Macroeconomic Report of the Central Bank of Montenegro Q1 2017

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1 Macroeconomic Report of the Central Bank of Montenegro Q Podgorica, 2017

2 PUBLISHED BY: WEB SITE: Central Bank of Montenegro Bulevar Svetog Petra Cetinjskog Podgorica Telephone: , Fax: CENTRAL BANK COUNCIL: DESIGNED BY: TRANSLATED BY: Radoje Žugić, PhD, Governor Irena Radović, 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 Users of this publication are requested to make reference to the source of information whenever they use data from the Report.

3 CONTENTS MACROECONOMIC ENVIRONMENT IN MONTENEGRO 7 1. REAL SECTOR DEVELOPMENTS Gross Domestic Product Industries Prices Labour Market MONETARY DEVELOPMENTS Banks Banks interest rates Micro-credit financial institutions MONEY MARKET CAPITAL MARKET FISCAL DEVELOPMENTS Montenegro s public finances Budget of Montenegro Local Self-Government State funds GOVERNMENT DEBT Domestic debt External debt Issued guarantees Debt repayment EXTERNAL SECTOR Current and capital accounts Financial Account REAL ESTATE MARKET ANALYSIS 103 HEDONIC INDEX OF REAL ESTATES IN MONTENEGRO MARCH INTERNATIONAL ECONOMY Global economic trends Advanced countries Emerging countries Neighbouring countries Interest rates of central banks and exchange rates trends MOST IMPORTANT EVENTS ANEXES 131

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5 Review of macroeconomic developments 2016 III 2017 % REAL SECTOR DEVELOPMENTS GDP (in current prices in EUR million) 1 3, ,957.2 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 2015) Number of unemployed people (December 2015) Inflation rate Consumer prices (annual rate) Average salary (without taxes and contributions) 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 1, 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 1, , Other loans MONEY MARKET Average interest rates on 91-day T-bills, last recorded 2.35% Average interest rates on 182-day T-bills, last recorded 2.18% 2.69% CAPITAL MARKET Turnover in stock exchanges (EUR million) 2 Montenegro stock exchange Stock exchange indices MNSE MONEX 11, , MONEX PIF 2, , FISCAL DEVELOPMENTS (EUR million) 2 Current incomes 4 1, Expenditures 4 1, Surplus/deficit Foreign government debt (in EUR million) 2, Domestic government debt (in EUR million) Debt of the local governments (in EUR million) EXTERNAL DEVELOPMENTS 2 Current account balance (EUR million) Trade balance -1, Balance of services % of trade deficit/other balances coverage Current account balance in % of GDP Data for 2016 is estimate of the Monstat, data for 2017 is estimate of the Ministry of Finance. 2 Data for period I-XII 2016 and I-III 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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7 Macroeconomic Environment in Montenegro CBCG Macroeconomic Report Q MACROECONOMIC ENVIRONMENT IN MONTENEGRO Real GDP growth rate of Montenegro, according to preliminary MONSTAT data, based on quarterly estimates in 2016 amounts to 2.5%. All four quarters in 2016 recorded a y-o-y growth: 1.1%, 2.7%, 2.4% and 3.4%, respectively. According to Ministry of Finance forecasts 1 for 2017 and 2018, the GDP growth will amount to 2.7%, and 3.2%, respectively. According to MONSTAT data, real GDP growth rate in Q amounted to 3.2% In March 2017, compared to the corresponding month of the previous year, CPI inflation in Montenegro was positive and amounted to 2.7%. Consumer prices recorded monthly increase of 0.1% in March Over the course of the first three months of 2017, industrial output recorded a y-o-y decline of 10.9%. Production decline of -25.1% was recorded in manufacturing industry and of -10.8% in electricity, gas and water supply sector while production growth was recorded in mining and quarrying (187.4%). In Q1 2017, construction recorded a y-o-y increase in the value of executed construction works by 37.5% as well as in the increase of effective working hours of 24.8% relative to Q Forestry recorded a y-o-y output increase of 44.1% 2 during Q The number of tourist arrivals in collective accommodation establishments 3 amounted to 65,753 in Q1 2017, which is the year-on-year increase of 10.3%. The number of foreign tourist arrivals amounted to Overnights amounted to 170,947 which is a y-o-y increase of 8.3%. In Q1 2017, according to MONSTAT data, air passenger transport recorded a y-o-y growth of 13.5%, while air freight transport increased by 0.5%. In the same period railway passenger transport decreased by 20.3% while railway freight transport increased by 85.2%. In Q1 2017, road passenger and freight transport recorded respective y-o-y increases of 0.7% and 1.6%. The banking sector in Montenegro is stable, liquid and solvent. At end-march 2017, non-performing loans (without interests and prepayments and accruals) amounted to million euros and acco- 1 Source: Ministry of Finance: Proposal of the fiscal strategy of Montenegro Expressed by weighted index, while expressed by non-weighted index production increased by 49.8% over the corresponding period. 3 In line with the Regulation (EU) No. 692/2011, as of February 2017, Monstat has started publishing monthly data on tourist arrivals and overnights only for collective accommodation establishments. 7

8 CBCG Macroeconomic Report Q Macroeconomic Environment in Montenegro unted for 9.9% of total loans. On a monthly level, non-performing loans declined by 0.5%, while they declined by 12.8% on an annual level. Even though they recorded a downward trend, non-performing loans continue to represent vulnerability of the banking system, but no longer represent a systemic but rather an individual problem. The weighted average effective interest rates on total granted loans in March 2017 amounted to 7.21%, and it recorded a y-o-y decline of 1.11 percentage points. In March 2017, the weighted average effective interest rate on new loans was 7.09%, representing a decrease of 0.95 percentage points compared to March The weighted average effective interest rate on deposits amounted to 0.89% in March 2017 and compared to March 2016 it declined by 0.27 percentage points. The deficit of the Budget of Montenegro was estimated to 70.5 million euros, or 1.8% of GDP for the first three months of According to the Ministry of Finance data, at the end of March 2017, the gross government debt of Montenegro amounted to 2,483 million euros or 62.7% of GDP. Out of that figure, domestic debt accounted for million euros or 12.2% of GDP, while external debt accounted for 2,001.7 million euros or 50.6% of GDP. Net government debt amounted to 61.2% of GDP. Preliminary data show that the first quarter of 2017, the current account deficit amounted to million euros, which is a y-o-y increase of 10.5%. The increase of the current account deficit came as a result of higher deficit in the goods account compared to the previous year. In Q1 2017, deficit in the goods account amounted to million euros, and recorded a y-o-y increase of 16.4% as a result of higher increase of imports than exports of goods. Total visible exports amounted to 80.9 million euros recording an increase of 35.8%. Exports growth was induced mainly by the increase in the exports of mineral ores and electricity. Total imports of goods amounted to million euros and recorded a y-o-y increase of 19.6%, as a result of higher imports of general-purpose machinery and electricity. During the reporting period, the services account recorded a deficit in the amount of 6.3 million euros. Total revenues from services amounted to million euros or 17.5% more in relation to 2016, while the expenditure amounted to million euros (9.9% increase). Increased services expenditure came as a result of higher outflow from transport, travel/tourism, telecommunication and computer and other services. The estimated revenues from travel/tourism for Q amounted to 23.4 million euros, which represents a y-o-y increase of 35.6%. During the reporting period, there was an increase in arrivals and overnights of foreign tourists. In Q1 2017, net foreign direct investments amounted to million euros, which represents a y-o-y increase of 45.4%. Total FDI inflow added up to million euros, or 54.5% lower than in In Q1 2017, total outflow of foreign direct investments amounted to 26.6 million euros. In the outflow structure the main share referred to outflow from withdrawal of non-residents funds invested in Montenegro, which amounted to 22.5 million euros, while the outflow from residents investments abroad amounted to 4.1 million euros. 4 Source: Ministry of Finance, estimated GDP for 2017 amounts to 3,957.2 million euros. 8

9 Macroeconomic Environment in Montenegro CBCG Macroeconomic Report Q In March 2017, the average number of employed persons amounted to 179,783 persons, which represents an increase of 0.9% compared to the previous month, and 4.5% compared to March In March 2017, the number of unemployed persons in Montenegro amounted to 52,905 which represents an increase of 1.3% compared to the previous month and an increase of 24.8% compared to March According to the Employment Agency data, the unemployment rate amounted to 22.8% 5 or 4.52 percentage points more than the rate recorded in March In Q1 2017, an average gross salariey in Montenegro amounted to 765 euros, while an average salary without taxes and contributions amounted to 510 euros. In March 2017, the average net wages and salaries recorded a y-o-y increase of 4.1%, while compared to the average net wages and salaries in 2016 it also recorded growth of 1.8%. 5 Monstat publishes different unemployment quarterly in the Labour Force Survey which is in compliance with the EUROSTAT recommendations. In Q1 2017, as per the Labour Force Survey, the unemployment rate amounted to 17.4%. 9

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11 REAL SECTOR DEVELOPMENTS 01

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13 1.1. Gross Domestic Product Taking into consideration the economic trends recorded in the first quarter of 2017 in Montenegro, it is evident that the y-o-y growth was recorded in the majority of sectors. In Q1 2017, as per the official Monstat data, GDP amounted to 748 million euros, while in the corresponding period of the previous year it amounted to 706 million euros. In Q1 2017, real GDP growth rate amounted to 3.2%. During this period there was an increase in the volume of activities in construction, forestry, retail turnover, increase in most of transport segments, as well as increase in arrivals and overnights in collective accommodation establishments. There was a y-o-y decline of total industrial output, with the decline of output in the sector of manufacturing industry and electricity, gas and steam supply, while there was an increase in the mining and quarrying. It is estimated that economic growth in 2017 could amount between 3.3% and 3.8%. Real Sector Developments Table GDP 6 change in % GDP - real rate Source: Monstat and Ministry of Finance In this period, there was an increase of consumer prices, both compared to December of the previous year as well as on an annual level. The increase of prices in the category food and non-alcoholic beverages, as a result of increased prices of a large number of food products and in the category transport, as a result of a global increase of oil prices, affected these categories in producing positive contribution to the increase of total annual inflation rate. At the same time, in Q1 there was a y-o-y increase of gross and net wages and salaries, slight increase of employed persons, as well as a significant increase of unemployed persons Industries Industrial output In Q1 2017, the physical volume of industrial output recorded a y-o-y decline of 10.9 percent. Output decline was recorded in the manufacturing industry (25.1%) and electricity, gas and steam supply sector (10.8%). In the mining and quarrying sector, the output increased by 187.4%. Total industrial output recorded an annual decline of 17.4% due to output decline in the manufacturing industry (-33.1%) and electricity, gas and water supply sector (-15.3%). The annual output increase of over 200% 7 was re- 6 For 2016, MONSTAT estimate, until final data are published in September For 2017 and 2018, the forecast of the Ministry of Finance from the "Economic reforms programme for Montenegro Calculated index was above

14 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 1.1 Industrial output, annual and monthly rate Source: MONSTAT corded in the mining and quarrying sector. Observed per month, the decline of industrial output was recorded in January (-36.6%), while there was an increase in February (34.1%) and March (4.1%). During the first three months of 2017, manufacturing industry recorded a y-o-y decline of output in six areas (Table 1.2). The highest decline was recorded in the area of production of basic pharmaceutical products (-66.7%), while the lowest decline was recorded in the area of production of basic metals (-18.6%). During this period, nine areas recorded output decline. The highest growth was recorded in production of leather and leather products (100%), while the lowest was in the production of rubber and plastic products (1.3%). In Q1 there were no activities in the area of production of tobacco products, nor in the area of repair and assembly of machinery and equipment. Table 1.2 Areas of manufacturing industry, change indices Industry/Period Jan-Mar 2017/Jan-Mar 2016 MANUFACTURING INDUSTRY - total 74.9 Production of food products Production of beverages Production of tobacco products - Production of apparel Production of leather and leather products Production of wood products, cork and the like 72.5 Production of paper and paper products Printing and reproduction of audio and video recordings 48.9 Production of chemicals and chemical products Production of basic pharmaceutical products 33.3 Rubber and plastic products Production of other non-metal minerals products Production of basic metals 81.4 Production of metal products, other than machinery and equipment 60.9 Production of machinery and equipment otherwise not mentioned 79.6 Production of furniture Repair and assembly of machinery and equipment - Source: MONSTAT 14

15 Having in mind that manufacturing industry has the highest share in the total industrial output (57.7%), it is very important to adopt the Manufacturing Industry Modernisation Support Programme 8 aimed at ensuring long-term output growth in this area of industrial output. During the first three months of 2017, mining and quarrying recorded a y-o-y output increase of 187.4%. Output growth was recorded in the area of coal mining (47.4%), as well as in the area metal ores mining (200% 9 ), where there was no production in the previous year, thus the increase in output of the total sector. In the area other mining, there was a decline of output amounting to 20.5%. In Q1 2017, the electricity, gas and steam supply recorded a y-o-y output decline of 10.8%. Bad weather conditions affected the production of electricity in hydro power plants to be significantly lower in January 2017 compared to the corresponding month of the previous year (HPP Perućica produced only 21% of the amount envisaged by the balance for that period, while HPP Piva produced 47% of the planed quantity), while thanks to good production readiness, the TPP Pljevlja produced 96% of the quantity envisaged by the balance for the first month of this year 10. Real Sector Developments Graph 1.2 Industrial output by sectors Ø 2010 = 100 Source: MONSTAT 8 18 th meeting of the Government of Montenegro, item 41 9 Calculated index was above Source: Elektroprivreda Crne Gore (Bulletin "Elektroprivreda" no. 372). 15

16 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 1.3 Industrial output - trends, (Ø 2010 = 100) Installation of the submarine part of the energy cable between Montenegro and Italy, with a total length of 433 km was completed in mid-february The total cable length amounts to 455 km, and when the project is completed, Montenegro will become the main energy link between the Western Balkan countries and the European Union. Observation shows mild downtrend in industrial output which ended in early 2013, recording a more 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 growth in January, February, September and October. In 2015, there was an increase of the total industrial output, while in 2016, as well in the first quarter of 2017 there was a decline of output Tourism During the first three months of 2017, according to MONSTAT data, a total of 65,753 tourists stayed in collective accommodation establishments, which is a y-o-y increase of 10.3%. During this period, collective accommodation establishments recorded an increase of tourist arrivals, both domestic (5%) and foreign (12.3%) in relation to the first quarter of Graph 1.4 Graph 1.5 Tourist arrivals in collective accommodation establishments in the period January-March Structure of tourist arrivals in collective accommodation establishments by municipalities in Q1 2017, % share Source: MONSTAT Source: MONSTAT 16

17 In the structure of total arrivals in collective accommodation establishments, the highest increase of the number of arrivals was recorded in the municipalities of Budva (29.7%) and Podgorica (29.3%). In the total recorded arrivals in collective accommodation establishments, in addition to Podgorica and Budva, a significant share was recorded by municipalities of Kolašin (8.6%), Herceg Novi (6.5%), as well as other municipalities which have their share in the structure of total arrivals indicated in Graph 1.5. Graph 1.6 Tourist overnights in collective accommodation establishments in the period January-March Real Sector Developments In Q1 2017, the number of overnights in collective accommodation establishments amounted to 170,947 or 8.3% more than in the corresponding period of Out of total number of overnights in collective accommodation establishments, domestic tourists recorded overnights or 6.3% more than in Q1 2016, while foreign tourists recorded 111,576 overnights which represents a growth of 9.4%. In this period, in the total structure of overnights in the collective accommodation establishments, the most tourists came from Serbia (12.7%), Albania (8.5%) and Russia (6%) (Graph 1.7). The report 11 of the World Travel & Tourism Council states that the total contribution of travel and tourism to GDP in 2017 could grow by 6.3%, the same as the average annual growth rate of tourism and travel by Source: MONSTAT Graph 1.7 Structure of tourist overnights in collective accommodation establishments in Q1 2017, Source: MONSTAT Box 1.1 Tourism - continued growth trend in Europe The European tourist market, despite numerous instabilities over the previous years, kept its positive trajectory in the beginning of According to the European Commission travel report (European Tourism in 2017: Trend & Prospects Q1/2017), after a modest growth in the number of international tourist arrivals of 2% in 2016, it is expected that during this year, despite geopolitical instability and numerous safety issues, the growth will be more optimistic and will be between 2% and 3%. 11 Source: World Travel & Tourism Council (WTTC) - Travel & Tourism ECONOMIC IMPACT 2017 MONTENEGRO 17

