution to it. Private bank’s basic objective is to generate profits; however majority of them generated losses, despite their experience, knowledge and best interest assessment. Data and experience indicates that the state banks have generated greater losses. Lessons learned based on this experience and examples are of crucial importance.

I was informed that the debt based on Eurobonds principal of EUR 200 million will be reprogrammed at the time of the maturity date in 2015. If so, are we continuing to pay off the buyer’s interests?

The Budget Law will define in details the repayment of debt based on the Eurobonds principal and all other credit liabilities for that year. Generally, the public debt management framework will be established by the Strategy, which is in its final phase of development. The Public Debt Management Strategy will be regularly updated with the Medium - term Budgetary Framework of the country. The question of whether specific liabilities based on the Eurobonds will be refinanced by the new credit, fully or partly services will depend on macroeconomic, primarily fiscal and financial circumstances at that time.

Budgeted borrowing level is EUR 180 million and additional EUR 53 million for financing infrastructural projects. Last year we made a début with the Eurobonds issue in the amount of EUR 200, being successful both in the number of overall demand and the number of investors. We have commenced preparations for the Eurobonds issue that should take place in the first half of the year and we are currently in the process of selecting financial institutions that will have an advisory role in the process. Depending on the needs, the Eurobonds proceeds will be used for the servicing of debts and capital spending financing. The amount of issuance, maturity and timing will depend on the market circumstances and the interest of potential investors. Preparation for the new Eurobonds issue is the key, bearing in mind that it encompasses several advantages, primarily concerning the fact that in this way the state is being presented to a great number of investors and secondly, in this manner we are opening doors to the private sector and institutions for cooperation with the investors operating on this market. We should also bear in mind that we are the country without the credit rating that entered for the first time an extremely instable international market last year. Thus, we must be more cautious and more responsible in fiscal policy implementation. We must create conditions to finance all liabilities from our own revenues, and not to be exposed to the net external crediting. The public finance policy means the decline in spending and deficit elimination, and by the time it encompasses the decline in public debt. Thereby we are creating conditions for the more stable public finance, being a prerequisite for a long – term economic growth.

Which position will you take with respect to the state support institute, which in the previous period was used for fire extinguishing in large privatized companies?

In previous period, a significant amount of funds was committed to revitalization and restructuring of companies of system importance for our economy, being affected by the negative effects of the economic crisis. Concerning the fact that the two large systems of Montenegro underwent the restructuring process, KAP and Steel Mills, and having in mind increased demand and the increase in the price of products of these companies on the world’s market, it is realistic to expect that the state support will reduce significantly. All countries are facing with the regional disparities problem that cannot be fully addressed by neither a strategy nor an active government’s policy. However, by creating preconditions for new investments, business and employment, especially by developing qualitative infrastructure, the economic policy may efficiently decrease evident regional disparities, fostering the development of the state thereon.

What was the state reserves level at the end of the year, gold inclusive?

The level of deposits as of 31st December 2010, gold inclusive amount to EUR 138,37 million, and EUR 100,85 gold exclusive.

Are we going to need the IMF assistance in this year, and in general, what is your opinion on the Fund from Washington?

During the last economic and financial crisis, the role of the IMF has significantly changed. This institution significantly increased its financial potential enabling active support to its members in overcoming the crisis subjecting its management to changes thereon. Countries which strengthened their position in the world economy, such as China and India, are acquiring higher voting powers, thus the IMF is becoming more legitimate. The Fund has recently introduced a new financial instrument, adapting the accompanying conditioning arrangement concept. As far as the relationship of Montenegro with the IMF is concerned, it is maintained on the basis of the established dynamic and the application of the different cooperation types encompassing the regular exchange of information, IMF’s annual analysis being carried out in all member states up to various types of the technical assistance, some of which we are using. The cooperation with the IMF will continue, whereas the entering of possible financial arrangements is not excluded, tailored to our specific needs.

“Little Prince” - must read book.

• Do you have any hobbies, what are you reading and which music do you listen to?

Sport is an integral part of my life and I'm not an ardent follower of any particular sports football, basketball, tennis, bowling, karting ... The good company is what matters. Few years ago I fulfilled my childhood dream by jumping with a parachute. Recently, my best anti – stress therapy is my boxing training. Currently I'm reading the "Black Swan" by Taleb and "This time is different" by Reinhart and Rogoff. The book "Little Prince" is the must – read classic. As for the foreign economists, the books of Hayek and Buchanan are always at my disposal, and in my leisure time I read blogs of Gregory Mankiw and Donald Woodrow. However, the exchange of views with professors and colleagues from the academic sphere is the most useful experience in grinding economic opinions.

In the office, I listen to the instrumentals of Morricone, Miles Davis, and Ray Charles, and Depeche Mode and Robbie Williams when I’m driving. In my leisure time, in pubs, I like old – time music. Đorđe Balašević is my favorite “local" songwriter.

• Are you afraid of any external shocks in this year?

Stability and the Euro survival as the common currency is certainly one of the most burning topics. Although our country is not officially the Euro zone member, we share the fate of the European area in monetary terms, given the fact that the Euro is our legal tender. The instability in the Euro zone is increasing the risk to which Europe and counties using Euro are exposed to. This means that investors are more cautious and less willing to invest, and when they decide to invest they are interesting in gaining higher yields, or they charge a potential risk. Therefore it is very important for Montenegro to maintain and strengthen cooperation with other potential funding sources, especially international financial institutions such as the IMF, WB, EIB and EBRD. Apart from the financial risks we have potential risks to which the export-oriented companies are exposed to, because any increased oscillation results in more difficult business conditions, lower income and poor prospects for restructuring. We should bear in mind all these risks and in the Ministry of Finance we are using them as one of the parameters when developing the economic and fiscal policy.