CENTRAL BANK OF MONTENEGRO MACROECONOMIC REPORT 2015

Transcription

1 CENTRAL BANK OF MONTENEGRO MACROECONOMIC REPORT 2015 Podgorica, 2016

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 Nikola Fabris, PhD, Vice-Governor Asim Telaćević Milivoje Radović, PhD Milorad Jovović, PhD Srđa Božović, PhD Andrijana Vujović Nikola Nikolić Translation Services Division Studio Branko d.o.o. 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 ARIMA GDP BiH CHF CIS CBCG CEFTA DB EBRD ECB EFTA EONIA ESA ETC EU Eurostat EURIBOR FED HICP IMF LIBOR Monstat Monex, Monex PIF, MNSE10 MFI MSCI NGO OECD OPEC VAT WAEIR WANIR ROA ROE USA FDI USD UN UN DESA UNWTO UNCTAD WEO Autoregressive Integrated Moving Average Gross domestic product Bosnia and Herzegovina Swiss franc Commonwealth of Independent States Central Bank of Montenegro Central European Free Trade Agreement Doing Business European Bank for Reconstruction and Development European Central Bank European Free Trade Association European OverNight Index Average European System of Accounts European Travel Commission European Union Statistical Office of the European Union Euro Interbank Offered Rate Federal reserve Harmonised Index of Consumer Prices International Monetary Fund London interbank offered rate Statistical Office of Montenegro Montenegro Stock Exchange indices Microcredit Financial Institution Morgan Stanley Capital Index Non-governmental organisation Organization for Economic Cooperation and Development Organization of the Petroleum Exporting Countries Value added tax Weighted average effective interest rate Weighted average nominal interest rate Return of Assets Return of Equity United States of America Foreign direct investments American dollar United Nations United Nations Department of Economic and Social Affairs UN World Tourism Organization United Nations Conference on Trade and Development World Economic Outlook (IMF reports)

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5 CONTENTS MACROECONOMIC ENVIRONMENT IN MONTENEGRO IN REAL SECTOR DEVELOPMENTS Gross Domestic Product Industries Prices Labour Market MONETARY DEVELOPMENTS Banks Banks interest rates Microcredit financial institutions MONEY MARKET CAPITAL MARKET FISCAL DEVELOPMENTS Montenegro s public finances Budget of Montenegro Local Self-Government State funds PUBLIC DEBT Government debt Local self-government units debt Debt repayment EXTERNAL SECTOR Current account Capital and financial transactions account INTERNATIONAL ECONOMY Developed Economies Emerging Countries Neighbouring Countries Central Banks Interest Rates Exchange Rate Developments MOST IMPORTANT EVENTS ANNEXES 147

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7 Review of macroeconomic developments % REAL SECTOR DEVELOPMENTS GDP (in current prices in EUR million) 1 3, ,595.0 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) 171, ,517 Number of unemployed people (December) 34,687 39,991 Inflation rate Consumer prices (annual rate) Average salary without taxes and contributions (average salary for period) MONETARY DEVELOPMENTS (EUR million) M11 Total deposits 2, , Deposits by economy Government deposits Central government Institutions and agencies of the Central Government Funds and municipalities Deposits by financial institutions Deposits by households Deposits - other Total loans 2, , Loans to economy Loans to government Central government Institutions and agencies of the Central Government Funds and municipalities Loans to banks and financial institutions Loans to private citizens Other loans MONEY MARKET Average interest rates on 91-day T-bills, last recorded 3.16% Average interest rates on 182-day T-bills, last recorded 0.37% 0.36% CAPITAL MARKET Turnover in stock exchanges (EUR million) 2 Montenegro stock exchange Stock exchange indices MNSE10 3 1, MONEX 11, , MONEX PIF 3, , FISCAL DEVELOPMENTS (EUR million) 2 Current incomes 4 1, , Expenditures 4 1, , Surplus/deficit Foreign government debt (in EUR million) 1,561.7 n/a Domestic government debt (in EUR million) n/a Debt of the local governments (in EUR million) n/a EXTERNAL DEVELOPMENTS 2 Current account balance (EUR million) Trade balance -1, ,463.5 Balance of services % of trade deficit/other balances coverage Current account balance in % of GDP Data for 2015 is estimate of the Monstat based on quarterly estimates of GDP. 2 Data for period I-XII 2014 and I-XII Since April 1, 2015 on the Montenegrin capital market within the observing of the price movement of companies, the 2 indices will be in use - MONEX and MNSE10. Index MONEX represents the successor of the index MONEX20 which with the newly composed Methodology has more companies in its index basket. The newly formed index MNSE10 represents blue chip index and the best 10 companies from Montenegrin market enter into its composition. 4 Current revenues and expenditures of the Budget of Montenegro and state funds and local governments. 5 In accordance with the new Law on Budget and Fiscal Responsibility, which was adopted in 2014, the structure of the public debt has been changed. Public debt is defined as debt of the central government (government debt) and debt of the local governments. Debt of the local governments is excluded from the domestic debt structure, while on the other hand, the amount that relates to the liabilities toward legal entities and companies are included in the domestic debt structure. In line with the new Law, the quarterly reports present government debt, while the annual reports present public debt.

