Interview of the Minister of Finance, Milorad Katnic, for "Bankar"

The circles of so called debtors and creditors’ relationships have been created. One should be careful when considering the possibility of introducing multilateral compensation as an instrument. Credit growth is not only the consequence of the bank’s readiness to grant loans, but it arises also from the existence of sufficient level of credible and profitable projects. The cooperation between the banks and the Ministry of Finance has been very successful on an ongoing basis. Currently, we are under preparation of the new issue of Eurobonds which should be realised in the first half of the year. The arrangement with IMF through credit facility... Mental transition is the slowest one and the most difficult to achieve. We can speak about gradual recovery after recession – this scenario anticipates moderate recovery and growth of 2.5-4.0 percentages in period 2011-2013.

The decline in the liquidity of economy resulted in continuous growth of number of companies whose accounts are frozen. Internal debt is becoming higher. Is the Ministry of Finance going to take any action in that respect? Would multilateral compensation with the State participation be adequate solution at this moment?

If the information on the number of companies whose accounts are frozen is analysed more thoroughly, a slight declining trend is evident as compared to the last two years. However, such statistics does not encourage, since the number of the companies whose accounts are frozen is still high, and the circles of so called creditor-debtor relationship are created.
Since the beginning of this problem, the Ministry of Finance and the Government, within their authority, have been trying to resolve it. This primarily refers to regular execution of all budget liabilities and comprehensive package of anti-crisis measures of about 10% of GDP, constant measures of tax relief to economy, provision of guarantees for corporate sector lending by international financial institutions, establishment of Investment Development Fund.
Therefore, we try to help by creating favourable environment which will enable better conditions for the activities of the companies, but this process must be two-fold – the economy should also prepare qualitative and sustainable projects that would create new value.

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One should be careful when considering the possibility of introducing multilateral compensation as an instrument. It may be a tool for resolving specific cases, but it cannot represent a permanent solution of this issue. Simultaneously, this was practice in the previous period which was abandoned, inter alia, through the reform of the treasury system in Montenegro. Illiquidity problem should be resolved by creating systemic, long-term solutions and/or policies, which is, in my opinion, already preformed through the economic policy measures.

What is your opinion on establishing interbank money market and secondary securities market, which would significantly facilitate potential liquidity problems and encourage increased securities trade?

The establishment of interbank money market would facilitate finding of additional sources of liquidity for banks. However, for this type of market to become operational, banks should recognise their interest in the existence of such market. On the other hand, secondary securities market already exists, but it should be further developed and “deepened” by new instruments. This is the expected next stage of the development of the financial market in Montenegro. The assessments of reference researches also point to this, primarily EBRD Transition Report, which mentioned, as one of the deficiencies of the financial market in Montenegro, lack of “sophistication” of instruments. Global economy developments influenced on vertiginous growth rates at financial markets, and they have subsequently caused vertiginous declining rates. In that respect, I expect that market will recover gradually with regard to the trade volume, diversification and type of instruments. Currently, drafting new Investment Funds Law is underway as well as the preparation of the amendments to the Voluntary Pension Funds Law. I believe that new regulation will additionally assist the development of financial markets.

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Criticism of banks and their lending policy is often heard. You are one of rare persons that has recently defended them saying that they are working under market principles and in accordance with the international rules.
The fact stands that we have witnessed criticism addressed to banking sector for some time. It is important to understand the position of each market player and my statement was directed to that. Credit growth is not only the consequence of the bank’s readiness to grant loans, but it arises also from the existence of sufficient level of credible and profitable projects. Both banks and companies, by default, have interest to make profit. Something that represents income to a bank represents the expense to a company and vice versa. This is the basics of each exchange that occurs at the market. The goals of both banks and companies may be achieved only if they are based on their mutual voluntary cooperation. The State, as intermediary or participant in this exchange, may make higher damage than benefit in a long run. Therefore, I am very reluctant with regard to any State interventions in the financial system and creditor-debtor relationship.

