CENTRAL BANK OF MONTENEGRO MACROECONOMIC REPORT 2013

Transcription

1 CENTRAL BANK OF MONTENEGRO MACROECONOMIC REPORT 2013 Podgorica, 2014

2 PUBLISHED BY: WEB SITE: CENTRAL BANK COUNCIL: DESIGNED BY: TRANSLATED BY: PRINTED BY: PRINTED IN: Central Bank of Montenegro Bulevar Svetog Petra Cetinjskog Podgorica Telephone: , Fax: Milojica Dakić, MS, Governor Velibor Milošević, PhD, Vice-Governor Nikola Fabris, PhD, Vice-Governor Asim Telaćević Milivoje Radović, PhD Milorad Jovović, PhD Srđa Božović, PhD Andrijana Vujović Nikola Nikolić Translation Services Division DPC Podgorica 100 copies Users of this publication are requested to make reference to the source of information whenever they use data from the Report.

3 Abbreviations and Acronyms ARIMA BiH CRBC CCCC CHF CPI CBCG CEFTA GDP DB EC ECB EMU EU EUR EIB EBRD EURIBOR EPCG EFTA FDI FAB FED FOB G 8 G20 GWh HPP HCI IBRD IDA IMF IFC IMF IDF IPA JIF KBM KFW Autoregressive Integrated Moving Average Bosnia and Herzegovina China Road and Bridge Corporation China Communications Construction Company Swiss Frank Consumer Price Index Central Bank of Montenegro Central European Free Trade Agreement Gross Domestic Product Doing Business European Community European Central Bank Economic and Monetary Union European Union Euro European Investment Bank European Bank for Reconstruction and Development Euro Interbank Offered Rate Electricity Company of Montenegro European Free Trade Association Foreign Direct investments Functional Airspace Block Federal Reserve System Free on Board Group of eight highly industrialised nations Group 20 includes 19 of the most developed countries in the world and the EU Gigawatt hour Hydro power plants Harmonised Competitiveness Indicators International bank for Reconstruction and Development International Development Association International Monetary Fund International Finance Corporation International Monetary Fund Investment and Development Fund Instrument for Pre-Accession Assistance Joint Investment Fund Kreditna banka Maribor Kreditanstalt Für Wiederaufbau (German Development Bank) SEC Securities and Exchange Commission LIBOR London Interbank Offered Rate MICE Meetings, Incentives, Conferences, Events MONSTAT Statistical Office of Montenegro MONEX20, MONEXPIF - Indexes of the Montenegro stock exchange MFI Microcredit financial institution Nikkei 225 Stock market index for the Tokyo Stock Exchange NDP National Development Plan NGO Non-governmental organisation OPEC Organization of the Petroleum Exporting Countries PEP Pre-accession Economic Programme PTT Postal and telephone services ROA Return of Assets ROE Return of Equity RTCG National Broadcasting Company of Montenegro RTSI index Russian Trading System Index SES Single European Sky SITC Standard International Trade Classification SFRY Socialist Federative Republic of Yugoslavia SSE composite index - Stock market index for the Shanghai Stock Exchange SWOT Strengths, Weaknesses, Opportunities, Threats TPP Thermal power plant SD United States Dollar UN United Nations UN DESA United Nations Department of Economic and Social Affairs UNWTO UN World tourism organization UNCTAD United Nations Conference on Trade and Development USA United States of America VAT Value Added Tax WAEIR Weighted average effective interest rate WANIR Weighted average nominal interest rate WBIF Western Balkans Investment Framework WESP World Economics Situation and Prospects WTM World Travel Market WTO World Trade Organisation

4 BASIC INFORMATION ABOUT MONTENEGRO Surface: 3,812 km 2 Population: 620,029 Length of borders: 614 km Capital: Podgorica (185,937 inhabitants) administrative and economic centre Royal Capital: Cetinje historical and cultural centre Length of seacoast: 293 km Length of beaches: 73 km The longest beach: Velika plaza, Ulcinj m The highest peak: Bobotov kuk (mountain Durmitor) - 2,522 m The largest lake: Skadar lake km 2 The deepest canyon: river Tara - 1,300 m The biggest bay: Boka Kotorska Time zone: GTM+1 Electric system: 220V/50Hz Climate: Mediterranean Average air temperature: in summer 27.4 C Maximum sea temperature: 27.1 C Average number of sunny days in a year: 240 Swimming season: 180 days Sea: Adriatic Sea transparency: from 38 to 56 m

5 CONTENTS MACROECONOMIC ENVIRONMENT IN MONTENEGRO IN REAL SECTOR DEVELOPMENTS Gross Domestic Product Industries Prices Labour Market MONETARY DEVELOPMENTS Banks Banks interest rates Micro-credit financial institutions MONEY AND CAPITAL MARKETS Money market Capital market FISCAL DEVELOPMENTS Montenegrin public finances Budget of Montenegro Local Governments State funds PUBLIC DEBT Domestic debt External debt Issued guarantees Debt repayment Projection and sustainability of public debt EXTERNAL SECTOR Current account Capital and financial account REAL ESTATE MARKET ANALYSIS INTERNATIONAL ECONOMY Advanced economies Emerging countries Countries in the region Interest rates of central banks Exchange rates IMPORTANT EVENTS IN ANNEXES 157