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9 Macroeconomic Environment in Montenegro in 2015 CBCG Macroeconomic Report 2015 MACROECONOMIC ENVIRONMENT IN MONTENEGRO IN 2015 As a small and open economy, Montenegro remained highly exposed to spillovers from external markets in 2015 that reflected on the local market movements. Regardless of the impact of international environment in the reporting year, Montenegro`s economy recorded positive rates of growth. The estimated rate of real growth of 3.2 percent points to a significant recovery compared to the previous period, which is primarily due to positive trend in manufacturing industry, tourism, and construction. The annual CPI inflation amounted to 1.4 percent in December, whilst the average annual rate of inflation stood at 1.5 percent. Positive FDI trends continued and recorded a substantial year-on-year increase of 75 percent. The banking system is stable and liquid but still burdened with non-performing loans which nonetheless significantly declined. Industrial production rose by 7.9 percent year-on-year, primarily because of a 19.9 percent output increase in manufacturing industry. Production decline was recorded in the electricity, gas, and steam supply of 8.1 percent. Tourism industry registered significant growth in relation to the previous year whereby 1.7 million tourists visited the country in the reporting year, which is a 12.9 year-on-year increase. Foreign tourist arrivals amounted to 1.6 million, and total tourist overnight stays reached 11.1 million, which is a 15.7 percent increase. Construction recorded the year-on-year increase in the value of performed construction work of 5.8 percent and a 4.7 percent growth in effective working hours. Forestry also rose by 17.6 percent. Road, rail, air, and port transport also increased in The banking systems accounts for the main share of Montenegro`s financial system, with nearly 90 percent of the financial system`s assets. All prescribed indicators of the banking system`s soundness were above the statutory minimums. A high level of liquid assets, growth in deposits and new loans, as well as recapitalisation of some of the banks additionally contributed to the banking system`s stability. The solvency ratio of all individual banks was above the regulatory minimum of 10 percent at the year-end, and the aggregate ratio was percent. The banking system recorded the aggregate negative financial result of 3.4 million euros. Nine banks ended the year with profit, while 5 banks ran a loss (one medium-sized and four small banks) but it should be emphasized that four of five biggest banks increased profit in the reporting year. The banking system`s result was affected by the Law on the Conversion of Swiss Franc (CHF)-denominated loans into Euro (EUR)- denominated loans. 9

10 CBCG Macroeconomic Report 2015 Macroeconomic Environment in Montenegro in 2015 A declining trend of lending and deposit interest rates over the past few years continued in 2015 as well, resulting in the year-on-year decrease of the weighted average lending effective interest rate on total loans of 0.69 percentage points and a 0.9 percentage point decline on new loans, dropping to 8.53 percent and 8.12 percent, respectively. The weighted average deposit effective interest rate declined from 1.86 percent to 1.23 percent. Although interest rates in the banking sector are on a downtrend they remain at a high level and additionally hinder economic recovery. The expansion of the banking sector with two new banks further contributed to the growth of competition, improvement of credit conditions, and reducing interest rates. A longstanding downtrend of concentration in the banking system continued in From a once extremely concentrated sector (measured by the HHI) and a dominant role of three largest banks, the situation today is visibly different and the banking market is getting closer to a competitive market. The 2015 fiscal deficit is estimated at 290 million euros or 8.1 percent of GDP, which is largely due to growing capital budget expenditure. The fiscal deficit consequently increased the net public debt that reached 2.2 billion euros at end- September 2015, of which 1.98 billion euros referred to the external debt. Additionally, the amount of issued guarantees (foreign and domestic) amounted to million euros. The public debt is still not too high in relation to GDP but what is a matter of concern is the continued uptrend in debt and difficulties in finding sources for its repayment. The current account deficit declined by 8.3 percent year-on-year. As for the structure, the current account deficit decline occurred mainly due to an increase in surplus in the services account and the primary income account, whereas the visible trade deficit rose 6.3 percent. Total visible export declined 9 percent in comparison with the previous year whilst total visible imports rose 3.1 percent. Reduced export of meat and meat products, as well as electricity had the major impact on the reduced export. The coverage of the foreign trade deficit with surpluses in other current account sub-accounts reached 67 percent, which is five percentage points more than a year ago. Increased revenue from services is a result of positive trends in tourism and transport. A surplus in the services account was 14.3 percent higher than in Total revenue from services rose 17.8 percent year-on-year while expenditure from services increased 24.8 percent. According to preliminary data, net foreign direct investments amounted to million euros, which is a 75 percent increase in comparison with the previous year. An increase in net inflow is a result of a significant increase in investments in local companies and banks, as well as a lower withdrawal of foreign investment in comparison with the previous year. Total FDI inflow amounted to million euros, which is 52.1 percent more than in Employment averaged 175,617 in 2015 and it was 1.2 percentage higher year-on-year, whereas in December 2015 this number was 172,517 or 0.8 percentage higher than in the same month a year before. Growth in employment was recorded in fourteen of nineteen branches, whereby the highest growth was in real estate activities (6.4 percent) and arts, entertainment and recreation (6.2 percent), and the lowest in the sector of state administration and defence, compulsory social security (0.2 percent). The largest decline in employment of 5.6 percent was recorded in manufacturing industry, and the lowest of 0.4 percent in the sector of water supply, waste water management, 10