18 Central Bank of Montenegro CBCG Macroeconomic Report Q Economic recovery of the euro area, favourable exchange rate, improvement in flight connections, and continued relatively low level of fuel price influenced higher international arrivals and tourist overnights by most European countries during the first months of However, there is a concern that terrorist attacks, migrant crisis, as well as Brexit might affect creation of barriers in the tourism sector, which will fail to provide security of destinations, but will significantly make the overall future functioning of this sector more difficult. Graph 1 Foreign tourist arrivals and overnights in the European countries, change in percent Source: TourMIS, *data vary (January-March) in different countries With an average annual growth of 25% over the last five years, Iceland remains the leading European destination which recorded growth of foreign tourist arrivals of 53.7% during the first three months of Even though the growth trend continued during the first months of 2017, it is expected that there could be a deceleration as a result of insufficient amount of accommodation capacities, as well as other shortcomings of the tourist infrastructure in this country. Having in mind that Portugal and Malta represent countries which largely depend on summer tourist season, there was a significant growth of arrivals and overnights of foreign tourists in these countries during the first months of this year. During the first two months of 2017, the increased number of tourist was also recorded in Finland and Estonia, mostly as a result of tourist arrivals from China. The downward trend of foreign tourist arrivals in Turkey, which started in 2015 continued into the first two months of 2017, with a y-o-y decline of 8.1%. During the following period, recovery of tourist market in Turkey will largely depend on political stability and lower terrorist threats in the country. During the first three months of 2017, Montenegro recorded 12.3% y-o-y increase of foreign tourist in collective accommodation establishments, while the number of overnights increased by 9.4% (Graph 1 for Montenegro shows data for the first two months) Forestry Following a decline of output during the previous year, production of forest assortments recorded growth in Q A total of 21,904 m³ of forest assortments was produced, which represents a significant growth of 44.1% 12 compared to the first quarter of In order to ensure proper protection and revaluation of forest potential in Montenegro and ensure continuous sustainable management of forest resources, Forest Management Programme for 2017 was adopted in February Expressed by weighted index, while expressed by non-weighted index production increased by 49.8% over the same period th meeting of the Government of Montenegro, item 5 18

19 Graph 1.8 Production of forests assortments, in m³ Real Sector Developments Source: MONSTAT Construction Positive results in the construction sector recorded during the previous year continued in Q In Q1 2017, the value of executed construction works amounted to 99.1 million euros, which represented a y-o-y growth of 37.5%, while construction activity measured by effective working hours grew by 24.8%. Graph 1.9 Construction activity Source: MONSTAT 19

20 Central Bank of Montenegro CBCG Macroeconomic Report Q Monstat records show that the value of new construction contracts for buildings amounted to 15.1 million euros, which is a 19.5% y-o-y growth and the value of other new construction contracts amounted to 26.1 million euros, which is a y-o-y increase of 211.1%. Graph 1.10 Road passenger transport (in thousands) Source: MONSTAT Graph 1.11 Passenger turnover at airports in Q1 in the period Transport In Q1 2017, most types of transport recorded a y-o-y growth. According to MONSTAT data, during the first three months of 2017, road transport recorded 0.7% 14 more passengers than in the same period of 2016, while road freight transport increased by 1.6% 15. In Q1 2017, railway passenger transport recorded a y-o-y 16 decline of 20.3% 17, while, over the same period, railway freight transport increased by 85.2%. Lower transport of passengers in railway transport in Q mostly came as a result of line cancellation of the night train Bar Belgrade Bar as a result works on Serbia railway infrastructure. Having in mind the importance of development of railway transport in terms of the functioning of the entire transport in Montenegro, in a Strategy for Railway Development was adopted in April In Q1 2017, air passenger transport recorded 202,783 passengers, or 13.5% more than in Q1 2016, while air freight transport grew 0.5%. The passenger turnover at airports, in relation with the corresponding period (first quarter), has been recording growth since This largely came as a result of a constant improvement of air transport accessibility of Montenegro, and the introduction of new flights by low cost airlines which already exist or are expected to start will contribute to further growth of passenger turnover in the forthcoming tourist season. Source: MONSTAT 14 Presented through number of passengers, while it increased by 9.6% expressed through passenger kilometres. 15 Presented through transported goods in thousand tonnes, while it increased by 11% presented in tonne kilometres. 16 Presented through number of passengers in thousands, while presented through passenger kilometres the decline was 22.9%. 17 Presented in thousand tonnes, while presented through passenger tonnes the increase was 102.3% th Meeting of the Government of Montenegro, item no

21 Total turnover in ports amounted to 556,791 tonnes, recording a 117% y-o-y increase, with an improved turnover structure, whereby exports accounted for 70.6% and imports accounted for 29.3% 19. In the observed period, exports increased by 274.2%, and imports increased by 7.6% Prices CPI inflation in Montenegro amounted to 0.5% in relation to December The rise in prices was mainly a result of a global oil prices increase that affected the price growth in the transport category (4.1%), as well as of an increase in the prices of numerous food products under the food and non-alcoholic beverages category (1.3%). In addition to oil price increase at the global level, the growth of prices in the transport category was also induced by higher excise duties on mineral oils following the adoption of the Law Amending the Law on Excise Taxes 20. Observation of consumer prices monthly trends, shows that the price increase was recorded in all three months, specifically 0.3% in January, and 0.1% in both February and March. Average consumer prices rate (the first three months of 2017 in relation to the same period of 2016) amounted to 2.4%, while at the annual level, prices increased by 2.7%. Graph 1.12 Source: MONSTAT Consumer prices Real Sector Developments In Q1, the most significant price growth of 4.1% was recorded in the transport category, with the highest increase of 9.5% recorded in the prices of fuels and lubricants for personal transport equipment while the highest positive contribution to total inflation (0.5 percentage points) came from the category food and non-alcoholic beverages with an increase of 1.3%. Within this category, the highest increase in prices was recorded by vegetable (8.8%), fruit (8.1%) and milk, cheese and eggs (1.7%), while the biggest decline of prices was recorded by food products n.e.c. 21 (-0.8%), meat (-0.6%) and non-alcoholic beverages (-0.5%). During this period, prices increased in the following categories: miscellaneous goods and services (0.8%), health (0.4%) and alcoholic beverages and tobacco (0.1%). Prices drop was recorded in the following categories: clothing and footwear by 3.3%, furnishing, household equipment and routine household maintenance by 0.8%, recreation and culture by 0.6%, and housing, water, electricity gas and other fuels by 0.5%. In March 2017, prices under communication, education and restaurants and hotels remained unchanged relative to December In the first three months of 2017, monthly core inflation stood below the official monthly inflation. Core inflation recorded a positive rate only in March, while the official monthly inflation during all three months recorded positive rate. Annual inflation in March was 2.7%, while annual inflation measured by the harmonized index of consumer prices stood at 2.8%. Annual prices growth of 3.8% in the food and non-alcoholic beverages 19 The sum of exports and imports does not give figure 100 due to the difference referring to the goods transit. 20 OGM, 1/2017, January Not classified elsewhere 21

22 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 1.13 Graph 1.14 Total and core inflation trends (monthly rate) Annual price changes in the category transport and food and non-alcoholic beverages in selected countries Source: Monstat and CBCG calculations Source: Monstat and the statistical offices of the selected countries category gave the largest contribution to the increase (1.3 percentage points) in the total annual inflation rate. In the euro area, annual inflation was 1.5%, whereby the greatest impact on inflation was recorded by transport fuel with an annual growth of 13.1%, fuel oil with an annual increase of 20.8% and fruit prices with a growth of 5.8%, i.e. telecommunication prices which recorded an annual decline of 1.4%, prices of package holidays with an annual decline of 3.9%, as well as prices of clothing with an annual decline of 0.4%. Table Share of selected categories in total inflation 22 Weights III 17/XII 16 Growth rate Contribution TOTAL Food and non-alcoholic beverages Alcoholic beverages and tobacco Clothing and footwear Housing, water, electricity gas and other fuels, Furnishing, household equipment and routine household maintenance Health care Transport Communication Recreation and culture Education Hotels and restaurants Other goods and services Source: MONSTAT and CBCG calculations 22 It should be noted that, regardless of the index changes, due to the weight structure, the contribution of the share of certain categories is not recorded before the second, i.e. third decimal. 22

23 In Montenegro, prices in the categories food and non-alcoholic beverages and transport gave the biggest contribution to the increase of annual inflation, and the positive rates in these categories were also recorded in the regional countries, except Macedonia where there was an annual decline of prices in the category food and non-alcoholic beverages, as seen in Graph The highest annual price growth in the category transport was recorded in Bosnia and Herzegovina (9%), while the highest price growth in the category food and non-alcoholic beverages was recorded in Montenegro (3.8%). During the first two months of 2017, there was an increase of oil prices compared to the last quarter of the previous year, while oil prices in March 2017 recorded a slight decline compared to December The decline of oil prices in March came as a result of concerns over the respect of obligations Graph 1.15 from the contract on the reduction of production of OPEC countries, as well as countries that are Oil prices, monthly growth rate not members of this group, higher than expected crude oil reserves in the USA, as well as strong recovery of shale oil production in that country. Regardless of a decline of oil prices in March, prices of the OPEC reference basket in Q1 on average amounted to 52.0 USD/barrel, which is 9.3% more in relation to the average price from the last quarter of the previous year. In Q1, the average price of Brent oil amounted to 53.7 USD/barrel, which is 8.6% more in relation to the average price from the last quarter of the previous year, mostly as a result of compliance with the contract signed at end-2016 between OPEC member countries, as well as some other countries that are not members of this group to lower production in H Source: MONSTAT and Monthly Oil Market Reports, OPEC Real Sector Developments In March 2017, producers` prices of manufactured products recorded 0.7% growth in relation to December This was due to the growth recorded in the sector of electricity, gas and steam supply of 5.3%. Prices decline was recorded in the mining and quarrying sector (-2.6%) and manufacturing industry (-2%). On the annual level, producers prices of manufactured products increased by 0.7%. Graph 1.16 Number of employed persons 1.4. Labour Market During the last six years, there is an upward trend in the number of employed persons, which continued in Q In Q1, the number of employees averaged to 178,318 and recorded a y-o-y increase of 4.2%. Fifteen out of the total of nineteen sectors recorded an increase in the number Source: MONSTAT 23

24 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 1.17 Employment structure, in % Source: MONSTAT Graph 1.18 Number of unemployed persons Source: Employment Agency of Montenegro of employees, and observed per individual sector, the highest growth was recorded in the following sectors: administrative and ancillary service activities (15.7%), construction (13.1%), professional, scientific and technical activities (6.5%), mining and quarrying (5.5%), accommodation and food service activities (4.9%), education (4.3%), human health and social work activities (4.2%), and transport and warehousing (4.1). The biggest decline in the number of employees was recorded in the real estate business sector (-4.6%) and agriculture, forestry and fishing sector (-4.2%). During the first three months of this year, the structure of employees, given through nineteen sectors, showed that the most employees came from the sector wholesale and retail trade, repair of motor vehicles and motorcycles (20.5%) and state administration and defence, compulsory social insurance (12%), while the lowest number of employees came from the mining and quarrying sector and real estate activities (0.9%, each). In Q1 2017, the number of registered unemployed persons averaged to 52,098 or 23.8% more than in the corresponding period of the previous year. In March 2017, it increased by 6.9% relative to December

25 As per the Employment Agency data, the unemployment rate in March 2017 amounted to 22.8%, being 4.52 percentage points higher than the one recorded in March MONSTAT publishes different unemployment rate quarterly in the Labour Force Survey which is in compliance with the EUROSTAT recommendations. Graph 1.19 shows trends of these two rates. According to the latest available data, the unemployment rate of young people (15 to 24 years) for 2016 remains high and amounted to 35.9% 23, therefore a number of programmes and projects aim to reduce the unemployment of younger population. One of these projects was initiated by the Employment Agency and the Montenegrin Employers Federation and was titled The Young are the Future of Montenegro. The project will be financed from the EU funds. Activities envisaged by this project will enable 100 unemployed persons to acquire practical training necessary for starting their own business. Graph 1.19 Unemployment rate trends Real Sector Developments In addition to the unemployment rate of the young people, there is a large unemployment in the northern part of the country which, according to the latest available data, amounts to 34.9%, while in the central and coastal region the unemployment rate is significantly lower and amounts to 13% and 9.6%, respectively 24. Aimed at increasing the employment rate in the northern part of Sources: Monstat and Employment Agency of Montenegro the country, the start of two programmes of the Employment Agency is very important: Professional training to work for an employer and Professional training for individual work. The first programme, with a total value of 150,000 euros, will include a total of 115 unemployed persons, out of which 60% of funds will be directed to the northern and less developed municipalities. In the second programmed, with a total value of 164,000 euros will include a total of 82 unemployed persons, out of which 49 will be from the northern and less developed municipalities. Wages and Salaries During the first three months of 2017, the average salary in Montenegro amounted to 765 euros, recording a y-o-y increase of 3.8%. The average salary without taxes and contributions amounted to 510 euros, or 4.1% more than the average salary without taxes and contributions in the same period of The highest salary without taxes and contributions in 2017 were recorded in the financial and insurance activities (919 euros), electricity, gas, steam and air conditioning supply (846 euros), information and communications (707 euros), real estate activities (687 euros), while the employees in the administrative and ancillary service activities sector recorded the lowest salaries (319 euros). The highest growth was recorded by wages and salaries without taxes and contributions in the sector health and social protection 11.3%, while the lowest growth of wages and salaries was recorded in the sector finan- 23 Source: MONSTAT - Labour force survey Ibid 25

26 Central Bank of Montenegro CBCG Macroeconomic Report Q cial and insurance activities 1.9%. Decline in the salaries without taxes and contributions was recorded in eight sectors, whereby the highest decline of 9% was recorded in the real estate operations sector, and the lowest in professional, scientific and technical activities sector of 0.2%. Table 1.4 Average wages and salaries without taxes and contributions, by sectors Wages and salaries without taxes and Index contributions Ø I - III 16 Ø I - III 17 ØI-III 17/Ø I-III 16 TOTAL Agriculture, forestry and fishery Mining and quarrying Manufacturing industry Electricity, gas, steam and air conditioning supply Water and waste management Construction Wholesale trade and retail trade Transport and warehousing Accommodation and food service activities Information and communications Financial and insurance activities Real estate activities Professional, scientific and technical activities Administrative and ancillary service activities Public administration and defence; compulsory social security Education Human health and social work activities Arts, entertainment and recreation Other service activities Source: MONSTAT Box 1.2 Average wages and salaries in the countries of the former Yugoslavia, March 2017 Data on the average wages and salaries in March 2017 showed substantial difference in the amount of income by individual countries of the former Yugoslavia. Wages and salaries without taxes and contributions in the observed countries, Slovenia, Croatia, Montenegro, Bosnia and Herzegovina, Serbia, and Macedonia recorded a y-o-y growth. The highest nominal growth in net annual wages and salaries was recorded in Croatia with growth of 5.2%, followed by Serbia (4.2%), Montenegro (4.1%), Slovenia (2.1%), Macedonia (1.8%) and Bosnia and Herzegovina, which recorded the lowest nominal increase of 1.4%. Slovenia is still the leader with regard to the amount of average net salaries, followed by Croatia, while the average for Montenegro is above the average for Bosnia and Herzegovina, Serbia and Macedonia. 26

27 Table 1 Wages and salaries in former Yugoslav countries, in euros (ranked as per net amount) Country Net wages and salaries Gross wages and salaries Slovenia 1,056 1,624 Croatia 812 1,093 Montenegro Bosnia and Herzegovina Serbia Macedonia Real Sector Developments Source: statistical offices and central banks of the selected countries 27