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7 Review of macroeconomic developments % REAL SECTOR DEVELOPMENTS GDP (in current prices in EUR million)* 3, Industrial output (compared to the same period the year before) Forestry (compared to the same period the year before) Construction (compared to the same period the year before-measured by effective working hours) Employment Number of employed people (december) 167, ,173 Number of unemployed people (december) 31,168 34,514 Inflation rate (compared to December the year before) Consumer prices compared to the year-end Average salary (without taxes and contributions) MONETARY DEVELOPMENTS (EUR million) M11 Total deposits 1, , Deposits by economy Government deposits Central government Regulatory agencies Local Government Government Funds Deposits by financial institutions Deposits by households Deposits - other Total loans 2, , Loans to economy Loans to government Central government Regulatory agencies Local Government Government Funds Loans to banks and financial institutions Loans to private citizens Other loans MONEY AND CAPITAL MARKET Turnover in stock exchanges (EUR million) Montenegro stock exchange Stock exchange indices MONEX20 9, , MONEX PIF 3, , Average interest rates on 28-day T-bills, last recorded Average interest rates on 56-day T-bills, last recorded Average interest rates on 91-day T-bills, last recorded 5.47% 3.44% Average interest rates on 182-day T-bills, last recorded 3.48% 1.83% FISCAL DEVELOPMENTS (EUR million) Current incomes** 1, , Expenditures** 1, , Surplus/deficit Public debt without debt of public enterprises (in EUR million) Foreign debt without debt of public enterprises (in EUR million) EXTERNAL DEVELOPMENTS Current account balance (EUR million) Trade balance -1, ,330.1 Balance of services % of trade deficit/other balances coverage Current account balance in % of GDP * 2013 data are estimates of the Monstat. ** Current revenues and expenditures of the Budget, State Funds and local governments.

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9 Macroeconomic Environment in Montenegro in 2013 CBCG Macroeconomic Report 2013 MACROECONOMIC ENVIRONMENT IN MONTENEGRO IN 2013 Most sectors recorded economic growth in Total industrial output recorded an upward trend. There was an increase in the volume of activities in construction and forestry, while the transport sector recorded an increase of activities in most segments. Tourism keeps recording increases in tourist arrivals and overnights. Inflation was low. There was an evident year-on-year decline of foreign direct investments in relation to the previous year but they remained high. The banking system is stable and liquid, but remains to be burdened with a high share of nonperforming loans. Inflation in Montenegro declined and recorded a disinflationary trend in The annual inflation in December amounted to 0.3 percent, being 4.8 percentage points lower than inflation in Total industrial output increased in the reporting year by 10.6 percent, primarily due to increased production in the sector of electricity, gas and water supply of 38.7 percent. There was a decline in mining and quarrying sector and manufacturing industry of 1.4 and 5 percent, respectively. Tourism, being the most competitive and vital sector, will remain one of the key generators of growth for the Montenegrin economy in the following period. The upward trending of tourist arrivals and overnights continued in 2013, although with a somewhat more moderate rate in relation to the previous year. According to Monstat data, 1.5 million tourists visited Montenegro during the reporting year, which is 3.6 percent more than in 2012, whereby foreign tourists arrivals rose by 4.8 percent, while domestic tourist arrivals declined by 4.4 percent. Recorded overnights amounted to 9.4 million, which is the year-on-year increase of 2.8 percent. The number of overnights of foreign tourists increased by 3.3 percent, while the number of domestic tourists declined by 1% in relation to the corresponding period of the previous year. There was an increase in road, rail and air transport, and there was an increase in both passenger and cargo transport. There was an increase of total turnover in ports. Forestry recorded an increased production of 9.7 percent in relation to the comparative period of the previous year, which came as a result of extremely low basis in January 2012, i.e. the absence of production in February Compared to 2012, according to preliminary Monstat data, construction recorded growth, measured both by the value of performed construction works and by effective working hours, which amounted to 9.7 percent and 31.5 percent, respectively. The banking sector preserved its stability in 2013, which was mostly caused by a significant growth in liquid funds, continuous growth in deposits, as well as recapitalisation of a certain number of banks. Liquidity and solvency coefficients at the banking system level were significantly above the 9