11 Macroeconomic Environment in Montenegro in 2015 CBCG Macroeconomic Report 2015 controlling the process of waste removal, and the like. There were 39,991 unemployed persons on the Employment Agency`s records at end-december 2015, which is 5,304 people or percent more year-on-year. The number of registered unemployed persons averaged 34,587 in the reporting year or 3.9 percent more than in According to the Employment Agency`s records, unemployment reached percent in December 2015, which is 2.29 percentage points more than in the same month the year before. Montstat data show that an average salary in Montenegro amounted to 727 euros in 2015, being 0.27 percent higher than in the previous year. An average salary without taxes and contributions amounted to 480 euros, showing the year-on-year increase of 0.6 percent. According to the CBCG`s model projection for 2016, GDP growth will range between 3.8 and 4.2 percent, with the central projection around 4 percent. However, numerous factors will affect real growth and its intensity and level of economic recovery in the following year. Capital inflow was the main driver of the economy over the past few years. The most important variables expected to affect a high inflow of foreign capital invo.ve: the continuation of numerous initiated investment projects in tourism, energy, and public sector (the highway construction), as well as the dynamics of announced new investment projects for The highway construction, as a capital and one-off investment in Montenegro, will influence the growth of economic activities on one hand, but it will also put a pressure on the public debt and fiscal developments on the other hand. In this context, it is of great importance to ensure that the development component of such significant infrastructure projects ensures the public debt sustainability. 11

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13 REAL SECTOR DEVELOPMENTS 01

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15 1.1. Gross Domestic Product According to Monstat data, GDP growth in 2014 stood at 1.8%, while for 2015 estimates for the real growth rate are higher, as a result of most of the indicators given in Table Monstat preliminary data on real GDP trends on a quarterly 1 level in 2015 also point to this, while growth in Q1 was 3%, 3.7% in Q2, 4.2% in Q3, and 1.4% in Q4, and according to preliminary data, annual growth was 3.2%. Real Sector Developments Table 1.1 Comparison of trends in basic indicators in 2014 and selected sectors Agriculture, forestry and fishing Sectors/Indicators Indices 2014 Indices 2015 Selling and repurchase of agriculture, forestry and fishing products Forestry Mining and quarrying Manufacturing industry Electricity supply Construction Value of executed construction works Effective working hours Trade Retail trade in current prices Retail trade in fixed prices Transport and warehousing Passenger road transportation Cargo road transportation* Passenger railway transportation Cargo railway transportation Air transportation - passengers at airports Cargo air transportation Food and accommodation services Tourist arrivals Tourist overnights * Due to changes in the methodology for cargo road transportation, data for 2014 are not comparable with data from 2013, so in 2014 the index is not available. Source: Monstat 1 Data will be preliminary until September 2016, when the final annual GDP data for 2015 will be published. Rates per quarter refer to the same period (quarter) of the previous year. 15

16 Central Bank of Montenegro CBCG Macroeconomic Report 2015 During 2015, in relation to the rates in 2014, there was an increase in total industrial production, significant growth of indicators in tourism, growth in construction, forestry, trade and transportation. According to the recent IMF projections, real GDP growth in Montenegro should amount to 4.1% and 4.7% in 2015 and 2016, respectively. A lower growth rate of 3.2% for 2015 was published in the latest report of the European Commission and an increase of 3.6% is projected for According to the World Bank projections, GDP growth for 2015 will be 3.4%, while the forecast for 2016 is 3.7%. Estimates of these international institutions on Montenegro`s 2015 GDP growth, which were already published, are ranging from 2.7% to 4.1%, while for 2016 they foresee growth ranging from 2.8% to 4.7%. Table 1.2 Projected GDP growth rates in Montenegro in 2015 and 2016 (%) Institution EBRD IMF European Commission UN DESA World Bank Vienna Institute Source: Websites of some institutions In the forthcoming period, investment activities in the sectors of transportation, tourism, energy and agriculture will represent the basis of economic growth. This is primarily related to the construction of the Bar - Boljare highway, the construction of hotels and tourist complexes, the construction of necessary infrastructure in ski resorts in order to improve the tourist offer in the north of Montenegro, the construction of small hydro power plants and wind power plants, the construction of an undersea cable linking the electricity systems of Montenegro and Italy, and the like. All this will affect the achievement of the foreseen growth rate 2 in the coming period (4.1% real GDP growth in 2016, and 4.0% in 2017). Box Macroeconomic GDP trends in the world According to estimates of the UN/DESA, the world economy recorded uneven growth by regions in The consequences of geopolitical conflicts, especially the conflict in Ukraine and the economic sanctions that have derived from it between Russia and the majority of OECD countries (including the USA and the EU), as well as the migrant crisis, which spilled over to Europe because of the conflict in Syria, affected the economic trends dynamic. Although there is still a range of geopolitical tensions and uncertainties, it is expected that growth of the global economy in 2016 will amount to 2.9%, while it will reach 3.2% in 2017, which is encouraging as compared to the estimated 2.4 % for 2015 (Graph 1 below). Table 1 shows growth rates according to the UN including global growth (world) and selected regions i.e. countries. 2 Source: Ministry of Finance of Montenegro - Program of economic reforms for Montenegro for the period , January

