Interview of the Minister of Finance, Milorad Katnić, for Economist

The role of the IMF changed significantly under the influence of the crisis, which in addition to the changes in the financial capital and voting powers distribution, resulted in launching of a “more resilient“ credit lines. In late September 2010, the IMF had introduced the Precautionary Credit Line (PCL), i.e. the precautionary line. During the IMF and the World Bank annual meetings held last year in Washington, the PCL was presented to Montenegro. However, the formal arrangement with the IMF was not subjected to discussions since our goal was to finance budgetary needs through the Eurobonds issue.

Preparatory activities referred to the new Eurobonds issue are underway and this activity will be implemented in the first half of the year.

Eurobonds proceeds will be used for debt servicing and capital consumption financing, and the concrete amount, time to maturity of bonds, currency, date and other elements will depend on market circumstances, needs of Montenegro and the interest of potential investors, said Mr. Milorad Katnić, Finance Minister of Montenegro to an interview to “Economist”.

According to him, the Budget for 2011 envisages the indebtedness level of EUR 180 million, and additional EUR 53 million for financing infrastructure – related projects.

“Last year we made a début with the Eurobonds issue in the amount of EUR 200, being successful both in the number of the overall demand and the number of investors. Within the preparatory activities related to the new issue, we have already selected recognized financial institutions to act as joint lead arrangers and advisors, and we are currently defining all other prerequisites that will lead to the successful issuance. This is an extremely sensitive issue if we have in mind both the fact that we are the country without the credit rating and the current instability of the international financial market. The borrowing cost is exposed to the successfulness of the process, becoming the borrowing benchmark to be followed by all other entities of Montenegro. Eurobonds issue is the opportunity for the country to present itself to a wide number of investors therefore triggering the increase in confidence of the investment community. Hence, we are very cautious in implementing the process“, explained Katnić.

Milorad Katnić: Medium - term budgetary framework envisages the generation of the primary budget surplus in the next year. This means that the current revenues will cover the overall expenditures and a part of expenditures will be used to finance the interest rate repayment. We have forecasted a slight budget surplus for 2013, which means to cover total interests expenditures and a part of debt from budget revenues. Aforementioned plans will be exposed to the economic trends and the options to counteract the influence for the public consumption increase.

Economic illiquidity is steadily increasing, being supported by the latest data illustrating that 54.517 companies are blocked generating the debt of EUR 285 million. Has the Government an idea on how to halt this negative trend in the following period?

M. Katnić: The number of accounts blocked and the debt stock is worrying, implying an excessive illiquidity problem. However, if the latest data are analyzed more carefully, there are some positive trends compared to the previous two years. The Ministry of Finance is committed to resolving this problem in a systematic manner. Primarily, we have provided for the budgetary stability and sustainability, implying the regular repayment of all liabilities. Simultaneously, we are applying the measures of unburdening the economy, encompassing simplified procedure for the payment of taxes and other liabilities, pursuing for the overall business environment improvement, which should provide for a better conditions for the operation of companies.

The new Foreclosure Law is under development process that will improve the foreclosure procedure and claims collection procedure. The state should create a high quality institutional framework guaranteeing protection and fulfillment of ownership and contractual rights. Generating a boosting institutional framework, that would enable the new crediting and the financial system development is a key task in this area. This is a systematic and long term path for a more efficient solving of the illiquidity problem.

Both the bankers and the businessman agreed that this problem will magnify and the banks should not be expected to improve their credit activity. Do you agree with them?

M. Katnić: At a recent meeting, the bank’s representatives have presented their plans and expressed expectations that the net credits will grow in 2011. Generation of positive credit activities rates, provided that the circumstances remain unchanged, will result in the liquidity improvement. Our task is the efficient application of the new legal solutions in the banking system area, improvement of the foreclosure procedure, improvement in the financial reporting and corporative culture, ownership rights transfer and security, credit rating improvement...

These is our focus of attention, aimed at improving the environment that would boost the increase in the new credits under more favorable conditions. I believe that a consistent application of the new banking regulations, being grounded on the best international practice and standards, will contribute to the increase in bank’s credit activity, and on the other hand, that the business environment improvement will trigger higher chances for business and the development of entrepreneurial ideas.