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29 MONETARY DEVELOPMENTS 02

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31 In 2017, the banking market was marked by high liquidity. Total liquid assets amounted to million euros at end-march this year, recording an annual increase of 2.3%. In 2017, total assets and liabilities of banks trended upward. The growth present on the assets side was mostly due to the increase in the monetary assets and deposits with depositary institutions, as well as in loans and placements in low-risk securities. The banks lending activity intensified over the first three months of this year. At end-march 2017, total banking loans amounted to 2,506 million euros, which is by 3.7% higher than at end-2016, and represents a y-o-y increase of 5.5%. Lending to the retail and the corporate sectors rose annually by 11.9% and 3.6%, respectively. However, although its share in total loans is not prominent, banks lending to the General Government sector in 2017 significantly increased, specifically by 73% at the annual level. Enhanced lending activity is also evident through an increase in new loans, which amounted to 290 million euros in the first three months of 2017, recording a y-o-y increase of 16%. Monetary Developments The quality of banking portfolio improved in Q1 2017, with a substantial reduction in the amount of non-performing loans (NPLs) and their share in total banking loans. At end -March 2017, NPLs amounted to million euros, which is a y-o-y decline of 12.8%. Non-performing loans accounted for 9.9% of total loans, their share in total loans declining by 2.09 percentage points at the annual level. The rise in lending activity accompanied by a mild decline in deposits resulted in an loans to deposits ratio increase. At end-march 2017, it amounted to 0.88, compared to end-2016 when it was Banks capital increased by 5.7% at the annual level. The first three months of the current year were marked by high solvency levels, with the solvency ratio of 15.90% at end-march. In 2017, weighted average effective interest rate on total banking loans declined, dropping to its record low at end-march. In March 2017, weighted average effective interest rate amounted to 7.21%, recording an annual decline of 1.20 percentage points. The weighted average effective interest rate on new loans amounted to 6.37% at end- March 2017, recording an annual decline of 1.67 percentage points. Deposit interest rates also trended downward as a result of a continuous growth of deposits, high liquidity in the banking system and the resulting lower banks demand for deposits. At end- March 2017, the weighted average effective deposit interest rate amounted to 0.89% recording an annual decline of 0.27 percentage points Banks Banks liquidity In Q1 2017, Montenegro s banking sector was marked by a high level of liquidity. According to the key liquidity indicators, in this period, all the banks regularly discharged of their current obligations 31

32 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 2.1 Aggregate daily liquidity indicator, end of month and maintained their daily and ten-day liquidity ratios above the statutory minimum 25 (Graph 2.1 and 2.2). In the observed period, daily and ten-day liquidity indicators declined, as was expected given the intensified lending activity. At the end of the observed period, the daily liquidity ratio amounted to 1.55 and it was lower in relation to the corresponding period of the previous year (1.81). In Q1 2017, the average daily liquidity indicator amounted to 1.74, which is a decline in relation to Q when it amounted to Source: Banks daily reports Graph 2.2 Aggregate ten-day liquidity indicator In the first three months of the current year, the average ten-day liquidity indicator amounted to 1.57, which is a decline in relation to the same period of 2016 when it amounted to Liquid assets of banks amounted to million euros at end-march In relation to end-2016, banks liquid assets declined by 17%, while at the annual level they increased by 2.3%. At end-q1 2017, the share of liquid in total assets amounted to 20.33%, which is a decline compared to end when it amounted to 24.53% as well as in relation to end-q1 2016, when it stood at 21.93% (Graph 2.3). At end-march 2017, loans to deposits ratio amounted to 0.88 increasing in relation to end-2016, when it amounted to 0.84 and declining compared to March 2016, when it amounted to 0.91 (Graph 2.4). Source: Banks ten-day reports 25 The Decision on Minimum Standards for Liquidity Risk Management in Banks (OGM 60/68) which prescribes the obligation of banks to maintain minimum daily (0.9) and ten-day (1.0) liquidity ratios is in effect. 32

33 Graph 2.3 Graph 2.4 Banks liquid assets (lhs) and the share of liquid assets in total assets (rhs) Loans to deposits ratio Monetary Developments Source: CBCG Aggregate balance sheet of banks At end-march 2017, total banks assets amounted to 3,796.9 million euros, recording a 6.6 million euros or 0.2% increase in relation to end-2016, and an annual increase of million euros or 10.4%. Assets increase was mainly a result of intensified lending, increase in banks investments in securities (both compared to year-end and annually), along with a million euros or 23% annual increase in monetary assets and deposit accounts with the central banks. Graph 2.5 Total assets, loans and deposits of banks, in thousand euros Bank s assets structure reveals that in the observed period, total banking loans accounted for the main share of 66%, while on the liabilities and capital side the main share of 75.3% was recorded by deposits (Graph 2.5). At end Q1 of the current year, the non-performing assets of banks amounted to million euros, which represents an increase of 832,000 or 0.3% in relation to end-2016 and an annual decline of 37 million euros or 10.7%. In this period, the share of non-performing assets in total assets of banks amounted to 8.16%, which is higher in relation to end-2016 (8.16%), and lower in relation to end-q (10.09%), (Graph 2.6). 33

34 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 2.6 Non-performing assets, in thousand euros (lhs), the share of non-performing in total banks assets, in % (rhs) In Q1 2017, banks recorded positive financial result in the total amount of 7.8 million euros, which is a y-o-y increase of 18.9%. Ten banks recorded profit, while five reported loss at end-q At end-q1, return on average assets (ROA) amounted to 0.83%, recording an increase in relation to the same period of 2016 when it amounted to 0.76% Banks lending activity In Q1 2017, total banking loans had a positive trend, increasing at an average monthly rate of 1.2%. At the end of the observed period, banking loans amounted to 2,506 million euros, which is by 90.1 million euros or 3.7% higher than at end-2016, and by million euros or 5.5% higher than at end- March Increase in loans, both in relation to end-2016 and annual, was recorded in eleven banks, whereas four banks recorded a decline. At end-q1, the main share of total granted banking loans referred to the retail sector (households) (41.8%), followed by nonfinancial institutions with the share of 41.5%, financial institutions with 10.1%, General Government with 6.4%, while 0.2% referred to the category other (Graph 2.7). Graph 2.7 Banking loans structure per sector in thousand euros The sectoral structure reveals that in relation to end-2016, growth was recorded by loans granted to the General Government (41.2%), retail sector (2.8%) and nonfinancial institutions (1.8), while other sectors recorded decrease, with the most significant decline in loans to financial institutions %1.4) and non-government and other non-profit institutions(1.1%). Annual growth was recorded in loans granted to the General Government (73%), non-government and other non-profit institutions (31.7%), retail sector (11.9%) and nonfinancial institutions (3%). Loans granted to the financial institutions sector recorded annual decline of 23.8%. Observation of monthly loan growth rate per sector reveals that the least oscillations in the trend of total loans granted were evident in the retail 34

35 and non-financial institutions sectors, while significant oscillations were present in the financial institutions sector (Graph 2.8). In addition, an evident increase in lending to the General Government sector was recorded in Q1 of this year. At end-q1 2017, resident legal persons debt arising from loans totalled at 1,159.2 million euros, which is by 7.8% more than at end-2016 and a y- o-y increase of 10.2%. In regards to industries, the main share of 31.4% was recorded by loans for the activities of wholesale and retail trade and repair of motor vehicles and motorcycles, followed by construction with the share of 14.4%, loans granted for public administration and defence; compulsory social security with 13.9%, accommodation and food service activities with 11.1%, while all other activities accounted for 29.2% (Graph 2.9). Graph 2.8 Growth of loans per sector, monthly rate, in % Monetary Developments In reference to purpose, the main share of banking loans referred to cash loans (22.2%), liquidity (18.3%), housing loans (13.2%), loans for the purchase of fixed assets (6.6%), loans for refinancing of obligations to other banks (6.1%) and loans for construction and renovation of buildings (4.9%). Banks funds were considerably less used through consumer loans, overdrafts, credit cards, loans for the preparation of tourist season, purchase of cars, purchase of securities and other purposes (Graph 2.10). Banking loans are mostly granted in euros for a period over one year. Therefore, at end-q1 of the current year, 2,346.6 million euros or 93.6% of total granted loans referred to loans granted in euros. In reference to maturity, a total of 1,926.5 million euros i.e. 76.9% of banking loans were long-term loans. Loans with maturities over three years amounted to 1,594.8 million euros and with the share of 82.8% they represented the main portion of long-term loans, and accounted for 63.6% of total loans. Graph 2.9 Loans to resident legal persons per industry, in thousand euros 35

36 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 2.10 Structure of banks loans per purpose, in % At end-march 2017, non-performing loans of banks amounted to million euros. In Q1 2017, non-performing loans recorded a downturn reflected in a decline of 465,000 euros or 0.2% in relation to end-2016, and a y-o-y decline of 36.6 million euros or 12.8%. At the end of the observed period, non-performing banking loans accounted for 9.9% of total banking loans, and their share in total loans declined by 0.39 percentage points compared to end-2016, i.e. by 2.09 percentage points on an annual basis. Graph 2.11 Non-performing loans and loan value adjustment, in thousand euros (lhs), share of non-performing loans in total loans, in % (rhs) At end-march, total value adjustments of the banking loans amounted to million euros and it accounted for 56.2% of banks non-performing loans. The percentage of coverage of non-performing loans by loan value adjustments declined in relation to end-2016 when it amounted to 57.1%, while it increased in relation to the same period of 2016, when it amounted to 50.7% (Graph 2.11). At the end of the observed period, past due loans amounted to million euros or 11.77% of total banking loans. Past due loans increased by 8.8% in relation to end-2016, while observed annually, they declined by 19.7%. New loans In Q1 2017, banks granted a total of 290 million euros of new placements in the form of loans. Banks lending activity expanded in the reporting period, which is reflected in the fact that the amount of granted loans increased by 40 million euros or 16% at the annual level. New loans maturity structure reveals that the main share (234 or 80.7%) of new loans was granted for a repayment period of over one year. The share of long-term loans in the new loans maturity structure increased in relation to the same period of 2016, when it amounted to 74% (Graph 2.12). 36

37 Graph 2.12 Graph 2.13 New loans, maturity structure, in thousand euros New loans, sectoral structure, in thousand euros Monetary Developments The structure of new loans per sector shows that the main portion of new loans referred to the loans granted to the nonfinancial and retail sectors. Thus, in the first three months of 2017, loans granted to the nonfinancial sector accounted for 43.1%, while retail sector accounted for 41.7%. These two sectors were followed by the General Government sector with the share of 14.2% (Graph 2.13). However, the sectoral structure also reveals that the surge in lending over this period was most prominent in the General Government sector (35.9 million euros), retail sector (27.3 million euros), while lending to the nonfinancial institutions sector declined (21.6 million euros) Earmarking structure of new loans shows that in the first three months of 2017, the main share of million euros or 40.1% of total new loans was granted for liquidity purposes, while the share of 78.2 million euros or 27% referred to cash loans Deposits In Q1 2017, funds deposited in banks were on a slight downturn, recording an average monthly decline at a rate of 0.2%. At the end of the observed period, deposits with banks amounted to 2,857.4 million euros, which is by 14.3 million euros or 0.5% lower in relation to end-2016, and represents a y-o-y increase of 247 million euros or 9.5%. In the structure of deposits of banks, the highest share was recorded by the retail and nonfinancial sectors deposits. These two sectors deposits accounted for 92.3% of total deposits at the end of the observed period. Compared to end-2016, retail deposits increased by 1.8%, while nonfinancial sector deposits declined by 4.5%. At the annual level, retail deposits increased by 8.4%, while nonfinancial sector deposits rose by 12.7%. General government is the third most important depositor in Montenegro s banking system with million euros or 4.8% of total deposits in banks. In relation to end-2016, the funds deposited by the General Government increased by 5.2%, while on the annual lever their growth was 20.2%. Deposits of financial institutions made up 1.4% of total funds deposited in banks, and they increased by 20.2% in relation to end-2016, while on annual level, they declined by 16.7% (Graph 2.14). 37

38 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 2.14 Deposits with banks per sector, in thousand euros At the end of the observed period, demand deposits accounted for 1,587.1 million euros or 55.5%, of total deposits while 1,253 million euros or 43.9% referred to time deposits. Minor part of banks deposits (0.6%) referred to funds in the escrow account. In relation to December 2016, the structure of time deposits shows a slight change reflected in the increased share of deposits with maturity up to one year, and consequential decline in the share of long-term deposits. Thus, at end-march 2017, the share of long-term in total deposits amounted to 21.6%, recording an annual decline of 8.8 percentage points. Nevertheless, the increase in the share of demand deposits in the maturity structure of deposits is more prominent given their annual increase of 5.4 percentage points. At the same time, the share of short-term deposits in total deposits recorded y-o-y increase of 2.9 percentage points (Graph 2.15). The share of deposits and borrowings in loans analysed per maturity indicates that 46.1% of loans granted for a period of over one year were covered by sources of financing (in the form of deposits and borrowings) with the same maturity. On the other hand, total demand deposits with banks were seven times higher than total banks receivables arising from demand deposits placed with other banks, while banks short-term deposits and borrowings were two times higher than banking loans granted for a period up to one year (Graph 2.16). Graph 2.15 Graph 2.16 Maturity structure of deposits, in % Share of deposits and borrowings in total banking loans per maturity, 31 March 2017, in % 38

39 Retail and corporate sectors Retail sector Total debt of the retail sector arising from loans taken from banks amounted to 1,046.3 million euros at end-march This sector s debt arising from loans increased by 28.3 million or 2.8% compared to end-2016, i.e. by 111 million euros or 11.9% on an annual basis. Loans to this sector grew at an average monthly rate of 0.9% during the first three months of this year. Retail sector borrowed mainly from banks, with loan maturity of over one year. At end-march 2017, long-term loans accounted for 96.4% of total loans granted to this sector. With regard to loan type, at end-march of this year, the main share of million euros or 52.9% of total retail loans referred to cash loans. In addition to these loans, a significant share in total retail loans granted referred to earmarked loans (39.7%), with the main portion (76.9%) referring to housing loans. At end-q1 2017, mortgage loans made up 5.4% in this sector s total debt towards banks. Debt arising from credit cards accounted for 1.8%, while a minor portion of debt referred to lease operations (0.2%). Monetary Developments At the end of this quarter, debt per capita amounted to 1,682 euros, which is by 2.8% higher than at end-2016, and by 11.9% higher than in March Analysis of new loans reveals that the banks lending activity to the retail sector expanded in the first three months of the current year when compared to the same period of Thus, in the observed period a total of million euros of new loans was granted, which was by 27.3 million euros or 29.1% more than in the same period of the previous year. In terms of purpose of the new loans, retail sector mainly applied for cash loans (64.1%), followed by housing purchase and renovation loans (9.7%) and loans for liquidity (9.4%), while the remaining 16.8% of new loans referred to all other purposes. In the total amount of new loans granted to this sector in the first three months of 2016, the main share of 97.1% referred to loans with maturity of over one year (Graph 2.17). At end-march 2017, retail sector deposits amounted to 1,561.6 million, which is by 27.4 million euros or 1.8% more than at end-2016 and a y-oy increase of million euros or 8.4%. The growth of retail deposits intensified in relation to the same period of 2016, which is indicated by higher average monthly growth rate of these deposits over the first three months of the current year (0.6%) compared to the same period of the previous year (0.02%). Graph 2.17 New retail loans, maturity structure, in thousand euros At end-march 2017, demand deposits accounted for 48.3% of total retail deposits, short-term deposits made up 26.1%, while 25.6% referred to funds deposited for a period over one year. Longterm retail deposits recorded an annual decline of million euros or 22.1%, demand deposits 39

40 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 2.18 Graph 2.19 Retail deposits, maturity structure, in % Loans, deposits and net savings of the retail sector, in thousand euros increased by million euros or 25.2%, while short-term deposits increased by 82.7 million euros or 25.5% at the annual level (Graph 2.18). At end-q1 2017, retail sector net savings amounted to million euros, being by 847,000 euros or 0.2% lower than at end-2016, while on annual level it increased by 9.8 million euros or 1.9% (Graph 2.19). Loans to deposits ratio for this sector amounted to 0.67 at the end of the observed period recording a mild uptrend in relation to end-2016 when it amounted to 0.66, as well as in relation to end-q1 2016, when it amounted to Corporate sector At end-q the corporate sector reported debt arising from loans in the total amount of million euros, which accounts for 38.9% of total banking loans granted. At the end of the observed period, corporate loans were by 36.5 million euros or 3.9% higher than at end-2016, while at the annual level they increased by 34.2 million euros or 3.6% (Graph 2.20). Comparison of new banking loans granted in the first three months of 2017 to those granted in the same period of 2016 reveals that banks lending to the corporate sector declined. In the observed period banks granted a total of million euros of new loans, which is a y-o-y decline of 5.9 million euros or 4.6%. The structure of total new corporate loans reveals that loans granted for a period of over one year accounted for the main share of 61.4% (Graph 2.21). 40