17 Graph 1 World GDP growth, % Real Sector Developments Source: UN/DESA, World Economic Situation and Prospects 2016 Table 1 Gross domestic product (annual change) - real rate World Advanced 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 2016 According to UN forecasts, it is expected that developed economies, led by the USA, will contribute more to global growth in the future period than contributions in the past four years (from 2011 to 2014). Therefore, economic growth in these countries will grow from 1.7%, as it amounted in 2014, to 2.3% in The economic situation is improving also in countries of the European Union, which is only one of a few major regions of the world where there has been a decrease in the growth rate in 17

18 Central Bank of Montenegro CBCG Macroeconomic Report compared to It is estimated that the growth of the EU economy in 2016 will be 2.0% and 2.2% in At the same time, growth in developing countries that were drivers of global growth in the past years is expected to be above the global average (4.3% in 2016 and 4.8% in 2017). Transition economies, according to forecasts, will record modest growths of 0.8% in 2016 and 1.9% in 2017, with zero growth rate in Russia in 2016 and a slight recovery in 2017 with a rate of 1.2%. According to forecasts of the IMF 3, expected growth in the global economy is 3.2% in 2016 and 3.5% in Growth of economies in transition and developing economies still account for over 70% of world growth, and according to forecasts of the IMF it will amount to 4.1% in 2016, while in developed economies, identical growth rate from 2015 (1.9%) is foreseen. The main risks that could adversely affect the forecasts are the following: growth slowdown in countries in transition, the slowing down of the Chinese economy more than expected due to the need for rebalancing and spreading through commercial channels on the global financial market, lower prices of raw materials, a gradual exit from the extremely loose monetary policy in the USA, as well as the escalation of the current geopolitical tensions affecting global trade, finance and tourism flows. Graph 1.1 Projections of the World Bank and the UN on the GDP trends for the countries of south-east Europe in growth rate in% Source: World Bank and UN (UN/DESA) During 2015, according to estimates of Monstat, growth of the Montenegrin economy was 3.2% thus continuing positive trend from 2013 and According to the model projection of the CBCG in 2016, real GDP growth will be around 4%, while the average real growth rate of GDP, according to estimates by the Ministry of Finance 4, in the next three-year period should amount to about 3.7%. According to forecasts of the World Bank 5 from April 2016, Montenegro s GDP in 2016 should have a growth of 3.7%, which is 0.8 percentage points higher compared to forecasts from October According to the same source, GDP rates in Serbia, Macedonia, Bosnia and Herzegovina and Romania increased, and Albania lowered the forecast, while forecast for growth rates of GDP for Bulgaria remained at the same level. According to estimates of the UN/DESA, GDP growth in 2016 for Montenegro is by 0.3 percentage points higher (Graph. 1.1) according to the forecast given in the World Economic Situation and Prospects 2016, compared to the forecast given in the previous edition of this publication. 3 IMF World Economic Outlook - too slow for too long, April Source: Ministry of Finance of Montenegro - Program of economic reforms for Montenegro for the period , January Source: World Bank - Europe and Central Asia Economic Update, April

19 Box Business environment in Montenegro Montenegro is continuously implementing reforms to improve the business environment. Results achieved in this area are recognized in the World Bank report Doing Business. In the last report (Doing Business 2016), a slight improvement in the doing business list was recorded. Montenegro has improved its position by one place, and currently sit at 46 th place 6 of 189 countries included in the report. In the region, Macedonia has a better position (12 th on the list), Slovenia (29 th ), and Croatia (40 th ), while Serbia (59 th ), Kosovo (66 th ), Bosnia and Herzegovina (79th) and Albania (97 th ) are ranked lower than Montenegro. Real Sector Developments Table 1 Ranking of Montenegro by the basic business indicators DB 2016 DB 2015 Position change Starting business Construction permits issuance Preparation of electrical connections Property registration Loans approval Protection of investors Tax payment Cross-border trade No change Contract implementation No change Resolving illiquidity Source: Doing Business in 2016 The World Bank Group The report stressed a successful implementation of reforms in the field of construction permits issuance and tax payment. In the field of issuing building permits, eleven places shift was recorded, as a result of a series of reforms undertaken in order to reduce the time required to obtain permits. In the area of paying taxes, Montenegro has advanced thirty-three positions due to the introduction of the electronic system of payment of income tax and the introduction of the so-called crisis tax on gross earnings exceeding of 720 euros per month. A slight decrease in the position was recorded in the following indicators: business start (down for 4 positions), obtaining connections for electricity, obtaining loans (-1), registering property (-2), resolving illiquidity and protection of investors (-3). Findings of the Doing Business 2016 report highlight little progress in reforming business, but there is still room for improvement of the business environment. The model-based projection of GDP growth is based on the seasonally adjusted model of autoregressive integrated moving average processes, known as ARIMA processes. To predict quarterly GDP for 2016, the model uses historical quarterly data from 2001 to In comparison to the previous report, the methodology was changed and the ranking list for 2015 was corrected accordingly. 7 Value of quarterly GDP is obtained by using three important time series for the evaluation of the development of GDP - data of industrial production, tourism and construction. Namely, monitoring of movements of these activities and their share in the total GDP affected interpolation of GDP. 19