The IMF Mission visited Montenegro. Is the financial arrangement an option?

M. Katnić: Financial arrangement with the IMF is always an option. We should bear in mind that the role of the IMF has significantly changed under the influence of the crisis, which, in addition to the changed in the financial capital of this institution and the significant changes in the allocation of the voting powers, resulted in a “more resilient” credit lines launched by this creditor. One of more resilient credit lines is the precautionary line launched in late September 2010. The Precautionary Credit Line was presented to Montenegro at the annual IMF and the World Bank meetings held in Washington last year. However, the question of a formal arrangement with the IMF was not at the agenda, because we are committed to financing the budgetary needs from the Eurobonds proceeds.

What are you intending to do to improve the sovereign credit rating being lowered due to the economic crisis?

M. Katnić: Montenegro is a stable country. The economic stability took over following a quite difficult economic crisis period. The crisis has helped in identifying the economic system weaknesses, and we as the Government were committed in triggering the problems. We recognized the basic risks and we are pursuing in defining adequate policies. In my opinion the fundamentals of our economy are today much more stronger than they were in years prior the escalation of the crisis. As for the fiscal area, we have implemented significant consolidation that will be continued in this year. We will be implementing credible policies generating enhanced confidence of the international investment community.

We will continue implementing policies that will make Montenegro both fiscally and financially stable and sustainable. Furthermore, we will expedite structural reforms and improve the business environment in order to create conditions for the investments increase, long - term growth and economic development. It is worth mentioning that we have adopted an ambitious pension reforms plan, being a problem in many European counties. Pension and other structural reforms that we have implemented are triggering positive effects for managing fiscal and financial risks of Montenegro, therefore creating conditions for its stable credit rating.

What are the further steps in eliminating business barriers and business environment improvement?

M. Katnić: A lot of work has been done in the previous period, being recognized in the relevant international reports. However, there are some links requiring improvement such as the consolidation of the procedure for registration of companies in one institution, simplification of the procedures for issuing building permits, unburdening the procedure for the payment of taxes and contributions, decrease in administrative fees, improvement of the procedure for the enforcement of contracts and the provision of simplified requirements for the employment of foreigners in Montenegro, In addition, the state administration should become citizen – economy oriented, and procedures ought to be transparent and efficient.

Privatization Plan for 2011, to the greatest extent envisages the sale of companies, the tenders of which have failed in past years. Do you believe that at least some tenders will be successfully completed?

M. Katnić: The restructuring and privatization process is reaching its final stage. There are some large systems in majority state ownership and companies with a complex ownership structure subjected to the operating problems. Privatization of these companies represents a sensitive issue requiring good preparation which is a task of the state, thus it is necessary to have a concrete interest of some credible investors. This often was not the case, thus some privatizations were postponed or have failed. Additional efforts were made aimed at restructuring companies in majority state ownership and to prepare them for privatization, thus I believe that some of the tenders will be successfully completed soon.

The budgetary deficit in 2011, is projected at EUR 83 million or 2,62 % of GDP. Do you think that it will stay at this level?

M. Katnić: The budgetary deficit and the public debt were planned within the Maastricht criteria. In a mid term, the objective is to have the budgetary surplus and the public debt bellow 40 % of GDP. There are challenges that may affect the deficit outlook in 2011. As for the expenditures, these are increased expenditures for the payment of pensions and social benefits. The Government is on the top of the challenge, and for this reason we have continued with the pension system reforms. We have increase the retirement age limit to 67, and we have altered the formula for pensions calculation, being predominantly dictated by the CPI index.

Those were tough and unpopular, yet responsible decisions pursuing the long - term pension and fiscal system sustainability. From the revenues stance, we are carefully monitoring the recovery degree of our economy and liquidity trends representing the factors affecting the collection of a significant part of budgetary revenues. In the absence of a more significant external shock and disturbance in the national economy, I believe our objectives will be met.

Journalist: Marija Mirjačić