BOX Banking sector has initiated a new development and growth stage
Banking sector is more stable now as compared to the previous year, which is shown by the key sector indicators. Those indicators primarily refer to liquidity ratio and solvency ratio, which are above the minimum prescribed level. The level and structure of deposits is also stable. Banking sector is not characterised by growth rates from the period of economic expansion, but it is important that there is an uptrend in recovery.
Recently I have held a meeting with the banks representatives in Montenegro and I was pleased to hear that the majority of banks have announced their lending activity growth in the current year. The announced lending growth rates will contribute to the economic growth rates which we have planned in economic policy.
A new, modern regulatory framework for the banking sector has been recently established. Simultaneously, the supervisor loosened its demands by adopting appropriate secondary legislation. The banks will also face additional harmonisation of their activities with the international standards.
In the combination of expectations and possibilities like this, I believe that a certain dosage of an increased concern and nervous is behind us and that the banking sector has initiated new development and growth stage.

Banks in Montenegro have qualitative cooperation with the Ministry of Finance, which was particularly evident in using EIB and KfW loans and in support provided to banks during crisis by adopting the special Law. Where do you see the area for strengthening the cooperation in the forthcoming period?

The cooperation between the commercial banks and the Ministry of Finance has been very successful on an ongoing basis. EIB and KfW support to SME projects are the examples of how significant funds can be obtained under preferential conditions for banks and companies by minimising risk to the State.
Systemic cooperation between the Ministry and the Association of Banks and individual commercial banks include continuous strengthening of business environment for banks primarily in the part regarding amendments to the legislation, while current cooperation primarily includes the financing of the significant capital projects.
Finally, the most qualitative cooperation between private and public sector reflects in the efficient execution of obligations and tasks. The State should create favourable legal and institutional framework, implement efficiently laws and protects property rights. Then the banks will have better basis to support more successful projects.

Immediately after you have become the Ministry of Finance, the information on possible new bonds issue emerged. Is it to expect the announced arrangement with IMF?
Indebtedness in 2011 is defined in the Budget Law, which projected indebtedness of EUR 180 million and additional EUR 53 million for the realisation of infrastructure projects. Last year we had the first experience regarding the bond issue in the amount of EUR 200 million, which was successful, particularly in respect of total demand and number of investors. Currently we are preparing new issue of Eurobonds which should be realised in the first part of the year. Surely, in my opinion, it is not good to define the precise timing in advance, but we carefully monitor market developments, which will determine, in line with our needs and potential investors’ interest, the best timing for the second bond issue.
The preparation of the process of Eurobond issue is important not only for the purpose of providing missing funds, but for creating the possibility to the State, its economy and private sector to present themselves to large number of investors.
Economic and financial crisis significantly influenced on the IMF role increasing significantly its financial potential to support actively member countries in overcoming the crisis, while, on the other hand, the significant changes occurred in the management of this international organisation. Countries that have significantly increased their relative importance in global economy during the last ten year period, such as China and India, obtained higher quotas in this institution, which became more legitimate than it used to be. IMF has introduced some new financial instruments lately, but it has also adapted conditioning concept which usually follows its arrangements.
In that direction goes the potential arrangement with IMF through credit line of precaution, which represents additional mechanism before us that we can discuss on if necessary.

Do you expect that the projected budget will be fully realised? What is the situation with capital investments?
Budget for 2011 was projected using the sustainability principle. Bearing in mind the projected decline in expenditures, we expect that the budget will be fully realised in majority of beneficiaries. There is a risk that the realisation of some expenditures will be higher than it was planned. This primarily refers to pensions and social contributions. Depending of the expenses movements as well as revenues, the Ministry of Finance may act during the year using adequate internal measures to reduce spending.
Capital budget is planned above the achieved one for 2010. Experience showed that the dynamics of capital expenditure cannot be easily anticipated. However, it is up to us to create conditions for the realisation of overall capital budget, particularly bearing in mind its multiple effects on economy.