20 Central Bank of Montenegro CBCG Macroeconomic Report 2015 Graph 1.2 Real GDP growth in model assessments, in million euros According to the model projections in 2016, GDP growth will move in the range from 3.8% to 4.2%, with the central projection of about 4%. Graph 1.2 shows model overview of real GDP trends. To test the model-based GDP projections, estimates of GDP by expenditure approach were made. Initial assumptions for the calculation according to the expenditure approach include the following: Due to increased salaries and certain new employments, household consumption increased by 2.7%, conditioned by the strengthening of investment activity, increased pensions, and the growth of lending activity of banks as well as a slight decrease in interest rates on loans as a result of higher market pressures; Growth in the government consumption up to 2.5%, as a result of the announced increase in the public sector wages and pensions; Growth of investment in fixed assets of 15.50%, as a result of capital investments for the construction of the Smokovac-Mateševo highway section, and foreign direct investment in tourism (Portonovi, Luštica, Bay Pržno near Tivat and Mamula) and energy (construction of underwater cable between Italy and Montenegro and wind farms at Možura); Exports of goods and services will grow at a rate of 1%, due to projected lower spending of foreign tourists compared to the record year 2015, but also a weak external demand for goods, especially for metals. Imports will rise by 3.5%, due to the need for investors to import equipment, construction materials and labour, in particular for the construction of the highway, and the substitution of import with domestic production of food. Source: CBCG 2016 Table 1.3 Assessment of GDP by expenditure approach for 2016 Categories Growth rate Contribution to GDP Households' consumption State consumption Gross investments in fixed assets Export of goods and services Import of goods and services Gross Domestic Product (%) 4.00 Source: CBCG Following the expenditure approach, GDP will achieve a growth rate of 4% in 2016, which confirms the validity of the central projection of GDP growth. 20

21 Box The transition process of European countries - transitional indicators Report of the EBRD Transition report monitors progress of reforms at the state level and at the level of the sector in the transition countries using the so-called a set of transition indicators. Looking at developments at the sectoral level, 30 positive and 8 negative structural reforms in 2015 were implemented, which represents a significant improvement compared to predominantly negative trend recorded in the previous year. The largest number of positive reforms was recorded in the infrastructure sector (only 14 positive and two negative), followed by the financial sector (seven positive and four negative) in the energy sector (five positive and one negative) in the sector of the economy (four positive and one negative). Real Sector Developments In the infrastructure sector, the largest number of positive reforms in Europe was achieved in the area of roads in: Poland, Croatia, Albania, Serbia, Russia and Belarus, which is mainly a result of the increasing involvement of the private sector in the construction, modernization and maintenance of the road network through public-private partnerships. In the area of railway transportation, improvement was recorded in Poland, Slovakia, Serbia and Croatia. In July 2015, in Serbia, reconstruction of the national railway company has started, while Croatia recorded the entry of new operators from Germany, Hungary and Slovakia on the domestic market of cargo transportation. Reforms in the field of public transportation were recorded in Hungary, where an increase in the number of private bus operators was recorded, and in Russia, where a new system of collection of road tolls for heavy cargo vehicles was introduced. Looking at the reforms in the corporate sector, in several countries in Europe reforms for the improvement of the business environment and reforms for attracting new investments were recorded. In Albania, reforms that contributed to simplify business start-up and facilitate the transfer of ownership rights were implemented, while investing significant efforts to reduce informal economy. In the telecommunications sector, positive reforms were realized in Slovakia in which the complete privatization of the remaining state-owned shares of Deutsche Telekom was implemented. In Slovenia, however, deterioration of the transition indicators was recorded due to an unsuccessful sale of Telekom Slovenia. Table 1 shows the transition indicators in four sectors for selected countries: the corporate sector (agriculture, industry, real estate and IT), energy (natural resources and electricity), infrastructure (water and waste water, urban transportation, roads and railways) and the financial sector (banking, insurance and other financial services, small and medium enterprises, private property and capital market). When it comes to reforms at the level of the financial sector, the largest number of indicator improvements was recorded in the banking sector. In Ukraine, after the closure of more than 50 banks in 2014 due to non-transparent ownership and poor corporate governance, implementing the recapitalization of banks was implemented and, in order to strengthen the resilience of the banking sector, new rules of lending were adopted. Significant reforms have been implemented in Cyprus, which adopted the new regulations in the area of solvency and enforced collection for the state to cope with the serious problem of non-performing loans. Some improvements of the indicators in the banking sector were noted also in Slovenia, due to the banking sector consolidation and preparation for privatization. The greatest deterioration of the transition indicators in the banking sector was recorded by Moldova, where mass fraud in three large banks resulted in the disappearance of the system of one billion US dollars (13% of the country s GDP). In the non-banking financial sector, reforms have been implemented in Macedonia, where a new Corporate law was adopted. It provides better legal conditions for capital investment by international financial institutions and private equity funds in Romania, where the development of the capital market should be facilitated with the use of a number of new legal and regulatory amendments adopted in 2014 and