10 CBCG Macroeconomic Report 2013 Macroeconomic Environment in Montenegro in 2013 statutory minimum. The banks finished the year with positive financial result. Even though there was a positive tendency in terms of lower levels of NPLs and other banks receivables in H2 2013, what remains is a high level of NPLs and other receivables, which is a key problem of the banking system in Montenegro. However, it is expected that the procedure of voluntary financial restructuring will stimulate the recovery of debtors. At the end of 2013, the weighted average effective interest rate of banks on total loans approved amounted to 9.36 percent, which represents the annual decline of 0.11 percentage points. The weighted average effective interest rate on new loans amounted to 9.42 percent, being 0.04 percentage points higher at the annual level. The weighted average effective deposit interest rate amounted to 2.55 percent and it was 0.68 percentage points lower than at end The fiscal deficit of Montenegro amounted to million euros or 3.8 percent of GDP. Its increase is primarily the result of methodological changes in the calculation of the deficit as the called guarantees are now included in the current budget spending and not in debt repayment as before. According to the Ministry of Finance data, Montenegro s public debt amounted to 1.9 billion euros at end-2013, which is 58 percent of the estimated GDP for The debt rose by million euros or 13.8 percent year-on-year. Foreign debt accounted for the main share in total debt with 74.1 percent and the remaining 25.9 percent was domestic debt. Montenegro guarantees amounted to million euros. If the guarantees were to be included, the public debt would amount to 67.1 percent of the estimated GDP, which clearly suggests that any further growing trend of the public debt has to be halted. To that end, the fiscal consolidation measures that have been taken as well the announcement of new measures are very encouraging. Observed year-on-year, the current account deficit decreased by 17 percent. The improvements in the current account balances were mostly caused by a reduction of foreign trade deficit, as well as a surplus in other sub-accounts of the current account. Current account deficit amounted to 14.6 percent of GDP, and was below the level of deficits recorded over the past several years. Visible foreign trade continues to show a high level of import dependence. In 2013, the share of import of goods in the GDP amounted 52 percent, thus resulting in a high foreign trade deficit of 40 percent of GDP. A decline of foreign trade deficit of 4.3 percent came as a result of increased import of goods, along with a decrease of import. In 2013, the value of visible export increased by 2.8 percent and its share in GDP amounted to 12 percent. This trend in export was mostly affected by the increased export of electricity (95.6 million euros), which accounted for a quarter of the total export of Montenegro. The coverage of the foreign trade deficit with surplus recorded in other current account sub-accounts amounted to 63.4 percent, which is 5.7 percentage points more in relation to the previous year. FDIs recorded a decline in According to preliminary data, a net inflow of foreign direct investments amounted to million euros, which is 29.8 percent less in relation to the previous year. Total FDI inflow amounted to million euros, out of which the largest share referred to real estate investments (42.2 percent) and intercompany debt (39.4 percent). The average number of employed people amounted to , which is 3 percent more in relation to the average number of employed people in 2012, while in December 2013 it reached and it was 0.2 percent lower in relation to the number of employees in December Most sectors 10

11 Macroeconomic Environment in Montenegro in 2013 CBCG Macroeconomic Report 2013 (fifteen out of nineteen) recorded increase in employment, whereby the highest growth was recorded in the following sectors: administrative and support service activities; agriculture, fishery and forestry, and accommodation and food services. A decline in the number of employed people was recorded in the sector of electricity, gas, steam and air conditioning, manufacturing industry, mining and quarrying and wholesale and retail trade sector. At end-2013, there were 34,514 unemployed people on the records of the Employment Agency, which is 10.7 percent more than in the comparative month in The average number of registered unemployed people amounted to or 6.7 percent more in relation to the corresponding period of the previous year. According to the Employment Agency s records, the unemployment rate amounted to percent in December 2013, which represents the year-on-year increase of 1.45 percentage points. According to Monstat data, the average salary in Montenegro amounted to 726 euros and it was 0.1 percent lower in relation to the average salary in the previous year. The average salary without taxes and contributions amounted to 479 euros, being 1.6 percent lower in relation to the previous year. Compared to countries in the region, Montenegro is ranked the third for the amount of an average salary, right behind Slovenia and Croatia, and ahead of Serbia, Bosnia and Herzegovina, and Macedonia. 11

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13 REAL SECTOR DEVELOPMENTS 01

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15 1.1. Gross Domestic Product Real Sector Developments In 2013, according to preliminary data, GDP growth amounted to 3.5%, which seems encouraging after a decline of 2.5% in Table 1.1 Basic indicators trending in 2013 selected sectors Sectors/Indicators Indices Agriculture, forestry and fishery - Purchase and sale of agricultural, forestry and fishery products Forestry Mining and quarrying 98.6 Manufacturing industry 95.0 Electricity supply Construction - Value of executed construction works Executed effective working hours Trade - Retail turnover in current prices Retail turnover in constant prices Transport and warehousing - Road passenger Road cargo Rail passenger Rail cargo Air transportation of passengers at airports Air cargo Accommodation and food service activities - Tourist arrivals Tourist overnights Source: Monstat In 2013, according to available indicators, the economic situation in Montenegro significantly improved in relation to the previous year. Positive trends were recorded in trade, energy sector, tourism, construction, forestry and most of the transport segments. The economic trends in 2013 were affected by mild improvements of the situation in international environment. According to the latest IMF s 15