It has been heard for many times that the development of entrepreneurship, small and medium enterprises represents a priority for the Government and other institutions that are concerned for the development of Montenegrin economy. What is your plan in the current year that would improve specific results in that respect?
Improvement of business environment is one of the priority policies of the Government of Montenegro. Besides the legislation framework that we try to improve and simplify, our objective is to develop different social awareness towards the business and entrepreneurship in Montenegro. Primarily, our goal is to raise awareness of the state administration and citizens that higher number of small and medium enterprises will means higher salaries and better life standard. In that respect, our aspiration is to create efficient state administration which would serve to the companies and citizens, and to develop entrepreneurial aspirations with citizens. We are aware of the fact that mental transition is the slowest one and the most difficult to achieve. In terms of specific measures for the improvement of conditions for doing business, the priorities for this year are the following: combine procedure for registering companies into one institution, simplify procedure for issuing building permits, facilitate procedures for tax and contribution payments, improve the procedure of contract execution, and create easier conditions for employing foreigners in Montenegro.

What are the main directions of Montenegrin economy development? What are the most important sectors of the economy?
Development and economy have not been determined. The velocity of technological changes and globalisation influences on the implementation of those business policies and ideas which implementation could not be imagined several years ago. Therefore I would not opt for the most important sectors of the economy. I would rather lean towards the establishing of general policies and institutional solutions that will not limit, but encourage individuals and companies to express their creativity, entrepreneurial spirit and desire to succeed, to develop their ideas thereby developing also the economy.

Has Montenegrin economy got out of crisis, and what are the consequences? How do you se global situation?
Based on recent projections, we expect that the economy slightly increased last year, which technically means that we got out of recession. We planned the recovery of economy and acceleration of growth in the forthcoming medium-term period, however there are still risks and uncertain dynamics. Potential growth rates of our economy are over 4% and that is medium-term framework that we should move towards to.
The similar situation is at global level; there is an increasing trend in majority of countries, markets are opened, growth in prices of shares and other risk assets shows that investors expect recovery. However, fiscal stimuli and low interest rates play significant part in current growth rates. It implies that new fall will not likely occur but the recovery will be slow during 2011 in Europe in general. In addition, a model for resolving European debt crisis has not been found yet and its consequences will follow us throughout the year. The hope remains that the investors will distinguish countries with good policies, primarily fiscal ones, which was the case in the last several months.

Can the solutions for so called soft landing be found, after great financial and economic crisis, by establishing adequate regulation and creating conditions for its full implementation?
When the economy was officially under recession, it was difficult to talk about so called soft landing. We can talk about gradual recovery after the recession, which represents the grounds of our economic policy. The basic scenario of growth projections in the forthcoming medium-term period comes from the forecasts that the recovery trend which has started in Q3 2011 will be continued with somewhat lower initial growth and higher rates in period 2012-2013.
This scenario anticipates moderate recovery, and economic growth of 2.5-4.0 percentages of realistic growth in period 2011-2013. It is based on the assumption that strong inflation growth is not expected, but its growth increased by 0.7% as compared to the projected one for Euro area, while it is below inflation rate projected for the economies of the Central and Eastern Europe in the same period.
Main contribution to the growth is expected in the services sector, mostly tourism and industrial production. There is also potential for growth in other sectors but there are also risks. The stabilisation of banking sector, slight recovery of the banks’ lending activity and favourable impact of Eurobonds project and other credit facilities for public finances will represent the framework for strengthening investment activities. Structural reforms in the education, health, social protection and state administration areas, as the basis for long-term systemic adjustments, will contribute to establishing sustainability of public finances, and new potential investments in energy, tourism, road and utility infrastructure should trigger the expected multiple effects.

In case of unexpected positive or negative movements, we have defined also appropriate alternative scenarios which represent part of responsible economic policy.