22 Central Bank of Montenegro CBCG Macroeconomic Report 2015 Table 1 Sectoral level of transition indicators for selected countries, 2015 Indicators/Countries Albania Bosnia and Herzegovina Bulgaria Montenegro Kosovo Macedonia Romania Serbia Slovenia Croatia Agriculture Industry Immovable properties IT Natural resources Electricity Water and waste water Urban transportation Roads Railway Banking Insurance and other financial services Small and medium enterprises Private property Capital market Results range from 1 to 4+, where 1 represents minor or no change from the centrally-planned economy, while 4+ is adequate to the standard of market economies. The arrows and indicate upward or downward degree in relation to the previous year. Two arrows upward indicate two improvement degrees. Source: EBRD Transition Report (Sector-Level Transition indicator scores) The biggest improvement in the energy sector was recorded in Ukraine where the government of this country reduced government subsidies of electricity prices. Although these measures are unpopular, because they result in an increase in electricity prices, they may have a significant impact on deficit reduction and redirection of state resources for other purposes, as well as to attract new investments in this sector. Progress was also recorded in Serbia, which started with the corporate restructuring of the state energy company (EPS), and the opening of the retail electricity market for households from January The only worsening of transition indicators in the energy sector was recorded in Hungary, where in recent years administrative regulated prices reduced gradually, with the result that electricity prices paid by households in Hungary are significantly below the EU average. According to the CBCG survey, optimism of entrepreneurs regarding their expectations of the scope of activities compared to the previous year increased. The number of entrepreneurs reduced (5%), which will reduce its activities in 2016, while in the previous year, 11% of entrepreneurs expected decrease of 11%. According to the same survey (conducted in late January and early February 2016), 58% of entrepreneurs expected to increase the scope of their activities (manufacturing and services). In the upcoming period, entrepreneurs list poor demand and high lending interest rates as the main business barriers. 22

23 Graph 1.3 Graph 1.4 Expected scope of activities in 2016, % Expected business barriers in 2016,% Real Sector Developments The realization of planned projects in the future should have a dominant influence on the level and trend of total economic activity. In the Program of Economic Reforms for Montenegro , the basic macroeconomic scenario envisages growth of the Montenegrin economy in 2016 of 4.1%, in % and 3.0% in Low growth scenario assumes that due to a possible worsening of the refugees crisis and the threat from terrorism, income from foreign tourists could be reduced, which would at the same time, due to the high base effect from 2015, affect weaker growth in the future, and indirectly to the development of complementary sectors such as trade and transport. Unstable environment could also lead to greater prudence in investments which would lead to a moderate slowdown in investment while obstacles in the implementation of international standards of construction may slow the main works on the highway section. In this scenario, growth in 2016 would amount to 1.3%, 4.0% in 2017, and 3.2% in Industries Industrial output Graph 1.5 In 2015, a growth of industrial production of 7.9% was due to a growth in production in manufacturing sector of 19.9%. Prices decline was recorded in the mining and quarrying sector (8.1%) and in the electricity, gas and steam supply sector (5.9%). Industrial output In the sector of mining and quarrying, production growth of 8.2% was recorded in the mining of coal, while the mining of metal ores production decreased by 67.4% and other mining production decline was 2.6% compared to the previous year. Manufacturing industry, which accounted for 53.9% of total industrial output, registered the y- o-y growth of 19.9%. Source: Monstat 23