16 Central Bank of Montenegro CBCG Macroeconomic Report 2013 projections for Montenegro, real GDP growth would amount to 3.4% in 2013 and 2.8% in A somewhat higher rate was published in the latest EBRD report 1, but it was assessed that that the growth in 2013 and 2014 could amount to 3.5% and 3%, respectively. Despite different trends of economic activities in most economies, tourism represents a sector that showed a great deal of flexibility in volatile market conditions. In 2013, the number of tourists who visited Montenegro increased by 3.6%, while the number of foreign tourists increased by 4.8%, which is somewhat lower in relation to the global level of 5%, but similar to the average annual trend of 3.8% until Positive trending in tourism influenced positive rates of some complementary activities. Thus, the air and road passenger transport rose by 14.1% and 8.6%, respectively. Also, retail trade increased by 11.3%, as did hospitality turnover which is higher in relation to all four corresponding quarters, with the growth of 3.3% in Q4. Trends in the labour market did not completely correspond to trends of the overall economic activity during the year. The number of unemployed persons increased significantly faster in comparison to the number of employed persons, and the number of unemployed persons increased by 10.7% in December 2013, while the number of employed persons decreased by a mere 0.2%. Uneven economic recovery of the global economy, a long-term recession, especially in some of the EU Member States, resulted in more moderate forecasts of basic economic indicators, both at the global and regional level. According to the CBCG rough forecast based on available data, GDP growth of Montenegro amounted to some 3 % in Already published forecasts by the mentioned selected international institutions regarding Montenegro s GDP growth in 2014 ranged from 2.1% to 3%. Table 1.2 Projected GDP growth rates in Montenegro in 2013 and 2014 (%) Institution EBRD IMF UN DESA Vienna Institute European Commission Source: Websites of the selected institutions The economy of Montenegro should be generated by developing tourism, energy sector and agriculture, which have the largest investment potential, while some of the announced investments include: tourism developments in Kumbor, Luštica; TPP Pljevlja Block II; small hydro power plants, and the like. Box 1.1 Macroeconomic situation and global GDP trends The global economic growth is supposed to accelerate in the next two years and reach the level of 2.8% in 2014, and 3.2% in According to the UN report (World Economic Situation and Prospects 1 Regional Economic Prospects in EBRD Countries of Operations: May

17 2014-updated in May 2014) this represents a significant improvement in relation to the growth in Long-term crisis and uneven recovery resulted in very cautious forecasts on the level of economic trends both globally and regionally. Even though the global economy shows an upward trend, indicators for 2013 are rather modest. Encouraging signs of strengthening of economic activity were more evident in H The IMF s estimates regarding the global growth are somewhat more optimistic in comparison to the UN reports, indicating a global growth of 3% in 2013 and growth rate of 3.6% in Real Sector Developments Table 1 shows growth rates according to the UN, including global growth (World total) and selected regions and/or countries. Table 1 GDP (annual change) real growth rates World Developed economies USA Japan EU Euro area Economies in transition South-Eastern Europe CIS and Georgia Russia Developing economies Africa East and South Asia China India Western Asia Latin America and the Caribbean Source: UN/DESA, World Economic Situation and Prospects Update as of mid-2014 Moderate global growth in 2013 was mostly a result of weakness of developed economies as well as a long-term recession in the euro area countries. At the same time, developing countries that were the drivers of the global growth over the past years recorded a slowdown of economic activities, which also influenced a modest overall growth of 2.2% in For 2014, it is estimated that the economy of the USA will grow at the rate of 2.5%, Japan 1.4%, EU countries 1.6%, and the euro area 1.2%. Even though the forecasts of economic trending in 2015 are somewhat more optimistic (3.2% at the global level), a concern remains that low inflation, especially in developed countries, could attenuate economic activity, which would lead to a revision of the existing forecasts of overall economic growth. 17

18 Central Bank of Montenegro CBCG Macroeconomic Report 2013 Based on the basic indicators and economic developments for 2013, as well as medium term forecasts for 2014, the Montenegrin economy may not expect high growth rates as those recorded before the crisis in 2009, especially if we add a real decline of the economy in Box 1.2 Business Environment in Montenegro Montenegro plays a significant role in implementing reforms for the improvement of business environment in the region. The achieved results enabled it to climb the Doing business 2014 list. With two recorded reforms, the country improved its position by seven places (44 th out of 185 countries included in the report). When it comes to the countries in the region, Macedonia (25 th ) and Slovenia (33 rd ) were better positioned on the list, while Croatia (89 th ), Albania (90 th ), Serbia (93 rd ), Kosovo (86 th ) and Bosnia and Herzegovina (131 st ) were listed below Montenegro. Table 1 Montenegro s rank by basic business indicators DB 2014 DB 2013 Change in rank Starting a business Dealing with construction permits Getting electricity No change Registering property Getting credit Protecting investors Paying taxes Trading across borders Enforcing contracts Resolving insolvency Source: Doing Business 2014 The World Bank Group The report noted successful reforms in dealing with construction permits and registering property. The biggest improvement (70 positions) was made in Dealing with construction permits due to a series of reforms that enabled easier obtaining of construction permits. The biggest innovation in this area refers to the introduction of a one stop shop principle, which enables obtaining of all necessary approval for the permit, ex officio. In the area of registering property, there was a progress of nineteen positions, due to a simplified registration of property by introducing a system of public notaries. The findings of the Doing Business Report 2014 point to the progress in operational reforms, but there is still room for improvement of the business environment. The EBRD estimates as of May 2014 show that Montenegro s GDP growth would increase 3% in 2014, which is more in line with the estimates from January According to the EBRD, in May 2014, as compared to estimates from January 2014, the GDP rate was reduced for Serbia, while it was increased for Romania, Montenegro and Bulgaria. It remained unchanged for Albania, Bosnia and Herzegovina, and Macedonia. For 2014, according to the UN/DESA estimates, GDP growth rate for Mon- 18