41 Graph 2.20 Graph 2.21 Corporate loans, in thousand euros (lhs), monthly change, in % (rhs) New corporate loans, maturity, in thousand euros Monetary Developments Box Debt arising from frozen accounts A total of 82,589 accounts of legal persons and entrepreneurs were registered in the Central Registry of Accounts at end-q In total number of registered accounts, 18.9% or 15,595 were frozen. The number of frozen accounts rose by 1.1% in relation to end-2016 (165 frozen accounts), and by 3.3% (495 frozen accounts) on annual level (Graph 1) 26. Graph 1 Number of legal persons and entrepreneurs with frozen accounts, amount of debt arising from frozen accounts (in thousand euros) At end-march of this year, total debt arising from frozen accounts amounted to million euros, which is a positive trend reflected in its decline of 8.2 million euros or 1.3% in relation to end Debt in the frozen accounts recorded a y-o-y increase of 73.3 million euros or 13.4% (Graph 1). Source: CBCG 26 It should be considered that this number also includes the following entities: legal persons and entrepreneurs that were deleted from the CRPS but the accounts of which have not yet been deleted from the Central Registry of Transaction Accounts; legal persons that fail to submit annual financial statements although thy are legally obligated to, and legal persons and entrepreneurs that have made no tax obligations or payments in the previous year. 41

42 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 2.22 Net debt of the corporate sector, in thousand euros Corporate sector was the second most important depositor in Montenegro s banking system. At end-march 2017, total amount of corporate sector s funds deposited in Montenegro s banks stood at 926 million euros, making up 32.4% of total deposits. Corporate deposits decreased by 41.7 million euros or 4.3% in relation to end- 2016, while their increase at the annual level was million euros or 14.2%. In the first three months of 2017, corporate loans exceeded this sector s deposits (with the exception of January). In March 2017, the net debt of the corporate sector amounted to 47.8 million euros at the end of the observed period, declining by 81 million euros or 62.9% in relation to end-q (Graph 2.22). For this sector the loans to deposits ratio was 1.05 at end of Q1 2017, and it deteriorated relative to end-2016 when it amounted to 0.97, yet it improved relative to March 2016 when it amounted to Banks foreign assets and liabilities At end-march 2017, foreign assets of banks amounted to million euros, dropping by 37.3 million euros or 7.1% compared to end-2016, while their y-o-y decline amounted to 60.8 million euros or 11%. Graph 2.23 Structure of banks foreign assets, in thousand euros In relation to end-2016, the decrease in foreign assets was a result of a decline of 17.8 million euros or 20.3% in banking loans with non-residents, and partly due to a decline in cash in the total amount of 11 million euros or 7.7%. Other positions of foreign assets also declined, specifically, deposits by 4.5 million euros or 1.8%; securities other than shares by 2.8 million euros or 6.8%, as well as all other receivables from nonresidents in the total amount of 1.3 million euros or 16.3%. Annual downturn in foreign assets was mainly a result of a decline in deposits of 78.6 million euros or 24.4% and a 9.1 million euros or 11.6% decline in loans. At the same time, annual increase was recorded in cash, which rose by 22.1 million euros or 20.2%, securities other than shares by 3.1 million euros or 8.8%, and in other receivables category by 1.7 million euros or 34.9% (Graph 2.23). 42

43 The most important category in the structure of foreign assets were banks deposits with foreign banks, which amounted to million euros and accounted for 49.7% of foreign assets at end-march At end-q1 2017, foreign liabilities of banks amounted to 839 million euros recording an increase of 21.3 million euros or 2.6% compared to end-2016 and an annual increase of 90.6 million euros or 12.1%. Foreign liabilities structure at end-q shows that non-residents deposits accounted for the main share of 70.4%, while 29.2% referred to banks borrowings, and the remaining 0.4% to other foreign liabilities items (Graph 2.24). Increase in foreign liabilities in relation to end was due to the non-residents borrowings increase in the amount of 11.8 million euros or 5.1%, as well as to an increase in non-residents deposits of 9.8 million euros or 1.7%. At the same time, decline was recorded only in the category other liabilities of non-residents, namely by 309,000 euros or 8.3%. Graph 2.24 Structure of banks foreign liabilities, in thousand euros Monetary Developments At the annual level, the recorded foreign liabilities increase was a result of a rise of 49.5 million euros or 25.3% in the borrowings of banks, and an increase of 42.1 million euros or 7.7% in nonresidents deposits. Decline was recorded in other liabilities in the total amount of 966 thousand euros or 22.1%. In Q1 2017, the most important foreign source of financing of banks were non-residents deposits, which were on an uptrend in the observed period. In the structure of foreign deposits, the main share referred to deposits of natural person nonresidents, which recorded constant growth over the observed period. In addition, the funds deposited in domestic banks by foreign companies increased. A minor portion of foreign deposits was deposited by foreign financial institutions and other sources (Graph 2.25). Graph 2.25 Non-residents deposits per sector, in thousand euros In Q1 2017, foreign assets were consistently lower than foreign liabilities, and at the end of the observed period, net foreign assets amounted to million euros (Graph 2.26). This was mainly due to the above mentioned decline in the deposits of domestic banks abroad and a decline in receivables arising from investment in securities of non-residents on one hand, and non-residents deposits growth in domestic banks on the other. 43

44 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 2.26 Banks net foreign assets, in thousand euros Graph 2.27 Share of foreign assets, foreign liabilities and net foreign assets in total assets and liabilities of banks, in % Foreign liabilities to total assets and liabilities of banks ratio shows that non-residents financed 22.1% of banks total assets, while 12.9% of banks assets referred to banks receivables from non-residents. The gap between foreign assets and foreign liabilities of banks amounted to -9.2% at end-march 2017 (Graph 2.27) Banks capital At end-march 2017, total banks capital amounted to million euros, recording an increase of 9.2 million euros or 1.9% in relation to end-2016 and a y-o-y increase of 27 million euros or 5.7%. Capital increase was induced mainly by recorded positive financial result (Graph 2.28). Graph 2.28 Total capital of banks and financial result, in thousand euros At end-march 2017, ten banks recorded an increase in total capital in relation to end-2016, while all other banks recorded a decline. The average monthly increase in capital amounted to 0.6% in the reporting period. The main share in the ownership structure of banks capital referred to capital from foreign sources with 79.9%, followed by domestic private capital with 17.9%, while the government had a share of only 2.2% in the total capital of banks. Total financial result at end-q amounted to 7.8 million euros. At end-q1 2017, ten banks reported profit, while five banks reported loss (Graph 2.29). 44

45 Graph 2.29 Graph 2.30 Aggregate financial result, in thousand euros Total banks capital (lhs) in thousand euros and solvency ratio (rhs), in % Monetary Developments In Q1 2017, the solvency ratio of the banking system was above the statutory minimum of 10%. At period-end, the solvency ratio stood at 15.90% and recorded a decline compared to end-2016, when it amounted to 16.07%, while it increased in relation to the same period of 2016, when it was 15.74% (Graph 2.30). Statutory solvency ratios differ among the countries of the region. In Serbia, the prescribed solvency ratio amounts to 12%, whereas in Croatia and Macedonia it amounts to 8% (Table 2.1). Table 2.1 Solvency ratio, March 2017 Country Prescribed solvency ratio Montenegro 10% Serbia 12% Croatia 8% Macedonia 8% At the end of the observed period, return on average equity (ROE) of the banking system was positive, and it amounted to 6.41%. The ROE ratio significantly improved in relation to the same period of 2016 when it amounted to 5.72%. This ratio was positive in ten banks, and negative in five (Graph 2.31). 45

46 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 2.31 Aggregate ROE trends, in % Graph 2.32 Allocated reserve requirement (rhs) and total deposits (lhs), in thousand euros Banks reserve requirement At the end of the observed period, allocated reserve requirement amounted to million euros, recording an increase of 1.9 million euros or 0.7% in relation to end-2016, and a y-o-y increase of 22.2 million euros or 9% (Graph 2.32). Box Reserve requirement as an instrument of the CBCG s monetary policy Reserve requirement represents an underlying instrument of the CBCG s monetary policy. In the application of this instrument the degree of monetary policy restrictiveness is defined by the reserve requirement rate, which can be uniform or differentiated, as well as by the base on which the rate is applied. Pursuant to the Decision adopted in March this year 27, the base used for calculating the reserve requirement rate remained unchanged, and consisted of demand deposits and time deposits. Pursuant to the 27 Decision on Bank Reserve Requirement to be Held with the Central Bank of Montenegro (OGM 15/17) 46

47 said Decision, banks shall calculate the reserve requirement by applying the reduced rate of 7.5% on a part of the base comprised of demand deposits and deposits with agreed maturity up to one year (365 days) and the rate of 6.5% on a part of the base comprised of deposits with agreed maturity over one year (over 365 days). Thus, releasing a part of the funds of banks used for allocation/maintenance of the reserve requirement is aimed at boosting the increase in lending activity of banks towards the private sector. On the other hand, the periods of allocation and maintenance the reserve requirement with the CBCG were changed from weakly to monthly. Considering the fact that deposits of banks showed no larger weakly oscillations in the previous period, the prolongation of the maintenance period shall enable better management of the CBCG funds. Pursuant to the above mentioned Decision, banks shall deposit the calculated reserve requirements to the reserve requirement account in the country and/or to the Central Bank accounts abroad, and they may not allocate or deposit reserve requirement in any other form. The period during which the banks were able to allocate a part of their reserve requirement in the form of T-Bills bought in 2016 expired as at 31 March Monetary Developments Amending the Decision on Bank Reserve Requirement to be Held with the Central Bank of Montenegro in this manner, the instrument of reserve requirement is being gradually harmonised with the ECB regulation governing this area. The effective reserve requirement rate, measured by allocated reserve requirement and total deposits ratio, amounted to 9.37% at end-q1 2017, recording an increase in relation to end-2016 when it amounted to 9.25%, and a decline in relation to the same period of 2016 when it stood at 9.40% (Graph 2.33). Graph 2.33 Reserve requirements to total deposits and borrowings ratio, in % At end-q1 2017, reserve requirement to deposits including borrowings ratio amounted to 8.42% recording an increase in relation to end-2016, when it amounted to 8.35%, and a decline in relation to the same period of 2016, when it amounted to 8.58% (Graph 2.33). In the total amount of allocated reserve requirement at end March-2017, 51.8% was allocated to reserve requirement accounts in the country, while 48.2% was allocated to the CBCG account abroad. In Q1 2017, none of the banks used reserve requirement for liquidity, and all banks allocated reserve requirement in the prescribed amount. 28 Pursuant to the Decision Amending the Decision on Bank Reserve Requirement to be Held with the Central Bank of Montenegro (OGM 33/16) 47

48 Central Bank of Montenegro CBCG Macroeconomic Report Q Banks interest rates Lending interest rates On total loans granted The weighted average nominal and effective interest rates on total loans granted continued a declining trend from At end Q1 2017, both rates reached their record low values. Graph 2.34 Lending interest rates on total loans at the system level, annual level, in % The weighted average nominal interest rate (WA- NIR) on total banking loans amounted to 6.52% in March 2017 and recorded a decline of 0.22 percentage points in relation to end-2016, and an annual decline of 0.99 percentage points. During the first three months of 2017, the weighted average effective interest rate (WAE- IR) on total loans granted was also on a constant downward trend. In March, this rate amounted to 7.21% being by 0.24 percentage points lower in relation to December 2016, and recording an annual decline of 1.11 percentage points (Graph 2.34). Graph 2.35 The WAEIR on loans per maturity, annual level, in % In reference to maturity, the downward trend is also present in interest rates on short-term and long-term loans, with a more significant decline recorded in interest rates on long-term loans. In March 2017, WAEIR on short-term loans reached the level of 5.71% being 0.06 percentage points below the level recorded at end-2016, i.e. by 1.95 percentage points below the level recorded in March In March 2016, WAEIR on longterm loans amounted to 7.35%, declining by 0.27 percentage points and 1.03 percentage points in relation to December and March, respectively (Graph 2.35). Sectoral analysis reveals that in Q1 2017, WAE- IR declined in all sectors except in other, which slightly increased in relation to end Thus in relation to December and March 2016, the most significant decline of respective 0.39 percentage points and 1.31 percentage points was recorded in the WAEIR on loans granted to nonfinancial institutions (Graph 2.36). 48

49 Graph 2.36 The WAEIR on loans per sector, annual level, in % Monetary Developments On new loans In the observed period, the weighted average nominal and effective interest rates on new loans oscillated, while both rates trended upwards. The weighted average nominal interest rate (WANIR) on new banking loans amounted to 5.67% in March 2017 and recorded an increase of 0.11 percentage points in relation to end-2016 and an annual decline of 1.45 percentage points. At the same time, the weighted average effective interest rate on new loans of banks amounted to 6.37% and recorded an increase of 0.10 percentage points in relation to end-2016, i.e. a decline of 1.67 percentage points in relation to March 2016 (Graph 2.37). Graph 2.37 Graph 2.38 Interest rates on new loans at the system level, annual level, in % Interest rates on new loans per maturity, annual level, in % 49

50 Central Bank of Montenegro CBCG Macroeconomic Report Q In regards of maturity, WAEIR on short-term loans continuously increased, while WAEIR on longterm loans oscillated to a large extent. In March of this year, WAEIR on short-term loans amounted to 7.42%, recording an increase of 1.71 in relation to end-2016, and an annual decline of 0.88 percentage points. At the same time, interest rate on long-term loans amounted to 6.13%, recording a decline of 0.48 percentage points in relation to December 2016, and a decline of 1.84 percentage points in relation to March 2016 (Graph 2.38). Graph 2.39 Interest rates on new loans per sector, in % Graph 2.40 The WAEIR on deposits per maturity, annual level, in % Sectoral analysis shows that interest rates on new loans granted to the corporate sector fluctuated over the first three months of 2017, while rates in the retail sector increased. In March 2017, WAE- IR on loans granted to natural persons amounted to 8.23% increasing by 0.37 percentage points in relation to December 2016, and recording an annual decline of 0.84 percentage points. At the same time, the WAEIR on loans to the corporate sector stood lower than the bank s rates on loans to natural persons. This rate amounted to 6.51% in March this year, being by 0.30 percentage points above that recorded in December, and by 0.95 percentage points below the rate recorded in March 2016 (Graph 2.39). In terms of the purpose of granted loans in the first three months of 2017, the highest WAEIR was recorded on loans granted for the purchase of vehicles (12.05% in January), followed by loans for the purchase of vehicles (8.86% in March), cash loans (8.71% in March), and for preparation of tourist season (8.60% in March). The lowest rates on new loans were recorded for consumer goods purchase (1.07% in January) and purchase of shares (4.65% in February) Deposit interest rates The weighted average effective interest rate on deposits continued its downward trend into the first quarter of 2017, when it also reached its record low. In March 2017, this rate amounted to 0.89% being lower in relation to December as well as March of 2016, by 0.04 and 0.27 percentage points, respectively. In reference to maturity, compared to December 2016, increase was recorded in the interest rate on deposits with maturity up to 3 months increased (0.03 percentage points) and in deposits with ma- 50