24 Central Bank of Montenegro CBCG Macroeconomic Report 2015 Observed by sub-sectors, the highest growth was recorded in the following sectors: the manufacturing of rubber and plastic products and the manufacturing of metal products, other than machinery and equipment. However these areas have small respective shares of 0.1% and 0.2% in the total production. The largest share in the total manufacturing industry was recorded by the manufacturing of basic metals, which recorded a continuous annual growth since February In 2015, there was an increase of 12.3% in this area compared to the same period of the previous year, as a result of growth in the steel production (a low base from the previous year), while the production of aluminium was at last year s level. 8 Significant growth was recorded in the manufacturing of basic pharmaceutical products, as a result of strong fluctuations of production in this sector. 9 In 2015, a decline in production was recorded in eight areas that made up 15.8% of total industrial production. The biggest drop was recorded in repair and assembly of machinery and equipment, then the manufacturing of food products, the manufacturing of leather and leather products, the manufacturing of tobacco products, printing and copying of audio and video recordings, the manufacturing of furniture, the manufacturing of paper and paper products, and the manufacturing of beverages. Graph 1.6 Industrial output by sectors Ø 2010 = 100 Source: Monstat and CBCG calculations 8 Source: "Program of Economic Reforms for Montenegro " (p.11) 9 Ibid. 24

25 The sector of electricity, gas and steam supply, which accounted for 40.1% in total production, recorded a drop of 5.9% compared to 2014, which is primarily a result of unfavourable hydrological conditions, and poor rainfall especially in the second, third and fourth quarters, which is why the hydro power facilities recorded a drop in production of 4.6% this year. Graph 1.7 Industrial output - trends (Ø 2010 = 100) Real Sector Developments Observations show a mild downtrend in industrial output which ended in early 2013, when it had come to stagnation or the ceasing of the downward trend and a significant growth in the last two months. In 2014, industrial output fluctuated trending downward, especially in the middle of the year, and recorded moderate annual growths in January, February, September and October. In 2015, total industrial output increased. Source: Monstat Tourism Tourism continued the trend of growth in arrivals and overnights in Significant results which have been achieved contributed to this sector to become one of the main generators of growth of the overall economy. Monstat data showed that the number of tourist arrivals to Montenegro amounted to 1.7 million in 2015, being 12.9% higher than in 2014, whereby domestic tourist arrivals decreased by 8.3% while foreign tourist arrivals increased by 15.5%. Graph 1.8 Tourist arrivals in 2015 According to the structure of arrivals, seaside resorts with 89.3% of total arrivals are still the most visited. The number of tourists on the coast was 11.6% higher, the number of visits to mountain resorts increased 40.9%, 18.9% to the capital of the country, 15%to other tourist resorts, and 3.9% to other places. Source: Monstat The number of overnights in 2015 was 11.1 million or 15.7% more than in Of this amount, domestic tourists recorded thousand overnights or 21.9% less than in 2014, while foreign tourists recorded 10.3 million or 19.9% more than in the previous year. 25

26 Central Bank of Montenegro CBCG Macroeconomic Report 2015 Graph 1.9 Structure of tourist arrivals by resorts in 2015, % The number of overnights in the coastal resorts amounted to 96.7% of total overnights, while the capital, mountain resorts, and other tourist resorts accounted for 1.4%, 1.2% and 0.7%, respectively. The total number of overnights of tourists from the EU Member States amounted to 2.1 million, which made up 18.5% of total overnights. Source: Monstat Graph 1.10 Graph 1.11 Tourist overnights in 2015 Structure of EU member states tourists overnights in 2015 Source: Monstat Source: Monstat Box Continued growth of tourism indicators in the world - led by the growth in Europe International tourist arrivals in the world after the crisis in 2009 (when there was a decrease of 3.9%) recorded growth above the average for six consecutive years. In 2015, according to preliminary data of the UNWTO, there were 1.2 billion of international arrivals (Graph 1), which represents an increase of 4.4% compared to The largest number of arrivals was recorded in Europe (5%), followed by the Americas (4.9%), Asia and Pacific (4.8%), Middle East (3.1%), while a decline in arrivals was recorded in Africa (-3.3%). 26

27 Europe, as the most visited tourist destination, recorded the biggest growth in interna- International tourist arrivals - in millions Graph 1 tional tourist arrivals in 2015 (5%) compared to the previous year. Despite the migrant crisis and security challenges, it is expected that growth will be between 3.5% and 4.5% in According to the European Travel Commission (ETC - European Travel Commission, Quarterly report Q4/2015) seven destinations achieved double-digit growth in foreign tourist arrivals. Island, with arrivals growth of 30.2%, for the fourth year in a row, is a leading European destination by arrivals. They are followed by Romania (growth of 16.9% in the first eleven months), Slovakia (16.2%), Montenegro (growth of foreign tourists in the period January-November 15.5%), Ireland Source: World Tourism Organisation (UNWTO) (13.7%), Slovenia (11.4%) and Serbia (10.1%). The fall in tourist arrivals was recorded in Bulgaria (-1.2%), Turkey (-1.4%), Estonia (-3.4%) and Finland (-5.3%) which, according to the ETC s report, is mostly due to a significant decline of tourists arrivals from Russia. Real Sector Developments In America, the highest growth was recorded in the Caribbean region (7.4%), Central America (7.1%), followed by North America (4.4%) and South America (4.3%). Countries in Asia and the Pacific recorded growth of tourist arrivals in all regions, with the largest growth in Oceania (7.3%), followed by countries in South East Asia (5.1%), North East Asia (4.4%) and South Asia (4.2%). Compared to the previous year, the Middle East recorded a growth of 3.1% in 2015, while the area of the African continent recorded a drop in the number of arrivals in both regions, Sub-Sahara region (-0.6%) and North Africa (-7.8%). Graph 2 Graph 3 Foreign tourist arrivals in European countries, change in % International tourist arrivals per year and the forecast for 2016 (%) Source: European Travel Commission, TourMIS * Figures vary (Jan-Oct/Dec) per country Source: World Tourism Organisation (UNWTO) *preliminary data 27