19 tenegro is somewhat lower (Graph 1.1), but the forecast issued in the World Economic Situation and Prospects 2014 was lowered by 0.5 percentage points in relation to the forecast issued in the World Economic Situation and Prospects According to the model projection for 2014, real GDP growth in Montenegro will range between 3.15% and 3.77%, with the central projection of 3.46%. Graph 1.2 shows the macro model overview of real GDP trending by quarters, with seasonal adjustments. Graph 1.1 EBRD and UN/DESA projections of GDP growth in South East Europe in 2014, growth rates in % Real Sector Developments The model assessment is based on a seasonally adjusted model of autoregressive integrated moving average processes. For the purpose of testing the central GDP projection, the expenditure approach was used to perform GDP assessment. The initial assumptions for 2014 calculations according to the expenditures approach include: Source: EBRD and UN/DESA Stagnation and slight growth of 0.3% in household spending. Stagnation of earnings arising from salaries and pensions will affect household spending. A slight increase in household spending may occur due to certain new employments, conditioned by the strengthening of investment activity, especially in the second half of the year; During this period, the share of government spending may increase as a result of expenditures for financing the first section of the highway, which will be realized through the capital budget. However, the multiplicative effects of investments will affect the growth of budget revenues, and no significant budget strains are expected; Growth of investments in fixed assets due to increased procurement of investment Graph 1.2 Real GDP trends in model assessment, in EUR million by quarters Source: CBCG, 2014 equipment and facilities that are necessary for construction of the upcoming major projects; Changes in inventories will be at the same level as in the previous year; The export of goods and services will gradually increase because it will be influenced by a high base of export of goods from The import will experience a weak growth and will be affected by increased imports of investment equipment and substitution of food import by domestic production. By expenditure approach, GDP rate of growth will amount to 3.5%, which affirms the validity of the central projection of GDP growth. 19

20 Central Bank of Montenegro CBCG Macroeconomic Report 2013 Box Harmonised competitiveness indicators of Montenegro Aimed at measuring external competiveness of the euro area, the ECB created harmonised competitiveness indicators (HCI). HCI correlate price and cost indicators of the euro area with the given indicators of the partner countries, which use other currencies. Taking into account the relative effective exchange rate, HCI indicate the level of foreign pressures on domestic economy. The main HCI include: relative consumer prices, relative GDP deflator, and relative unit labour cost. According to the latest data for 2013, these indicators amounted to 98.9, 93.1, and 94.1 (Q1 1999=100), respectively. These indicators hold a particular importance for euroised economies, such is Montenegro. The CBCG created indicators for the period , which may correspond to the HCI. The shares of competitive countries in Montenegro s export have been selected for weights that are attributed to these countries. Our most important export markets include the EU countries and countries in the region (Serbia, Bosnia and Herzegovina, and Albania). Inclusion of these countries covers 84%-89% of total exports, depending on the year. Serbia, which represents the largest export market (36% of Montenegro s export in 2013), has the biggest individual foreign influence on Montenegro s competiveness indicators. In 2013, the EU countries made up 41% of Montenegro s exports, and in relation to the previous year, they recorded an increase of 12.3 percentage points, mostly due to Croatia`s accession to the EU, which made up 22.8% of Montenegro s export during the previous year. Graph 1 below shows the annual HCI, expressed in relative consumer prices for the euro area countries and Montenegro. This represents the most reliable indicator, because of its statistical accuracy as well as easier comparability with competitive countries. Graph 1 HCI of the euro area (Q1 1999=100) and Montenegro measured in relative consumer prices The graph was created by using the data of the ECB (HCI of the euro area) and Eurostat, Monstat, and statistical offices of competitive countries (HCI of Montenegro) Graph 1 shows a decline of the harmonised competitiveness indicator of the euro area, expressed in relative consumer prices during the period , and from the aspect of prices, the competiveness of the euro area increased during the given period. In 2013, this indicator shows an upward trend. For Montenegro, the harmonised competiveness indicator expressed in relative consumer prices has been calculated since 2011 (due to unavailability of data), and does not show large oscillations in its value, and therefore no major changes in the competiveness when it comes to prices. 20