51 turity from 3 months up to one year (0.01 percentage points). Interest rates for all other maturities of deposits were lower at the end of Q1 compared to end-2016, with the most significant decline of 0.18 percentage points recorded in the interest rate on deposits with maturity from 3 up to 5 years. Annual growth was recorded in rates on deposits with maturity up to 3 months (0.10 percentage points) and over 5 years (0.24 percentage points). Other rates recorded annual decline, with the most prominent decline of 0.44 percentage points recorded in interest rate on deposits with maturity from one up to three years (Graph 2.40). Graph 2.41 The WAEIR on retail and corporate deposits, in % Monetary Developments WAEIR on retail (natural persons ) deposits declined, while WAEIR on corporate (legal persons ) deposits increased over the observed period (Graph 2.41). In March 2017, WAEIR on retail deposits amounted to 1.14% recording a decline of 0.09 percentage points in relation to end-2016, and an annual decline of 0.38 percentage points. In reference to maturity, the highest interest rates were recorded on retail deposits with maturity over five years. WAEIR on corporate deposits amounted to 0.58% recording an increase of 0.01 percentage points in relation to end-2016, and a y-o-y decline of 0.14 percentage points. Observed per maturity, the highest interest rates were recorded on corporate deposits with maturity over five years. In March 2017, the difference between lending and deposit interest rates (interest rate spread) trended downwards (Graph 2.42). At end-q1, the difference between lending and deposit interest rates (interest rate spread) on total loans and deposits of banks amounted to 6.32 percentage points, decreasing in relation to end-2016 when it amounted to 6.52 percentage points as well as in relation to March 2016 when it amounted to 7.16 percentage points. Graph 2.42 The WAEIR on loans and deposits, and interest rate spread, in % 2.3. Micro-credit financial institutions Total assets and liabilities of micro-credit financial institutions (MFIs) amounted to 57.2 million euros at Q1 2017, increasing by 1.6 million euros or 3% relative to end-2016, and by 4.4 million euros or 8.4% at the annual level. 51

52 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 2.43 MFIs loans per sector, in thousand euros At end-march 2017, total MFIs loans amounted to 56.1 million euros, which is by 2.1 million euros or 3.9% more than at end-2016, i.e. by 4 million euros or 7.6% more at the annual level. Allocation per sector shows that the main share (95.3%) of MFIs loans referred to retail sector, while 2.6% referred to nonfinancial institutions, and the remaining 2.1% referred to financial institutions (Graph 2.43). 29 In Q1 2017, MFIs granted new loans in the total amount of 13.4 million euros. Lending activity intensified in the observed period, recording a y- o-y increase of 1.8 million euros or 15.2% in new loans. The largest part of new placements of MFIs (96.9%) was approved to the retail sector. With regard to the structure of total liabilities of MFIs, borrowings accounted for the main share (57.2%), while total capital accounted for 39.1% and other liabilities made up 3.7% of total assets and liabilities. MFIs capital amounted to 22.4 million euros as at end-q1 2017, which is by 90 thousand euros or 0.4% more than at end-2016, and by 174 thousand euros or 0.8% less than in March Capital from donations accounted for 68.5% of total capital, while retained earnings made up 27.7% and profit from the current year made up 3.8%. At end-q1 2017, MFIs borrowings amounted to 32.7 million euros, accounting for an increase of 1.6 million euros or 5.3% in relation to December, and a y-o-y increase of 4.6 million euros or 16.4%. The main share (89%) of MFIs borrowings was taken from foreign financial institutions, while 11% referred to borrowings taken from domestic banks. At the aggregate level, in Q1 2017, MFIs reported net profit of 836 thousand euros, which represents a y-o-y increase of 40.5%. In 2017, four MFIs recorded positive financial result, while two reported negative results MFIs interest rates On total loans granted Even though interest rates on total MFIs loans recorded a decline over the reporting period, the decline was not as significant as in the case of the interest rates of banks (Graph 2.44). In March 2017, the weighted average nominal interest rate (WANIR) on total MFIs loans amounted to 20.51% and it was by 0.05 and 0.30 percentage points lower in relation to December and March 2016, respectively. On the other hand, the weighted average effective interest rate (WAEIR) amounted to 24.37%, recording a decline of 0.06 percentage points in relation to December, and an annual decline of 0.06 percentage points. 29 MFIs' deposits in domestic banks 52

53 At end-q1 2017, the WAEIR on total short-term loans amounted to 26.48%, while the value of this rate on long-term loans was 24.21%. The WAEIR on short-term loans recorded respective increases of 0.32 percentage points and 0.06 percentage points in relation to December and March of the previous year. On the other hand, rate on longterm loans recorded respective declines of 0.09 and 0.32 percentage points in relation to longterm loans and March of The WANIR on MFIs loans to the corporate sector amounted to 17.99%, while the WAEIR on these loans amounted to 22.43%. Both rates declined in relation to end-2016, by 0.27 percentage points and 0.04 percentage points, respectively. At the annual level, WANIR on corporate loans declined by 0.10 percentage points, while WAEIR increased by 0.44 percentage points. Graph 2.44 The WANIR and the WAEIR on total MFIs loans, annual level, in % Monetary Developments The WANIR and WAEIR on retail loans amounted to 20.57% and 24.43%, respectively, whereby the nominal rate was by 0.04 percentage points lower than in December, and by 0.28 percentage points lower at the annual level, while the effective interest rate declined by 0.05 percentage points or 0.28 percentage points, respectively. On new loans In Q1 2017, the WANIR and WAEIR on new MFIs loans recorded oscillations and a downward trend (Graph 2.45). In March 2017, WANIR on new MFIs loans amounted to 20.61%, recording a decline of 0.15 percentage points in relation to end-2016, and an annual decline of 0.39 percentage points. At the same time, WAEIR amounted to 24.67% recording a decrease of 0.12 percentage points in relation to December, as well as a decrease of 0.55 percentage points in relation to March Graph 2.45 Interest rates on new loans, system level, annual level, in % In reference to maturity, the WAEIR on new short-term loans amounted to 26.53% recording an increase of 0.56 percentage points in relation to December 2016 and an annual decline of 0.05 percentage points. In addition, the WAEIR on loans with maturity over one year amounted to 24.34%, recording respective declines of 0.26 percentage points and 0.63 percentage points in relation to both December and March

54 Central Bank of Montenegro CBCG Macroeconomic Report Q In regards of the purpose of the loans, in Q1 2017, the highest WAEIR rate was on loans for the purchase of land (30.25% in February) and for the purchase of consumer goods (26.83% in January). Box 2.3 Comparison of banks and MFIs interest rates on loans Banks and MFIs interest rates on loans differ significantly. Specifically, banks WANIR on total loans amounted to 6.52% and WAEIR amounted to 7.21%, while the same rates with MFIs amounted to 20.51% and 24.37%, respectively. Banks granted short-term loans at the WAEIR of 5.71%, while MFIs WAEIR was 26.48%. In regards to long-term loans, banks WAEIR was 7.35%, while the same rate of MFIs added up to 24.21% (Table 1, Graph 1). Table 1 Banks and MFIs interest rates on total loans, March 2017, in % Retail Corporate Total loans Short-term Long-term Total Banks MFIs Banks MFIs Banks MFIs WANIR WAEIR WANIR WAEIR WANIR WAEIR Graph 1 Banks and MFIs interest rates on total loans, in % There are large discrepancies with regard to interest rates on new loans granted by banks and those granted by MFIs. Specifically, WANIR on banks new loans amounted to 6.05% and WAEIR amounted to 7.09%, while the same rates with MFIs amounted to 20.61% and 24.67%, respectively. 54

55 Banks granted short-term loans at the WAEIR of 7.95%, while the same rate with MFIs amounted to 26.53%. The WAEIR on long-term loans with banks amounted to 6.36%, while with MFI this rate was 24.34% (Table 2 and Graph 2). Table 2 Retail Corporate Total loans Banks and MFIs interest rates on new loans, March 2017, in % Short-term Long-term Total Banks MFIs Banks MFIs Banks MFIs WANIR WAEIR WANIR WAEIR WANIR WAEIR Monetary Developments Graph 2 Banks and MFIs interest rates on new loans, in % 55

56

57 MONEY MARKET 03

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59 During the first quarter of 2017, three auctions of Treasury bills with maturity of 182 days and one auction with maturity of 91 days were held. In Q1 2017, the Ministry of Finance issued T-Bills in the total amount of 92.7 million euros, which represents an increase of 9.4% compared to the corresponding period of the previous year. This shows there was a greater need for short-term financing from domestic market. During the first three months of 2017, total demand for Treasury bills exceeded the value of issued Treasury bills by 50.1%. In the reporting period, demand for T-bills amounted to million euros and was by 27.7% higher y-o-y. Money Market In the first quarter of 2017, T-bills were sold in the amount of million euros, which means that sold T-bills exceeded the total value of issued T- bills by 11.8 million euros 30. Buyers at all T-bills auctions were Montenegrin banks while the Deposit Protection Fund was the buyer at three auctions. In Q1 2017, the total amount of sold T-Bills was 12% lower compared to the corresponding period of the previous year. Graph 3.1 T-bills sold and corresponding interest rate, Q The increasing trend in weighted average interest rate on T-bills, which begun in 2016, has continued in Q Thus, realized weighted average interest rate on total sold treasury bills amounted to 2.50% in the first quarter of 2017, which was 1.30 percentage points more than the weighted average interest rate on sold T-bills in the first quarter of the previous year. Total government debt based on T-bills sold amounted to 93.4 million euros as at 31 March 2017, and in relation to the corresponding period of the previous year it was higher by 11.9 million euros or 11.9%. Source: CBCG 30 At auctions held during the first quarter of 2017, the Ministry of Finance issued treasury bills with maturity of 56 and 182 days, with the possibility of selling a larger number of T-bills than the number which was issued. 59

60

61 CAPITAL MARKET 04

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63 In Q1 2017, Montenegro Stock Exchange recorded turnover in the amount of 16 million euros, which is a y-o-y increase of 58.5%. Graph 4.1 Structure of turnover at the Montenegro Stock Exchange, first quarter of 2015, 2016 and 2017 The average monthly turnover in the first quarter of 2017 amounted to 5.3 million euros, which is more than the average monthly turnover in the same period of 2016 (3.4 million euros). During the reporting period the total number of transactions amounted to 1,692 and recorded a y-o-y increase of 24.6%. Overall turnover in Q was made through primary and secondary trade. Capital Market Turnover structure In the structure of turnover in the first quarter of 2017, the largest share of 45.2% was recorded by turnover with various types of bonds, which is 23.6 percentage points more than in the same period last year. The share of turnover with different types of shares amounted to 38.6%, recording a decrease of 26.4 percentage points on an annual basis. The remaining 16.2% of total turnover referred to investment funds shares, which increased by 2.8 percentage points. Source: Montenegro Stock Exchange Graph 4.2 Structure of turnover at the Montenegro Stock Exchange, first quarter of 2014, 2015 and 2016 The total turnover of companies shares in the amount of 6.2 million euros was executed through transactions representing 78.2% of total transactions in the reporting period. Turnover in companies shares was 5.9% lower in relation to Q1 2016, while the number of unrealized transactions increased by 20.6%. In the first quarter of 2017, mostly traded were shares of Jugopetrol AD and Port of Bar. Source: Montenegro Stock Exchange 63

64 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 4.3 Graph 4.4 Turnover and number of transactions of companies shares, first quarter of 2015, 2016 and 2017 Turnover and number of transactions of joint investment funds, first quarter of 2015, 2016 and 2017 Source: Montenegro Stock Exchange In Q1 2017, turnover in joint investment funds (JIF) shares amounted to 2.6 million euros and it was carried out through 249 transactions. Realized turnover of JIF shares was 91.8% higher than in the first quarter of Significant increase in turnover of joint investment funds shares came as a result of trade in shares of close-end investment fund Trend, which represented 99.8% of the total turnover of shares of all JIF during the first quarter. Graph 4.5 Turnover (left scale) and number of bonds transactions (right scale), first quarter of 2015, 2016 and 2017 Bonds turnover in Q totalled at 7.2 million euros, which represents a y-o-y increase of 231.4%. Total bonds turnover was realized through 7 transactions. The main share of bonds turnover, referred to government bonds with 98.1%, followed by corporate bonds with 1.8% while 0.1% related to frozen foreign currency bonds turnover. Stock exchange indices Source: Montenegro Stock Exchange During the first quarter of 2017, stock index Monex had a positive trend. The value of the index at the end of the first quarter amounted to 11, and was index points or 3.7% higher than the value achieved at the end of the previous year. Compared with the same period of the previous year, 64

65 the value of this index is higher by index points or 4.7%. Graph 4.6 Montenegro Stock Exchange indices On the other hand, investment funds index Monex PIF also recorded a constant increase during the first three months of At end-march 2017, the value of this index stood at 2, index points and it increased by index points or 2.9% compared to the end of 2016, while compared to March 2016 it grew by index points or 6.7%. Index MNSE10 at the end of the first quarter was index points and it recorded a growth of index points or 6.2% compared to the end of the previous year, while compared to the same period of the previous year, it recorded a slight drop of 0.19 index points. Source: Montenegro Stock Exchange Capital Market Block trade During the first three months of 2017, Montenegro Stock Exchange recorded three block trades with a total value of euros. Capitalisation Market capitalisation at the Montenegro Stock Exchange amounted to 2,910.6 million euros at end-march In relation to end-2016, stock exchange capitalisation increased by 1.1%, while at the annual level it increased by 2.4%. Liquidity measured by turnover ratio at Montenegro Stock Exchange amounted to at end March Graph 4.7 Capitalisation, EUR million Source: Montenegro Stock Exchange Box Regional stock exchanges, selected operating indicators During the first quarter of 2017, the majority of stock exchanges in the region recorded a fall in turnover, while one stock exchange recorded decline compared to the same period of the previous year. The biggest increase in the total turnover was recorded by the Belgrade Stock Exchange (98.7%), while Sarajevo Stock Exchange (57.6%) recorded decline. At the same time, the decline in the number of transactions was registered in Belgrade and Sarajevo Stock Exchanges, while other regional stock exchanges recorded growth (Table 1). 65

66 Central Bank of Montenegro CBCG Macroeconomic Report Q Table 1 Changes in turnover and transactions at regional stock exchanges Stock exchange Relative relation of turnover I-III 17/I-III 16 Relative coefficient of the number of transactions I-III 17/I-III 16 Belgrade Stock Exchange Zagreb Stock Exchange Sarajevo Stock Exchange Macedonian Stock Exchange Ljubljana Stock Exchange Montenegro Stock Exchange Source: Reports of regional stock exchanges At end-q1 2017, only Sarajevo Stock Exchange recorded a y-o-y decrease of the stock exchange index (10.0%), while all other regional stock exchanges recorded increase (Table 2). Table 2 Changes in selected regional stock exchange indices Stock exchange Index name Index value % of change 31 March March 2016 March 2017/March 2016 Belgrade Stock Exchange BELEX Zagreb Stock Exchange CROBEX Sarajevo Stock Exchange SASX Macedonian Stock Exchange MBI Ljubljana Stock Exchange SBItop Montenegro Stock Exchange MONEX Source: Reports of regional stock exchanges In relation to Q1-2016, the most significant decline in stock exchange capitalisation was recorded in Belgrade Stock Exchange (13.3%), while the most significant increase was recorded on Sarajevo Stock Exchange (19.8%). Table 3 Comparison of market capitalization of regional stock exchanges Stock exchange Market capitalization (% of change) 31 March 2017/31 March 2016 Belgrade Stock Exchange Zagreb Stock Exchange 12.4 Sarajevo Stock Exchange -4.0 Macedonian Stock Exchange 19.8 Ljubljana Stock Exchange 2.4 Montenegro Stock Exchange 2.4 Source: Reports of regional stock exchanges 66

67 FISCAL DEVELOPMENTS 05

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69 In the first quarter of 2017, Public finances were characterized by the continuation of fiscal adjustment measures, the fight against the shadow economy and the activities to reduce tax debt. With the entry into force of the new legislation, during the first three months of the current year, a better collection of tax receivables was achieved as one of the instruments for reducing the budget deficit. Thus, from the beginning of the year, excise duties increased for nine cents per litre on all mineral fuels, while the value added tax rate on computers and other computer equipment increased from seven to nineteen percent. In order to achieve the goal of balancing the budget of Montenegro, consolidation on the expenditure side is aimed at reducing the earnings to public officials, compensation for mothers with three and more children and expenditures of the capital budget, except for the costs related to the construction of the highway. Box Fiscal consolidation measures implemented in the first quarter of Since the beginning of 2017, the implementation of measures from the Plan for remedying the budget deficit and public debt, at the end of 2016 the Parliament adopted by the Parliament an integral part of the Budget Law for In order to increase tax revenues, reduce the budget deficit and the level of public debt, from the beginning of 2017, the following measures of fiscal consolidation started: Fiscal Developments On income side: The VAT rate on the turnover of computer equipment has increased from 7% to 19%, which, among other things, is in line with EU directives; The Law on the reorganization of tax claims was adopted, which foresees the possibility of repayment of tax debt to a maximum of 60 instalments, with the obligation to provide a one-time payment in the amount of 10 percent of the total debt, while the taxpayer himself proposes the dynamics of the tax debt settlement. In this way, the write-off of recorded interest will be made to all taxpayers, who will settle the basic debt in this manner; Measures to strengthen fiscal discipline in order to reduce the informal economy have been defined. One of them is fiscalization that will give results in 2018; Higher tax rate of personal income tax is maintained in the amount of 11% on gross wages and salaries above average, in the next three years; Excise duties on all mineral fuels increased for 9 cents per litter. On expense side: Wages and salaries of public officials were reduced by 8%, nominally; Decrease in social expenditures on maternity benefits for three or more children by 21%, or 25%, nominally (amendments to the Law on Social and Child Protection); Expenditures for financing political parties are reduced to 0.5% of the current budget. Reduction of capital budget expenditures other than highway expenditures. 31 Source: Economic reforms programme for Montenegro