28 Central Bank of Montenegro CBCG Macroeconomic Report 2015 For 2016, UNWTO forecasts growth ranging from 3.5% to 4.5% 10, with stronger growth in the Asia- Pacific region and the America (both from 4% to 5%), followed by Europe (from 3.5 to 4.5 %), Africa and the Middle East (both from 2% to 5%). Tourism in Montenegro recorded a significant growth of indicators of tourist arrivals and overnights in the reporting year compared to the European average. The trend of total arrivals and overnights growth continued, which has been obvious after the crisis from The total number of arrivals increased by 12.9%, while overnights grew by 15.7% compared to the previous year, which are record growth rates in the last eight years. At the same time, the gross value added of the sector in total GDP, according to published data, increased by 2.3 percentage points in the last eight years (from 4.3% in 2008 to 6.6% in 2014). Graph 1.12 Production of forests assortments, in m³ Forestry During 2015, 377,043 m³ of wood products were produced, which is 17.6% 11 more than in the previous year. As for the sale, 360,595 m³ of wood products were sold, which is 16.9% more than in the previous year. Source: Monstat Construction Preliminary Monstat data showed that the total value of executed construction works in 2015 amounted to 291 million euros or 5.8% more than in the previous year, and 4.7% more when measured by effective working hours. The value of new construction contracts for buildings amounted to 25.8 million euros, which was 26.3% less than in 2014, and the value of other new construction contracts was 69 million euros or 46.5% more than in the previous year. 10 Source: UNWTO, World Tourism Barometer, January This is presented by the weighted index, while the output presented by non-weighted index was 22.3% higher in the same period. 28

29 Graph 1.13 Construction activity Real Sector Developments Source: Monstat Transportation According to Monstat data, road transport recorded 1.4% more passengers 12 in 2015 than last year. In the same period, cargo transport increased by 20.2%. 13 Graph 1.14 Road passenger transport (in thousands euros) In 2015, passenger railway transport increased by 10.2% 14, while cargo transport increased by 9.4% compared to the previous year. 15 In 2015, air passenger transport totalled 1.6 million passengers, which was 2% more than in The largest number of passengers was in the third quarter, due to the seasonal nature of this segment of transport, where more dynamic growth of passenger transport during the summer tourist season is expressed. In 2015, air transport recorded 3.1% more transported goods in relation to the previous year. Source: Monstat 12 Expressed through the number of passengers, by passenger km, growth of passenger transport was 1.9%. 13 In terms of transported goods expressed in thousands of tons and tons km, transport of goods increased by 14.1% 14 Presented via transported passengers in thousands and travellers' kilometres, the increase amounted to 5.8%. 15 Presented in thousand tons and in ton-kilometres, the increase amounted to 18.6%. 29

30 Central Bank of Montenegro CBCG Macroeconomic Report 2015 Graph 1.15 Air passenger transport Total turnover in ports amounted to 1.5 million tonnes, which is 19.9% more than a year ago. In the structure of total turnover, export accounted for 56.3% and it increased by 56.9% compared to 2014, while import accounted for 43.7% and it declined by 8% compared to the previous year Prices Source: Monstat Graph 1.16 Rate of consumer prices and core inflation Source: Monstat and CBCG calculations Low or negative inflation rates were recorded in 2015 in many European countries. Most countries at the end of the year recorded a very low rate, or rate with a negative sign and one of the main reasons of such inflationary trends are oil prices that were the lowest in the last six years, as well as lower prices of certain food products. Following the negative inflation in Montenegro in 2014, prices in the twelve months of 2015, observed by the annual rates by months, had a positive sign. In December 2015, annual inflation was 1.4%, while measured by the HICP annual rate in Montenegro amounted to 1.7%. Average consumer prices growth in 2015 was 1.5%. Observed by months, the largest increase in the consumer prices was recorded in March (1.1%), while the biggest drop in prices was recorded in July (-0.5%). During 2015, the monthly core inflation rate 16 for four months (February, March, April and May) was below the level of total monthly inflation, while in the remaining eight months it was higher than the overall inflation. The highest range between total monthly and core inflation was recorded in March (due to changes in prices of certain products which are otherwise excluded from the calculation of core inflation, (for example: electricity prices, agricultural products, and the like). The movement rates of overall and core inflation can be seen in Graph In 2015, as in the previous three year, data on the annual price change for all goods that make up the basket of core inflation were not available, i.e. products that are excluded from the basket for calculation of core inflation. 30