21 Table 1. Harmonised competiveness indicator of Montenegro for the period HCI measured in relation to the following competitive economies : 2012 Relative consumer prices % annual HCI change Relative GDP deflator HCI % annual change Relative unit labour cost % annual HCI change EU27, SRB,HR, BIH, AL % % % EU % % % Real Sector Developments EZ % % % EU28, SRB, BIH, AL n/a n/a n/a n/a 2013 EU n/a n/a n/a n/a EZ n/a n/a n/a n/a Source: Indicators created by using the data of Eurostat, Monstat, central banks, and statistical offices of competitive countries. Relative consumer prices calculated by using the HICP index of Montenegro, the EU and euro area, as well as CPI indices of Serbia, Croatia, and Bosnia and Herzegovina; Relative GDP deflator calculated by using GDP (current prices) per employee for the given countries in the absence of data for construction of a more credible aforementioned indicator. The exchange rate on 31 December 2013, used for conversion of GDP values to EUR; n/a indicates unavailability of data for the given year. Decline (or increase) of competiveness indicators should be interpreted as an increase (or decline) of Montenegro s competiveness, from the given price and cost aspects. In 2013, harmonised competiveness indicator, expressed in relative consumer prices recorded a decline of 1.8% in relation to the previous year. In 2012, harmonised competiveness indicator, expressed in relative GDP deflator recorded the y-o-y decline of 6.5%, while the harmonised competiveness indicator, expressed in the relative unit labour cost increased by 14.8% in 2012, relative to The text below shows the SWOT analysis which should point to strengths and weaknesses of Montenegro s economy, as well as opportunities and threats. Table 1.3 SWOT matrix Strengths Abundant natural resources - potential for attracting FDI Euro as legal tender Low customs rates and a liberal system Low tax rates Large potential for development of tourism, agriculture and energy sector EU candidate country status using of the funds Weaknesses High public debt Growing companies with frozen accounts and losses Insufficient bank lending activity High interest rates Uneven regional development Insufficiently developed infrastructure Rigid labour market and unemployment Dependence on FDI, low level of greenfield investments and investments in production, Low level and non-diversification of exports Dependence on imports and unfavourable import structure 21

22 Central Bank of Montenegro CBCG Macroeconomic Report 2013 Opportunities Stabilization of banking sector reflected through growing depositary potential Changes in the structure of bank financing in favour of deposits NPL resolution via Podgorica Approach Fresh water springs and good protection against pollution of water, air and soil Potential for organic food production and rural development processing of primary agricultural production and organic agriculture Wood processing industry and wood end-products Planned development projects, particularly in tourism and energy sectors Using renewable energy sources Attracting FDI in production sectors Threats Increasing trend in public debt Danger from the calling of government guarantees Reduced FDI inflow, low level of reinvestments and potential outflow of foreign capital Decrease in external demand (exports and revenues from tourism) 1. Strengths represent the factors that have a positive impact on economic growth. Natural resources represent a great potential for a long-term economic growth, which can be achieved thorough domestic and foreign investments. This is one of the strategic goals of Montenegro, which exploitation is timely unpredictable. This refers to large agricultural, tourism and hydroenergy potentials. In addition to hydro-energy potential, coal represents the second most important energy source, followed by biomass, wind-energy, and the like. 2 The existing unexploited potentials represent a good prerequisite for attracting FDI. Having the euro as a legal tender represents an advantage for both domestic and foreign investors since it protects the economy from FX risk and the threat of appearance of the exchange rate - inflation - exchange rate spiral. This is a big comparative advantage of Montenegro in relation to other countries in the region. Low customs duties and a liberal foreign trade system boost the business environment and have a positive effect on potential investments. The customs-free zone within the CEFTA agreement should be added to this list. With value added tax (VAT) rates of 19% and 7%, Montenegro is still one of the countries with the lowest rates in the region. So, in the upcoming period, Montenegro will continue to attract foreign investments. Montenegro s advantage lies in a vast potential for the development of three basic pillars of the Montenegrin economy: tourism, energy and agriculture. Tourism should represent a foothold of the economy, whose development stimulates growth in other sectors, and diversification of products influences regional development. The energy sector which is based on renewable resources such as water, wind, and biomass represents a great potential for investments. Finally, agriculture represents a sector which creates conditions for the development of manufacturing industry and 2 All details regarding energy potentials are given in the Energy Development Strategy of Montenegro until 2030 (Green Book Draft) 22