70 Central Bank of Montenegro CBCG Macroeconomic Report Q The above measures will significantly reduce the pressure on public finances, and the expectation is that they will lead to a unification of current budget expenditure, i.e. that current consumption will be financed from the source revenues, while only for the needs of financing the capital budget funds will be provided from borrowing Montenegro s public finances In Q1 2017, according to the estimate of the Ministry of Finance, public revenues 32 amounted to million euros, i.e. 8.4% of the estimated GDP for Compared to the corresponding period of 2016, public revenues were higher by 4.6%, which represents a nominal growth of 14.6 million euros, mostly as a result of increased tax revenues by 13.3 million euros, i.e. 6.6%. In this category the highest growth came from excise duties (7.4 million euros) and VAT (5.1 million euros). In relation to the plan, revenues declined by 2.2 million euros. As for the structure of public revenues, taxes accounted for the main share (64.4%) followed by contributions (25.8%), whereas the remaining public revenues accounted for 9.8%. Graph 5.1 Consolidated public spending, in million euros Source: Ministry of Finance Public spending in Q amounted to million euros, i.e. 10.3% of the estimated GDP. Compared to Q1 2016, public spending recorded the y-o-y increase of 2.5%, or 9.9 million euros. The increase in expenditures was recorded as a result of higher expenditures for gross salaries and contributions at the expense of the employer in the amount of 13.2 million euros and interest in the amount of 12.3 million euros. Also, social protection transfers and capital budget increased by 7.5 million euros and 7 million euros, respectively. The lacking funds amounted to million euro as at end-march During the first three months of 2017, the state borrowed an amount of 79.4 million euros through domestic sources of financing, i.e. 6 million euros through foreign sources of financing. Current public spending 34 amounted to million euros or 9.9% of GDP recording minor y-o-y increase. 32 Total public revenues include revenues from budget, state funds and local governments. 33 Source: Ministry of Finance, Estimated GDP for 2017 amounts to 3.96 million euros. 34 Public spending minus total capital expenditures 70

71 In terms of economic classification, the largest expenditure items were social transfers (136.7 million euro or 3.5% of GDP, mainly due to expenditures for pensions) and gross wages and salaries (117.7 million euro or 3% of GDP), while the capital budget amounted to 15 million euros or 0.4% of GDP. The level of public revenues at end-q was lower than the recorded public spending; therefore the public sector deficit amounted to 74.8 million euros or 1.9% of estimated GDP, while in the corresponding period of the previous year public sector deficit amounted to 79.5 million euros. (Annex D, Table 12) Budget of Montenegro Total revenues of the Budget and State Funds, as per preliminary data of the Ministry of Finance, amounted to million in Q1 2017, or 9.6% of the estimated GDP. In the structure of budget revenues, source revenues accounted for 78.2%, while borrowings, loans and revenues from the sale of assets accounted for 21.8% (Table 5.1). 35 Source revenues of the Budget amounted to million euros, or 7.5% of the estimated GDP. Compared to the plan, these revenues were lower by 2.4%, which is a consequence of the lower realization of revenues from personal income tax and contributions. Source revenues recorded a y- o-y increase of 4.6%. Graph 5.2 Source revenues, in million euros Fiscal Developments In the source revenues structure, tax revenues accounted for the main share (65.4%), followed by contributions (28.8%), while the remaining 5.8% referred to revenues from fees, duties, other revenues, loan repayment revenues and donations. Source: Ministry of Finance Collection of tax revenues (taxes and contributions) amounted to million euros, of which direct taxes accounted for million euros and indirect taxes accounted for million euros. Tax based revenues amounted to million euros, recording a 1.4% increase relative to the plan and a y-o-y increase of 7.9%. Except for personal income tax and immovable property tax, all other taxes have increased in relation to the plan, as well as in relation to the same period of the previous year. Revenues arising from contributions amounted to 85.7 million euros being 10.1% lower in relation to the plan for three months of 2017, and 7.5% lower observed y-o-y. 35 Revenues include source revenues (direct and indirect taxes and non-tax revenues), borrowings and loans from domestic and foreign sources, and revenues from the sale of assets. 71

72 Central Bank of Montenegro CBCG Macroeconomic Report Q Table 5.1 Revenues of the Budget of Montenegro and state funds, January March 2017 Type of revenue Plan January- March 2017 In million euros Recorded in January- March 2017 In million euros Share in revenues Share in GDP Recorded in relation to the plan % % index Recorded in January- March 2016 In million euros Recorded in relation to I-III 2016 Taxes Personal income tax Corporate profit tax Property turnover tax Value added tax Excise Duties Tax on international trade and transactions Other republic taxes Contributions Contributions for pension and disability insurance Contributions for health insurance Contributions for unemployment insurance Other contributions Duties Fees Other revenues Receipts from loan repayment and funds transferred from the previous year Grants and transfers SOURCE REVENUES Revenues from sale of property Borrowings and loans from foreign sources Borrowings and loans from domestic sources TOTAL REVENUES OF THE BUDGET OF MONTENEGRO AND STATE FUNDS Source: Ministry of Finance index Graph 5.3 Budget spending in Q1 2017, in million euros Total Budget expenditures in Q amounted to million euro or 10% of estimated GDP. Compared to the corresponding period of 2016, budget spending was 17.1% lower, and 11.1% lower relative to the plan (Table 5.2). Consolidated Budget expenditures 36 amounted to million euros, and made up 9.3% of the estimated GDP. During the three months of 2017, recorded expenditures were 13.3% lower than planned. Compared to the same period in 2016, they were higher by 3.3% or 11.7 million euros, Source: Ministry of Finance 36 Total expenditures minus debt repayment 72

73 mostly due to an increase in interest payments of 12.3 million euros, gross salaries and employers contributions of 11.7 million euros, transfers for social protection (growth of 7.3 million euros) and capital budget (increase of 6.5 million euros). During the reporting period, current expenditures amounted to million euros or 9.1% of GDP, while the capital budget amounted to 9 million euros or 0.2% of GDP. Current budget expenditures amounted to 189 million euros or 2.8% less than planned. Almost all expenditures, with the exception of expenditures for material, services and interest were lower than planned. The most significant increase in expenditures in relation to the comparative period of the previous year was realized in interests (38.7% growth), which is the result of paying interests on the basis of Eurobonds issued during 2015 and Table 5.2 Expenditures of the Budget of Montenegro and state funds, January March 2017 D E S C R I P T I O N Plan January- March 2017 In million euros Recorded January- March 2017 In million euros Share in expenditures Share in GDP Recorded in relation to the plan % % index Recorded January- March 2016 In million euros Recorded in relation to I-III 2016 Current expenditures Gross salaries and contributions paid by the employer Other personal income Expenditures for material Expenditures for services Expenditures for current maintenance Interests Rent Subsidies Other expenditures Capital expenditures in current budget Transfers for social welfare Transfers to individuals, NGOs and public sector Capital budget of Montenegro Borrowings and loans Reserves Repayment of guarantees Repayment of obligations from earlier years index Fiscal Developments Net increase in obligations BUDGET EXPENDITURES Repayment of securities and loans to residents Repayment of securities and loans to residents Repayment of obligations from earlier years TOTAL EXPENDITURES Source: Ministry of Finance 73

74 Central Bank of Montenegro CBCG Macroeconomic Report Q Structure of the budget expenditures shows that the highest share is recorded by transfers for social welfare (37.1%) and gross wages and salaries (29.7%). Other purposes include 33.2% of budget expenditures, of which interest amount to 11.9%, transfers to institutions, individuals, NGOs and the public sector account for 7%, expenditures for materials and services with 4.8% of budget spending, and repayment of obligation from the previous years with 1.9%. Debt repayment amounted to 27.2 million euros, which is 93.6 million euros less in relation to the comparative period of the previous year. During Q1 2017, borrowings and loans from domestic sources (primarily issuing of bonds) amounted to 76.7 million euros, while borrowings and loans from foreign sources amounted to 6 million euros. During three months of 2017, the Budget of Montenegro recorded a deficit 37 of 70.5 million euros or 1.8% of GDP, while deficit amounted to 71.8 million euros in the corresponding period of Local Self-Government Total source revenues of local self-government in Q amounted to 34.8 million euros or 0.9% of GDP, which is a y-o-y increase of 4.3% or 1.4 million euros. Within the revenues, a positive deviation in relation to the first quarter of the previous year records fees in amount of 1.8 million euros, duties of 0.9 million euros and other revenues of 0.6 million euros. Compared to plan, revenues of local self-government increased by 4.9 million euros or 16.4%. Total expenses of local self-government at end-q amounted to 39.3 million euros or 1% of GDP, which is a y-o-y decrease of 6.2% or 2.6 million euros. During the first three months of 2017, local self-government recorded a deficit in the amount of 4.5 million or 0.1% of GDP, while a total of 10.6 million liabilities from the previous period were repaid. (Table 5.3) 37 Methodology for surplus/deficit calculation, OGM, 53/09 74

75 Table 5.3 Current revenues and expenditures of local self-governments, January-March 2017 Type of revenue Recorded January- March 2017 million euros % of GDP Plan January- March 2017 million euros Recorded January- March 2016 million euros Recorded in relation to 2016 SOURCE REVENUES Taxes Duties Fees Other revenues Receipts from loan repayment and funds transferred from the previous year Donations EXPENDITURES CURRENT SPENDING Current expenditures Gross salaries and contributions paid by the employer Other personal income Expenditures for material Expenditures for services Current maintenance Interests Rent Subsidies Other expenditures Transfers for social welfare Transfers to institutions, individuals, NGO and public sector Capital expenditures Borrowings and loans Reserves Repayment of guarantees Repayment of liabilities from the previous years Net increase in obligations Surplus/Deficit Primary deficit Transfers from the Budget of Montenegro Debt repayment Borrowings and loans from domestic sources Borrowings and loans from foreign sources Revenues from privatisation and sale of property Increase/decrease in deposits index Fiscal Developments Source: Ministry of Finance 5.4. State funds According to the Pension and Disability Insurance Fund of Montenegro data, for three months of 2017, total revenues amounted to million euros or 1.8% more than in the corresponding period of 75

76 Central Bank of Montenegro CBCG Macroeconomic Report Q The share of contributions in total revenues, which are the main source of the Pension and Disability Insurance Fund s financing, amounted to 55.5%. This category of revenues was 2% lower compared to the corresponding period of At the same time, transfers from the budget, which account for 44.3% of total revenues, recorded a 7.1% increase relative to the comparative period of Total expenditures of the Pension and Disability Insurance Fund of Montenegro amounted to million euros, which is a 1.8% y-o-y increase, yet 0.5% below the plan. Expenditures for pensions, accounting for 99.1% of total expenditures, represented the most significant expenditure item, while 0.9% was administrative expenses and repayment of loans. Expenditures for pensions recorded a y-o-y increase of 2.1%. Comparing the recorded revenues and expenditures, the Pension and Disability Insurance Fund ran a balanced budget. According to Employment Agency of Montenegro data, for three months of 2017, total revenues amounted to 5.8 million euros, which represents a y-o-y increase of 6.9%. Expenditures of the Agency amounted to 3.4 million euros, and they were 29.6% higher compared to the corresponding period of 2016, and 41.4% below the plan. In total expenditures, 25% referred to current expenditures, while 51.5% referred to social welfare transfers, while transfers to individuals, institutions and public sector amounted to 23.5%. Comparing revenues and expenditures recorded during three months of 2017, the Agency operated with a surplus in the amount of 2.4 million euros. Outstanding liabilities of the Agency amounted to 974 thousand euros at end March, primarily as a result of obligations for transfers to institutions, individuals, non-government and public sector. According to the Pension and Disability Insurance Fund of Montenegro data, in Q1 2017, total revenues amounted to 33.7 million euros or 12.5% less than in the same period of 2016, and by 31.5% lower than relative to the plan for Q1. Total expenditures of the Health Insurance Fund amounted to 33.7 million euros; therefore the Fund ran a balanced budget in Q The main share in total expenditures referred to current expenditures, 17.3 million euros, expenditures based on transfers to institutions, individuals, non-governmental and public sectors in the amount of 11.1 million euros and transfers for social welfare in the amount of 5.3 million euros. Outstanding liabilities of the Fund amounted to 11.4 million euros as at end-march 2017, with the highest share belonging to transfers to institutions, individuals and loans (8.3 million euros) and transfers for social welfare (3 million euros). During three months of 2017, the Labour Fund, being a typical budget beneficiary financed from general and earmarked revenues, recorded revenues in the amount of 571 thousand euros and the equal amount of total expenditures, which is by 32.6% below the corresponding period of the previous year and 9.9% below the plan. 76

77 Expenditures referring to social welfare transfers, i.e. funds for redundancies represented the most important expenditure item. Outstanding liabilities of the Fund amounted to 1.4 million euros as at 30 March 2017, primarily as a result of liabilities arising from transfers for social welfare. During three months of 2017, the Indemnification Fund recorded total revenues in the amount of 25 thousand euros, which is 15.8% more in relation to the corresponding period of Total expenditures of the Fund amounted to 22.5 thousand euros and they were higher by 16.6% compared y-o-y. Outstanding liabilities of the Fund amounted to 2.6 thousand euros as at 31 March 2017, referring to current expenditures. Fiscal Developments 77

78

79 GOVERNMENT DEBT 06

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81 According to Ministry of Finance data, gross government debt of Montenegro amounted to million euros or 62.7% of GDP at end-march 2017, being higher by 80 million euros, or 3.3% compared to end Growth of the state debt, during the first three months of 2017, was mostly affected by the contracting of new credit arrangements of the state with domestic commercial banks. The increased expected growth rate of GDP is the main reason for reducing the share of government debt in the estimated GDP at the end of the first quarter, despite the new borrowing during the observed period. 38 Out of the total amount of gross government debt, 2.001,7 million euros or 80.6% referred to external debt, while the remaining million euros or 19.4% referred to domestic debt. If deposits of the Ministry of Finance were included, as well as the 38,477 ounces of gold, the net state debt of Montenegro would amount to 2,241.2 million euros, or 61.2% of GDP. Compared to end-2016, net public debt increased by 2.8%. Table 6.1 Government debt structure, in million euros March 2016 June 2016 September 2016 December 2016 Domestic debt External debt 2, , , , ,001.7 Government debt (gross) 2, , , , ,483.0 Deposits of Ministry of Finance, including 38,477 ounces of gold Government debt (net) 2, , , , ,421.2 Mach 2017 Government Debt Source: Ministry of Finance and CBCG calculations The currency structure of the government debt is favourable. The entire domestic debt is in Euros, as is the major portion of the external debt (around 88.5%), whereas a part of the obligations is toward the Paris Club, as well as the obligations for IDA credits and the debt to EUROFIMA are in other currencies. Graph 6.1 External debt currency structure 38 Pursuant to the new Law on Budget and Fiscal Accountability, quarterly reports present state debt, while annual report publishes public debt. The Law defines public debt as a debt of the central government debt and local government level, precisely of the General Government Level. Government debt includes central government debt and debt of state companies. Unlike previous periods, government debt does not include debt of local government. Source: Ministry of Finance 81