23 production of food using natural potential, which in turn can stimulate development of rural areas. In the National Development Plan of Montenegro (NDP), tourism, energy, agriculture and rural development represent the priority sectors for development of the overall economy. By receiving the EU candidate status, Montenegro can benefit from the Instrument for Pre-accession Assistance (IPA) funds covering new sectors, like regional development, human resources development, agriculture and rural development. Through the Instrument for Pre-accession Assistance, the European Union allocated a grant in the amount of 245 million euros to Montenegro for the implementation of the national IPA programmes. In the meantime, the process of strategic planning of financial resources that will be available to Montenegro through IPA instrument for the period (IPA II) was initiated. Also, the Country Strategy Paper for Montenegro represents the key document that defines priorities for financial support at the national level. The document defines specific types of support that are required in order to achieve the set objectives in selected sectors. The planned support must have a foothold in the priorities defined in the national strategy papers, and it must apply to the areas that need to be improved in order to prepare the country for the EU membership. Real Sector Developments 2. Weaknesses are factors that have negative effects on economic growth and they were present in the previous period. Montenegro s economic sector has been facing more difficulties caused by the global financial crisis. Liquidity decreased, resulting from the increased public debt which amounted to 1,933.7 million euros or 58% of GDP at the 2013 year-end, and the growing number of companies with frozen accounts. On 31 December 2013, the number of legal persons and entrepreneurs with frozen accounts amounted to 12,981, which represents 23.55% of all legal persons. There was a problem of lower demand as a result of the global crisis. Banks lending activity in 2013 was also strongly influenced by the crisis and the banks inadequate lending policy during the pre-crisis period. Banks were still very cautious in assessing risks and thus they did not have appetite for a more intensive lending. In addition, the real sector trends still show signs of slow recovery, which does not create an impetus for the increase in banks lending activity. The interest rates in Montenegro are high, primarily because of a large loan demand in the country, limited and expensive sources of financing in international market, as well as high risk premiums, mostly caused by an increased illiquidity of the real sector. The loans approved at extremely high interest rates in the previous years were not repaid, which resulted in an increase of non-performing assets in the banking system, caused by an increase of non-performing loans and a further growth of illiquidity of the real sector. In respect of its regions, the economic development of Montenegro is very uneven, which is particularly evident in the underdeveloped north. The undeveloped labour market, winding up of certain companies which belonged to the labour-intensive industries in the northern region have caused the migration of population from north to the south, which in turn increased the pressure on infrastructure of parts of the country with an increased inflow of population, and simultaneously leading to depopulation of municipalities in the northern region. The Strategy of Regional Development of Montenegro should define the objectives aimed at increasing the regional and local competiveness of Montenegro, with an emphasis on the less developed northern region. The strategy will be aligned with the Montenegro Development Directions and the seven-ye- 23

24 Central Bank of Montenegro CBCG Macroeconomic Report 2013 ar Financial Perspectives of the EU which refers to same period of The document provides a framework for using financial support from European funds in order to overcome regional differences. Insufficiently built and undeveloped infrastructure may be a limiting factor for the future economic growth of Montenegro. Transport is a complementary branch to other activities (tourism, trade, industry, goods transit) which increases the importance of its improvement. Significant progress in this segment is related to defining contracts for construction of the highway, design and procurement of equipment and materials, as well as the announced implementation of the project in When it comes to the labour market in Montenegro, there is a strong mismatch between the labour force supply and the needs of the labour market. At the same time, there is a high degree of longterm unemployment, as well as a high unemployment rate of young people. The Program of vocational training of persons with university degree was initiated in January 2013, and it also continued in It aims to reduce the unemployment of young people in Montenegro. At the same time, in 2013, the Employment Agency of Montenegro carried out the project Employ our young people on seasonal jobs. It was organised for the third time and represents a way of reducing the unemployment rate. Although a number of programs and projects aim to reduce the unemployment, especially among young people, the unemployment rate in this age group (15 to 24 years) is more than two times higher in relation to the overall unemployment, according to the Labour Survey carried out by Monstat. In Q4 2013, according to the latest available data, the unemployment rate of young people amounted to 48.4%, while overall unemployment rate amounted to 19.5%. The National Strategy for Employment and Human Resources Development , adopted in December 2011, aims to resolve the abovementioned labour market problems. One of the priorities of this Strategy is to improve knowledge and skills through formal and non-formal education and training in order to reduce the mismatch between offer and demand, while simultaneously reducing the unemployment. In spite of a substantial FDI inflow, we cannot be satisfied with their structure, because in most cases these were investments in the existing facilities and construction of properties for personal use. Only a small part of investments were in manufacturing. This leads to short-term effects of investments on the domestic economy and a small impact on job creation, adoption of new knowledge and technologies, increasing productivity and exports, that is, a long-term development of Montenegro. Montenegro s export is characterized by a low level of diversification, namely, visible exports is dominated by raw materials and products of low processing degree which are often influenced by stock exchange fluctuations and subject to market cycle. In addition to a larger degree of diversification, export also needs to be increased in order to improve foreign trade deficit and structural adjustments of our economy. The service trade mainly involves tourism which largely depends on market trends. Such high import dependence represents a permanent weakness of the Montenegrin economy. The problem may be partially solved by import substitution because domestic economy offers real capacities for it. The import structure is also rather unfavourable. Consumer goods dominate in imports, while the share of equipment and machines is much lower. A change of the import structure towards equipment and machines could have positive effects on economic activity and initiate investment cycles in the country. 24