82 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 6.2 Interest structure of government debt The interest structure of the state debt can also be assessed as favorable. Most government debt (loans and bonds) is serviced at fixed interest rates (79% of government debt). Source: Ministry of Finance 6.1. Domestic debt At end-march 2017, domestic debt amounted to million euros, being 81.1 million euros or 20.3% higher than at end The conclusion of new loan arrangements with domestic banks is the main reason for the significant growth of debt to residents during the first quarter of 2017 (Table 6.2). Table 6.2 Domestic debt structure Domestic public debt structure Debt balance 31 March 2016 Debt balance 31 December 2016 Debt balance 31 March 2017 Change Share in domestic debt (3-2) 5 (3-1) 6 (3/2) 7 (3/1) 8 million euros % % Foreign currency deposits Restitution Loans with commercial banks Accrued pensions T-bills Labour Fund bonds Government bonds Legal persons and companies TOTAL Source: Ministry of Finance and CBCG calculations After new loan arrangements with domestic banks, the structure of domestic debt has changed significantly. In the structure of domestic debt, at the end of the first quarter of 2017, the largest share accounted for loans with commercial banks %, followed by liabilities based on government bon- 82

83 ds %, while the share of liabilities on the basis of issued government bonds in the domestic debt amounted to 19.1% (Table 6.2) External debt According to Ministry of Finance data, external debt of Montenegro amounted to 2.001,7 million euros or 50.6% of GDP at end-march 2017, being lower by 1.1 million euros, or 0.1% compared to end During the first three months of the current year, there was a withdrawal of funds based on loan arrangements with international institutions, in the total amount of million euros, as follows: Withdrawal of the funds of the Chinese Exim Bank in the amount of 6.16 million euros (for financing the construction of the priority section of the highway), Withdrawal of funds from the Council of the European Development Bank in the amount of 4.85 million euros (for the project Phase II ), Withdrawal of KfW funds in the amount of 2.03 million euros (for the projects: Water-supply and Waste Water Disposal, phases III, IV, and V, Withdrawal of IBRD funds in the amount of 1.68 million euros (for the projects Midas - additional financing, Energy efficiency - additional financing and Higher education and research for innovation and competitiveness ), Withdrawal of EBRD funds in the amount of 0.39 million euros (for the needs of reconstruction of local roads). Government Debt 83

84 Central Bank of Montenegro CBCG Macroeconomic Report Q Table 6.3 Creditor International Bank for Reconstruction and Development (IBRD) Structure of external debt, as at 31 March 2017 Debt balance External debt GDP Share in external debt million euros % Share in government debt % 10.5% 8.5% Member countries of the Paris Club of creditors % 4.6% 3.7% International Development Association (IDA) % 2.7% 2.2% European Investment Bank (EIB) % 5.2% 4.2% EBRD % 0.7% 0.6% Council of Europe Development Bank % 1.1% 0.9% European Union % 0.1% 0.1% Kreditanstalt für Wiederaufbau Germany (KFW) % 2.2% 1.8% Loan from Hungary % 0.3% 0.3% Loan from Poland % 0.3% 0.3% Loan from France - Natixis % 0.3% 0.2% EUROFIMA - debt of AD Željeznica Crne Gore % 0.5% 0.4% Czech EXIM - debt of AD Željeznica Crne Gore % 0.2% 0.2% Steiermarkische Bank und Sparkassen AG % 0.4% 0.4% Erste Bank % 0.3% 0.2% Credit Suisse Bank % 4.4% 5.2% Chinese EXIM Bank % 9.6% 7.7% Loan from Spain for the construction of landfill % 0.2% 0.2% Loan from Austria % 0.2% 0.2% EUROBOND 1, % 54.0% 43.5% TOTAL 2, % 100.0% 80.6% 1 EIB loans amounting to 47 million euros in total servicing state companies ( Monteput, Airports of Montenegro and EPCG ) are not calculated in external debt, but are treated as guarantees. 2 Loans with KfW for the needs of water supplies are used by municipalities, but they are considered a part of external debt. 3 Merchandise loan - EPCG 4 Loan for financing the purchase of fire engines for Ministry of Interior Affairs 5 Loan for construction of part of the highway Bar - Boljari Source: Ministry of Finance The structure of external debt shows that the highest share belongs to liabilities arising from issued Eurobonds (54% of external debt), while the International Bank for Reconstruction and Development stands as the largest individual creditor with a share of external debt of 10.It should be noted that there are granted credit line funds which have not been withdrawn. Total amount of available nonwithdrawn funds amounted to million euros (where million euros refers to Chinese Exim Bank). 84

85 Table 6.4 Structure of external debt and non-withdrawn funds, in million euros Creditor Debt balance million euros Amount of nonwithdrawn funds International Bank for Reconstruction and Development (IBRD) Member countries of the Paris Club of creditors International Development Association (IDA) European Investment Bank (EIB) EBRD Council of Europe Development Bank European Commission Kreditanstalt für Wiederaufbau Germany (KFW) Loan from Hungary Loan from Poland Loan from France - Natixis EUROFIMA - debt of AD Željeznica Crne Gore Czech EXIM - debt of AD Željeznica Crne Gore Steiermarkische Bank und Sparkassen AG Erste Bank Credit Suisse Bank Chinese EXIM Bank Loan from Spain for the construction of landfill Austrian loan (Erste Bank) EUROBOND 1, TOTAL 2, Source: Ministry of Finance Government Debt 6.3. Issued guarantees Graph 6.3 Issued foreign guarantees, in million euros At end-march 2017, state guarantees of Montenegro amounted to million euros or 8.6% of estimated GDP, and were 1.9% million euros lower in relation to end If we include the issued state guarantees, public debt of Montenegro amounted to 2,821.4 million euros or 71.3% of GDP at the end of March Foreign guarantees of Montenegro amounted to million euros or 7.3% of GDP. If foreign guarantees were included into the external debt, the external debt of Montenegro would amount to 57.9% of GDP. It should be noted that the above amount of foreign guarantees refers to non-withdrawn credit assets. Considering the total underwritten amount, foreign guarantees reached the amount of million euros. Source: Ministry of Finance 85

86 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 6.4 Issued domestic guarantees, in million euros At Q1 2017, total domestic guarantees amounted to 50 million euros (1.3% of GDP). Domestic debt with the guarantees amounted to 13.4% of GDP. Of the total amount of domestic guarantees, 37.9 million euros related to guarantees granted to municipalities for loans with various commercial banks for the implementation of the reconstruction plan 39. During Q1 2017, there were no called guarantees Debt repayment Source: Ministry of Finance Graph 6.5 In Q1 2017, total debt repayment amounted to 77.9 million euros or 2% of estimated GDP. In the total amount of debt repayment, the main share referred to repayment of interest arising from loan arrangements to residents and non-residents in the amount of 43.7 million euros and repayment of principal of debt to residents and non-residents in the amount of 27.2 million euros. Repayment of liabilities from the previous period amounted to 7 million euros. 40 Debt repayment in Q1 2017, in million euros Source: Ministry of Finance 39 The total signed amount of guarantees for loans used by municipalities for the realization of the reconstruction plan is million euros. 40 Total debt repayment includes repayment of debt arising from principal, interest repayment, as well as repayment of debt from previous years. 86

87 EXTERNAL SECTOR 07

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89 In Q1 2017, the external sector was characterised by the current account deficit increase. Preliminary data show that current account deficit amounted to million euros, showing a y-o-y increase of 10.5%. Negative current account trend resulted from increased foreign trade deficit. Export and import of goods increased during the reporting period with more significant increase in imports. Compared to 2016, other current account sub-accounts recorded positive trends: decline in services account deficit and increased surplus on primary and secondary income accounts. Net FDI and other investments inflow increased, while net inflow from portfolio investments decreased compared to the same period of Due to higher imports than export of goods, the imbalance in visible in international visible trade deepened. 42 Deficit in goods account in Q amounted to million euros, being 16.4% higher compared y-o-y. Montenegro s high dependence on imports is a result of a narrow production base and high correlation between visible imports and tourism. Visible imports increase over the last several years resulted from increased demand for the purposes of carrying out the infrastructure projects, as well as other significant projects in the area of energy industry and tourism. Moreover, high import is also induced by strong ties between visible imports and exports (high share of imported raw materials in exported goods). Total export of goods amounted to 80.9 million euros, showing an increase of 35.8%. The increased export of mineral ores and electricity contributed to the exports increase. Total goods imports increased by 19.6% y-o-y, amounting to million euros, mainly due to increased imports of machinery for general use, electricity and oil and oil derivatives. During the reporting period, the services account recorded a deficit of 6.3 million euros. Total revenues from services amounted to million euros or 17.5% more in relation to Q1 2016, while the expenditures amounted to (a 9.9% increase). Increase in expenditures resulted from an increased outflow arising from transportation, travel-tourism, telecommunication, and computing and other services. During the reporting period, the volume of the invisible trade amounted to million euros, which represents a y-o-y increase of 13.4%. External Sector The primary income account ran a surplus of 10.8 million euros, growing by 80.7%. Surplus increase resulted from increase in inflow caused by compensations to employees, and interest. In the secondary income account there was a surplus of 34.7 million euros, which represents an increase of 38.9% in relation to Financial account recorded a net inflow arising from foreign direct investments, portfolio investments and other investments. Net FDI inflow amounted to million euros in Q1 2017, recording a y-o-y growth of 45.4%, due to increased investments in immovable property and in loans between ownership related companies, as well as lower outflow compared to Portfolio investments account recorded net inflow of 1.4 million euros in Q Other investments account recorded a net inflow of 94 million euros. Trends in this account show an increase in liabilities from taken loans. In the 41 Montenegro s balance of payments data published in accordance with the new IMF methodology (IMF Balance of Payment Manual, sixth edition - BMP 6) 42 Monstat data with adjustments performed by the CBCG in line with the IMF methodology (Balance of Payments Manual, Sixth edition, IMF, 2009). Data on visible import and export are presented by f.o.b. 89

90 Central Bank of Montenegro CBCG Macroeconomic Report Q reporting period, domestic banks have increased liabilities from borrowings, while simultaneously reducing deposits abroad. Table No. Balance of Payments of Montenegro, in thousand euros 43 Item January - March 2016 January - March 2017 Change in % 1 A. CURRENT ACCOUNT -288, , A GOODS AND SERVICES BALANCE -319, , A.a Goods** -307, , A.a.1 Exports f.o.b. 59,585 80, A.a.2 Imports f.o.b. 366, , A.b Services -12,062-6, A.b.1 Income 90, , A.b.2 Expenses 102, , B Primary income 5,977 10, B.1 Income 62,340 69, B.2 Expenses 56,363 58, C Secondary income 24,987 34, C.1 Income 39,377 50, C.2 Expenses 14,390 15, CAPITAL ACCOUNT A Income B Expenses 0 0 CURRENT AND CAPITAL ACCOUNT BALANCE -287, , FINANCIAL ACCOUNT, net **** -106, , A Financial assets net increase 52, ,578 3.B Net increase in obligations 158, , Direct investment, net (=assets-liabilities) -69, , Financial assets net increase -151,962 2, Net increase in obligations -82, , Portfolio investments, net (=assets-liabilities) -213,131-1, Financial assets net increase 9,371 2, Net increase in obligations 222,501 4, Financial derivatives, net (=assets-liabilities) Financial assets net increase Net increase in obligations Other investment, net (=assets-liabilities) -47,483-93, Financial assets net increase -29,210-63, Net increase in obligations 18,273 30, CBCG reserves 223,946-44,352 4 NET ERRORS AND OMISSIONS (3-2-1) 180,831 77, Source: CBCG 43 Montenegro s balance of payments data published in accordance with the new IMF methodology (IMF Balance of Payment Manual, sixth edition - BMP 6) 90

91 7.1. Current and capital accounts Current account recorded increase in deficit in the first three quarters of Trends at this result mostly depended on trends at the goods subaccount. Although foreign trade deficit increased by 16.4%, coverage of visible imports by exports amounted to 18.5%, being by 2.2 percentage points higher than in Graph 7.1 Current account structure, in thousand euros Services account recorded positive trends in Q Compared to the same period of 2016, deficit almost decreased double, mostly due to increase in revenues from transport services, and travel/tourism. The surplus at primary and secondary income sub-accounts of 45.5 million euros resulted in diminishing the current account deficit in Q Visible trade 44 Source: CBCG In Q1 2017, as per preliminary Monstat data, total Montenegro s international visible trade increased by 22.2% compared y-o-y, due to simultaneous goods exports and imports increase. A more rapid growth of goods imports in relation to that of exports resulted in the widening of foreign trade deficit, which amounted to million euros, and recorded a y-o-y increase of 15.9%. Graph 7.2 Coverage of imports by exports, 2005 March 2017 External Sector Preliminary Monstat data shows that the total visible exports amounted to 81.8 million euros, recording a 39.3% y-o-y growth, while imports amounted to million euros recording a 19.6% y-o-y growth. Products with lower degree of processing (aluminium and aluminium products, mineral fuels, mineral oils and products of their distillation) take the main share in visible exports. According to SITC, exports of metalliferous ores and metal scrap, which exports amounted to 16.6 million euros, accounted for the highest share of exports. The increase in im- Source: MONSTAT 44 Methodological remarks: Data on foreign trade and balance of payment of Montenegro are shown according to the special trading system. The CBCG performs adjustments of data received by Monstat for the purposes of compiling the balance of payments in line with the IMF methodology (Balance of Payments Manual, Sixth edition, IMF, 2009). Data on visible import and export are presented by f.o.b. 91

92 Central Bank of Montenegro CBCG Macroeconomic Report Q ports under this category was mostly the result of exports of aluminium ores, lead and zinc, and their concentrates. Subcategory aluminium ores and concentrates increased by 7.9 million euros. Export of electricity was also by 89.2% higher compared y-o-y, amounting to 13.5 million euros. In exports structure, according to SITC 45, products classified by materials recorded the highest share of 28.3% of total exports, followed by raw materials except fuels (26.7%) and mineral fuels and lubricants (19.4%). Within the category products classified by materials, non-ferrous metals (aluminium) accounted for the largest share of 16.9 million euros, followed by iron and steel with 3.4 million euros. The category as a whole recorded a 17.6% growth in exports. Exports in the category mineral fuels and lubricants grew by 83.6% compared to the period January-March 2016, with the main share in this category referring to electricity (13.5 million euros, or 89.2% higher), followed by oil and oil derivatives (declining by 3.9%). Table 7.2 Structure of import of goods in January-March 2017, in thousand euros January - March 2016 January - March 2017 Change 0 Food and live animals 3, , % 6.3% 1 Beverages and tobacco 3, , % 3.4% 2 Crude materials, inedible, except fuels 9, , % 26.7% 3 Mineral fuels and lubricants 8, , % 19.4% 4 Animal and vegetable oils and fats % 0.1% 5 Chemical products 3, , % 3.2% 6 Products classified by materials 19, , % 28.3% 7 Machinery and transport equipment 6, , % 9.5% 8 Miscellaneous manufactured articles 3, , % 3.1% 9 Commodities and transactions not classified elsewhere in the SITC % TOTAL: 58, , % 100.0% Source: MONSTAT Share Monstat data show that total visible imports in the first three months of 2017 amounted to million euros, which is a y-o-y increase of 19.6%. Compared to first three months of 2016, visible imports increase in was a result of increased demand for the purposes of carrying out the infrastructure projects, as well as other significant projects in the area of energy industry and tourism. Machinery and transport equipment (23.7%) took the main share in imports, followed by products classified by materials (17.1%) and products from the sector food and live animals (16.9%). The main share in the import of machinery and transport equipment referred to road vehicles in the amount of 32.4 million euros, and electrical machinery and apparatus in the amount of 19.4 million euros. Export of food and live animals amounted to 76.3 million euros, growing by 2.2%. Under this category, the most representing categories include meat and meat preparations and vegetables and fruits with the respective amounts of 19.7 and 11.9 million euros. In terms of SITC subcategories, the increased import in Q mostly came due to increased import of the following categories: electricity by 10.6 million euros as well as special machinery for certain 45 Standard International Trade Classification 92