25 3. Opportunities represent possibilities for further economic growth that depend on numerous factors. In 2013, the banking sector was sound, liquid and solvent. The banking sector s liquidity was satisfactory and solvency ratios were above the statutory minimums. Recapitalisations during previous years provided the banking sector s solvency. The capital adequacy ratio at the aggregate level was largely above the statutory minimum and it amounted to 14.44% as at 2013 year-end. A continuous growth of deposit potential of banks in 2013 is a reflection of steady confidence of both citizens and corporates into the banking system of Montenegro. Real Sector Developments The decline of support by parent banks to their subsidiaries in Montenegro, which is reflected into foreign borrowings of banks since the middle of 2009, influenced the fact that the Montenegrin banks re-oriented to other sources of funding, i.e. to attract and increase the use of deposits. Despite negative aspects of reducing foreign borrowing, these structural changes of financing created conditions for a more sustainable model of doing business in the future. Aimed at reducing the amount of non-performing loans in the banking sector and increasing liquidity of enterprises and economy, the CBCG and the Ministry of Finance, in cooperation with the World Bank, created the so-called Podgorica Approach, i.e. a model of out-of-court loan restructuring of legal persons that have loans with one or more banks in the system, and which are not regularly repaid. The model aims at resolving the management of non-performing loans through financial restructuring of companies. Both banks and legal persons would benefit from the implementation of this model, because it represents a systemic solution which is of great importance for the ongoing recovery of the real and banking sectors. In addition, the state would get companies able to meet their obligations, while the CBCG would strengthen financial stability. A number of studies show that a lack of drinking water will be one of the biggest global problems in the coming decades. Montenegro is relatively rich in springs of drinking water and this should be more valorised in the coming years. Environmentally, Montenegro is well preserved (with the exception of few locations, such as the area around KAP), which represents a good basis for development of tourism, agriculture and food industry. Investments in the production of food products, especially organic fruit and vegetables, healthy food which is an absolute global hit, can be a potential chance for attracting investments. Benefits related to the development of rural areas primarily include simultaneous investments in tourism and agriculture. Development of agriculture and production of healthy food in the northern region of Montenegro would influence a reduction of regional disparities and create conditions for development of rural areas. A well-established agricultural production implies an increase in the arable farmland, as well as processing of primary agricultural products. Montenegro has significant potential for the development of agricultural products, which could be used to substitute imports and increase exports. It is a known fact that the wood industry represents one of the oldest industries, with a tradition of over 130 years. Also, Montenegro has 60% of its territory covered by forests, which makes it one of the most densely wooded countries in Europe. This clearly indicates the size of Montenegro s potential. Because of the available wood resources, investments in wood processing industry would influence an increase of production, especially an increase of finished wood products. This would have a positive influence on unemployment in the northern municipalities. Therefore, the adoption of the Strategy for development of manufacturing industry in Montenegro is important 25

26 Central Bank of Montenegro CBCG Macroeconomic Report 2013 because it provides a good analysis of the situation in the manufacturing industry for the previous period, as well as the key strategic goals in the forthcoming period. As stated in the National Development Plan , economic growth and development of Montenegro is based on three pillars: tourism, energy and agriculture. Implementation of projects in the sector of tourism and energy will directly or indirectly trigger activities in complementary sectors (transport, trade, certain areas of manufacturing industry and the like). There is an ongoing valorisation of the tourist resort in Kumbor, other phases of the Porto Montenegro marina, Luštica project, Queen`s Beach (Kraljièina plaza), as well as expected start of construction of the project TPP Pljevlja Block II, small hydropower plants and several other projects. Implementation of the planned projects will encourage positive trends not only in these sectors, but also in the overall economy. According to available data, Montenegro has a considerable potential for production of energy from renewable resources (water, sun, wind, biomass), which can present one of the central investment areas in the future. In line with its commitment to the EU accession, the objective of Montenegro in the energy sector is to increase the use of energy from renewable resources in addition to increasing the security of electricity supply and energy efficiency. For several years, high level of FDI has been raising the question of how much these investments are economically exploited. The current FDI structure has a significant room for improvement in terms of increasing investments in greenfield projects, production capacities and export oriented production. This is something Montenegro has been lacking and changes in the existing structure would improve multiplicative effects of FDI on the economy. This would strengthen the export and give impetus to the overall economy. 4. Threats are factors that could have a negative impact on the overall economy in the following period. Perennial fiscal deficit increases the public debt, given the fact that the deficit is financed from borrowings. Debt sustainability analysis indicates that Montenegro s public debt is sustainable, but difficulties could appear in case of negative GDP trends, a long-term fiscal deficit, the calling of new guarantees, as well as in the case of a continued rapid public debt growth trend. Extremely high level of state guarantees poses a big threat to the public debt sustainability because if they were to be included in the public debt level, the latter would exceed the Maastricht Criteria limits. There is a high risk that certain guarantees will be called, thus the total amount of guarantees issued should also be taken into account. The pace of public debt growth has represented an additional reason for concern over the past several years. In the past few years, there has been a large inflow of capital in the form of foreign direct investments, which has had a positive effect on economic growth. A reduced FDI inflow, accompanied by a low level of reinvestments on one hand, and potential outflows of foreign capital on the other hand, would have a negative impact on long-term economic growth of Montenegro. Deepening of the crisis and lowering of demand at export markets may have adverse effects on revenues from exports of goods and services. This primarily refers to tourism sector and its main share in total revenues from services, i.e. large dependence of the entire economy on tourism. Therefore, reliance only on tourism represents a potential danger in case of poor tourist season. 26