93 industrial branches by 10 million euros, and oil and oil derivatives (9.9 million euros). The decline in sub-categories professional, scientific and controlling instruments and apparatus for some industrial branches slowed the growth in the reporting period. Imports of scientific and controlling instruments and apparatus amounted to 3.4 million euros (decline by 48.9%), while imports of sub-category special machines for industrial branches was 7 million euros, declining y-o-y by 19.7%. Table 7.3 Structure of goods imports in January-March 2017, in thousand euros January - March 2016 January - March 2017 Change 0 Food and live animals 74, , % 16.9% 1 Beverages and tobacco 10, , % 2.6% 2 Crude materials, inedible, except fuels 8, , % 2.1% 3 Mineral fuels and lubricants 38, , % 14.1% 4 Animal and vegetable oils and fats 2, , % 0.5% 5 Chemical products 39, , % 10.5% 6 Products classified per material 61, , % -17.1% 7 Machinery and transport equipment 84, , % 23.7% 8 Miscellaneous manufactured articles 58, , % 13.4% 9 Commodities and transactions not classified elsewhere in the SITC % 0.0% TOTAL: 377, , % 100.0% Source: Monstat Share Regarding the export per region in the period January-March 2017, the main external trade partners of Montenegro were CEFTA countries with 39.7%, followed by the EU countries (32.2%), EFTA countries (1.9%) and other countries (26.1%). In terms of visible imports, the largest share belongs to the EU (47.4%), followed by CEFTA countries (30.8%), EFTA (0.6%) and other countries (21.1%). In consideration of individual countries, the biggest exports partners were Serbia (14.8 million euros), Bosnia and External Sector Graph 7.3 Structure of visible export and import in January-March 2017, per country Source: MONSTAT 93

94 Central Bank of Montenegro CBCG Macroeconomic Report Q Herzegovina (11.5 million euros) and Hungary (8 million euros). In terms of import, the most goods were imported from Serbia (95.2 million euros), followed by China (42.9 million euros) and Germany (38.7 million euros). Box Analysis of export and import of food and live animals in the period Montenegro s economy is characterised by high dependence of food imports from abroad. During the period , imports of products under category food and live animals was about 13 times higher than exports. Total imports under category food and live animals amounted to 3.8 billion euros in the period , exports amounted to million euros. Graph 1 Total exports and imports under category food and live animals, , in thousand euros During the reporting period, a moderate trend in the food exports growth was evident, except in 2014 when there was a sharp increase in exports of meat and meat products. Imports recorded the highest growth in the period , when food imports almost doubled. Such trend continued until 2016, however with lower growth rates. According to the SITC methodology, the category food and live animals includes nine subcategories, with meat and meat processing being the most common subcategory in export and import. In the structure of Montenegrin exports, the most of the products include meat and meat products, followed by vegetables and fruits and cereals and cereal products. The structure of imports of food and live Source: MONSTAT animals is more diversified than the export structure. Meat and meat processing, cereals and cereal products, dairy products, and vegetables and fruits dominate in the structure of imports. Imports trend shows an evident increase in imports in almost all sub-categories. The survey on consumer behaviour in Montenegro 46 showed that, when purchasing agricultural products, the people most appreciated quality (45%), affordability (21%) and country of origin (17%). Montenegrin consumers would prefer local products to have proven quality certification (26%), to be cheaper (25.5%) and to be more readily available (21.4%). In addition, 35% of surveyed consumers confirmed that they purchase organic products. They considered that the demand for organic products would increase if the awareness of the importance of individual health and the food s contribution to it would develop. The results of the Survey showed that quality is of key importance to consumers. The poor competitiveness of the agriculture sector in Montenegro is the consequence of the low investments in this area due to the lack of funds for intensifying production intended for both domestic consumption and exports. To reduce large imports, it would be necessary to promote domestic 46 Strategy for the Development of Agriculture and Rural Areas , Ministry of Agriculture and Rural Development, June 2015, Podgorica 94

95 products and domestic production. A favourable climate for producing different types and varieties of plants, well-preserved nature, including high quality, preserved and fertile land, low pollution due to poor use of mineral fertilizers and pesticides, are elements contributing to the development of agriculture in Montenegro. Climate, rich biodiversity and nature, and clean environment are excellent preconditions for the development of organic agriculture that could reduce food imports and increase the purchase of domestic products. During the recent years, processing capacities have developed in several sectors, being a good example of the development of new products with added value offered on the market Services In Q1 2017, Montenegro recorded a deficit of 6.3 million euros in international invisible trade, being lower by 47.7% compared to Q This year s deficit is a result of significantly increased expenditures in transport, other business services, telecommunication, computer and IT services, and in travel-tourism services. Total volume of invisible trade in Q was million euros, which is a y-o-y increase of 13.4%. Graph 7.4 Structure of revenues from services, January- March 2017 Revenues from services amounted to million euros recording a y-o-y increase of 17.5%. With 45.4 million euros, transport recorded the highest revenues, followed by travel-tourism with 23.4 million euros, other business services with 13.8 million euros and telecommunication, computer and IT services with 8.7 million euros. Source: CBCG Graph 7.5 External Sector In Q1 2017, expenses from services amounted to million euros, recording a y-o-y increase of 9.9%. The structure of expenditures shows that transport expenditures accounted for the main share of 45 million euros or 39.8%. Expenditures from other business services amounted to 26.1 million euros and accounted for 23.1% of total expenditures. Within these services, the highest expenditures arose from professional and consulting services adding up to 16.5 million euros, and from various technical, trade and other business services for 8.1 million euros. Structure of expenditures from services, January-March 2017 Source: CBCG 95

96 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 7.6 Transport revenues, January-March 2016/2017, in thousand euros Source: CBCG Graph 7.7 Transport expenditures, January-March 2016/2017, in thousand euros In the period January -March 2017, the transport services account recorded a surplus of thousand euros, which is about five times lower than in the previous year. Transport revenues amounted to 45.4 million euros, recording an increase of 12.9%. The highest income was recorded in road (24.1%) and maritime transport (17.2%). Road transport revenues amounted to 10.9 million euros, which is by 5.5% higher than in Air transport revenues amounted to 7.8 million euros or 8.3% more than in 2016, while railway transport revenues added up to 1.5 million euros or by 21.7% lower than in Total transport expenditures amounted to 44.9 million euros or 18.5% more compared to The most significant expenditures were recorded in road transport, pipeline transport and transmission, as well as in air transport. Expenditure in road transport amounted to 18.4 million euros recording an y-o-y increase of 10.8%. Expenditures in electricity transport totalled to 12.3 million euros, which is by 9.3 million euros higher than in In Q1 2017, estimated revenues from travel-tourism amounted to 23.4 million euros and increased by 35.6%, resulting in a surplus of 11 million euros in the travel-tourism account. Increase in arrivals and in the number of overnights may announce the continuation of positive trend in the upcoming months. Source: CBCG Box 7.2 Effects of tourism on Montenegro s economy The effects of tourism on Montenegro s economy are significant and Graph 1 shows an uptrend from 2011 onwards. In 2017, Montenegro was ranked 31st of 185 countries by travel & tourism s total contribution to GDP according to the analysis of the World Travel and Tourism Council 47. The total contribution of Travel & Tourism to GDP was million euros or 22.1% of GDP, of which foreign tourists 47 World Travel & Tourism Council (WTTC) - Travel & Tourism ECONOMIC IMPACT 2017 MONTENEGRO 96

97 (82.7%) generated the largest portion. According to World Travel & Tourism Council, the total contribution of travel & tourism to GDP is forecasted to rise to 6.3% in 2017, and to 31.2% of GDP by Moreover, travel & tourism contributed to the creation of 14.6% of total jobs in Montenegro. This is expected to rise in the upcoming years, and to creating some 40,000 jobs in Graph 1 Contribution of tourism sector to Montenegro s economy. Source: World Travel & Tourism Council (WTTC) According to the 2017 Competitiveness Index, Montenegro was ranked 72nd out of 136 countries in the travel and tourism sector, which is five times lower than the 2015 index when Montenegro was ranked 67th. We were the most competitive on the infrastructure needed for tourist service, security, hygiene, and health security. The estimated average spending per arrival amounted to US dollars. 48 Graph 2 Components of the Competitiveness Index - Comparative presentation of Montenegro and countries of the Balkans and Eastern Europe External Sector Graph 2 shows Montenegro s position according to certain components of the Competitiveness Index compared to the average of the countries of the Balkans and Eastern Europe. Montenegro was placed above average concerning infrastructure for tourist services, air transport infrastructure and the fact that we point put tourism as a priority branch more than other countries. On the other hand, we were below the average for international openness, cultural resources and business travel. World Economic Forum 48 World Economic Forum 97

98 Central Bank of Montenegro CBCG Macroeconomic Report Q During the reporting period, construction services account recorded total revenues in the amount of 7.7 million euros, which is a y-o-y increase of 16.8%. Simultaneously, expenditures arising from hiring non-residents in construction amounted to 5.5 million euros, which resulted in 2.2 million euros surplus at the construction services account in Q Revenues from other business services amounted to 13.8 million euros, with the main share of revenues arising from providing various business, professional and consulting services in the amount of 9.8 million euros. Expenses for other business services amounted to 26.1 million euros, resulting in recording deficit on this account amounting to 12.3 million euros, showing a y-o-y increase of 8.8%. Such trend resulted from increased expenditures for providing various business, professional and consulting services Primary income In Q1 2017, primary income account recorded surplus in the amount of 10.8 million euros, which is a y-o-y growth of 80.7%, resulting from increased revenues for compensations to employees and interest. During the reporting period, there primary income revenues increased more than primary income expenditures. Graph 7.8 Source: CBCG Structure of factor income revenues, January-March 2017 Revenues from primary income amounted to 69.1 million euros, which is by 10.9% more than in Q The main portion of revenues referred to employees compensations in the amount of 61.6 million euros, which is a y-o-y increase of 6.6%. Revenues from international investment income increased by 66.2% during the reporting period, which resulted from increased earnings from unpaid interest. Revenues from international investment income amounted to 7.6 million euros, with the main share referring to collected interest in the amount of 7.4 million euros (increase by 3.1 million euros (70.1%)). In Q1 2017, expenditures arising from factor income amounted to 58.3 million euros, with the main share of 54.1 million euros share referring to expenditures from international investments, while wages and salaries of non-residents employed in Montenegro accounted for 4.2 million euros. Of total expenditures arising from international investment, interest repayment accounted for 48.6 million euros, recording a y-o-y increase of 65.1%. Outflow arising from paid dividends amounted to 5.5 million euros, being considerably lower relative to the same period of 2015, when it was 22.2 million euros. Decrease in outflow arising from paid dividends compensated the increase of outflow from interest repayment, thus total factor income expenditure increased by 3.5% Secondary income Secondary income account surplus amounted to 34.7 million euros, which is a y-o-y increase of 38.9%. Increase in surplus resulted from significantly higher increase in revenues than expenditures. 98

99 In Q1 2017, inflow to Montenegro arising from secondary income amounted to 50.3 million euros, which is a y-o-y increase of 27.6%. In the revenues structure, 36.9 million euros referred to other sectors, while 13.4 million euros referred to the government sector. Inflow in both sectors increased y-o-y; however, the increase in inflow of state sector was higher than the increased inflow from IPA funds. In the total inflow of other sectors transfers, 25.6 million euros arose from personal transfers to Montenegro, which is approximately at the same level of Inflow arising from other current transfers was higher by 19.1% and it amounted to 11.3 million euros (including pensions and other social income). Inflow from secondary income increased by 8.7 million euros due to inflow from current international cooperation. Graph 7.9 Secondary income account trends, in thousand euros In Q1 2017, transfers from Montenegro amounted to 15.6 million euros, which is a y-o-y growth of 8.1%. Of this amount, sector state referred to 2 million euros referred to the state sector, while other sectors accounted for 13.5 million euros. Outflow of monetary assets arising from personal transfers amounted to 8.3 million euros, recording a y-o-y growth of 22.2%, while the outflow arising from other current transfers amounted to 5.2 million euros Financial Account In Q1 2017, the financial account recorded net inflow, resulting from net inflow on direct, portfolio and other investments accounts. During the reporting period, the net FDI inflow increased due to increased investments into real estates (55.8%) and investments into ownership related companies (43%), as well as due to significantly lower outflow compared to Source: CBCG Graph 7.10 Structure of financial account per investment category, in thousand euros External Sector Net FDIs amounted to million euros in Q1 2017, recording a y-o-y increase of 45.4%, resulting from lower outflow during the same period of Recorded net inflow during the reporting period financed 31.9 of current account deficit. Total FDI inflow in the observed period amounted to million euros, while the outflow of 26.6 million euros was recorded in the same period. Source: CBCG 99

100 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 7.11 Source: CBCG Graph 7.12 Total FDI inflow, in thousand euros Structure of total FDI inflow, January-March 2017 In the observed period, decrease was recorded in inflow from equity investments while loans between ownership related companies recorded inflow increase. The inflow in the form of equity investments amounted to 85.6 million euros or 66.7% of total recorded inflow. In the structure of equity investments, investments in companies and banks accounted for 48.4 million euros or 37.7% of total inflow, while inflow arising from the investments in real estate amounted to 37.2 million euros. Inflow of FDI in the form of intercompany debt amounted to 41.1 million euros, or 43% more compared to the same period of The inflow of monetary assets arising from the withdrawal of residents capital abroad amounted to 1.6 million euros (1.3% of total inflow), being significantly lower compared to Total FDI outflow in Q amounted to 26.6 million euros, being significantly lower compared y-o-y when it amounted to million euros (due to paid accumulated profit of one company). In the outflow structure, withdrawal of non-residents investments in Montenegro amounted to 22.5 million euros, while the outflow from residents investments abroad amounted to 4.1 million euros. Total inflow from portfolio investments amounted to 41.3 million euros in Q1 2017, being lower by 87.5% compared y-o-y. A significant decline in total outflow resulted from high base in 2016, due to Government s borrowing from issuing Eurobonds. Investments in domestic securities amounted to 26.7 million euros, whereby investments Source: CBCG into equity securities amounted to 8.1 million euros, while investments into debt securities amounted to 18.6 million euros. The inflow arising from the withdrawal of funds invested in foreign securities amounted to 14.6 million euros. Simultaneously, the outflow of funds based on portfolio investments amounted to 40 million euros, which is 65.9% less than in the same period of Residents investments in foreign securities amounted to 17.4 million euros, recording a 11% y-o-y decline, due to decline in investments into debt securities abroad by 45.4%. Because of these trends at the portfolio investments account in Q1 2017, there was a net inflow in the amount of 1.4 million euros. The other investments account recorded net inflow of 94 million euros. Inflow arising from the withdrawal of funds by the corporate and household sectors amounted to 46.1 million euros, which is a decrease of 18.1% compared y-o-y. The outflow arising from the repayment of principal amounted 100

101 to 38.3 million euros or 7% less compared y-o-y. During the reporting period, domestic banks have increased liabilities from borrowings, while simultaneously reducing deposits abroad. At end-march 2017, the amount of CBCG s monetary assets in foreign accounts and in the vault decreased by 44.4 million euros compared to 31 December External Sector 101

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103 REAL ESTATE MARKET ANALYSIS 08

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105 HEDONIC INDEX OF REAL ESTATES IN MONTENEGRO MARCH 2017 In March 2017, the CBCG conducted its regular survey on the real estate prices trend in Podgorica. Questions in the survey referred to the characteristics of apartments (heating, internet connection, number of rooms, number of balconies, etc.) with the main objective to determine the relative impact of these qualitative characteristics on an apartment value. Subjective housing unit value was assessed with the following question: Which is the price that a housing unit owner would not go below at the moment of the survey? The collected data were used for receiving the Hedonic index of real estate prices, which measures the effect of such qualitative characteristics on the value of a housing unit. Table 8.1 Summary statistics of average housing unit value per square meter in Podgorica Period Price in euros Chain index Base index September , March , September , March , September , March , June , September , December , March , June , September , December , January , June , September , December , March , June , March September March September March ,84 June , September December March Real Estate Market Analysis Source: CBCG 105

106 Central Bank of Montenegro CBCG Macroeconomic Report Q The calculation of an average price per square meter in March 2017 was based on a sample of 55,827 housing units in the locations Podgorica 1, Podgorica 2 and Podgorica 3. The survey included a random sample of owners of housing units of which 439 questionnaires were successfully completed. This means that the total response rate was 19.1%. The results of the March survey showed that the average price of a square meter of real estate units in Podgorica amounted to euros, which is a y-o-y decrease of 6.6%. The real estate prices chain index shows that the mild downtrend in real estate prices is still present, after a mild recovery of prices at the real estate market in Q1 and Q The development of real estate market in Q points to the continued trend in adjusting large offer to the limited demand, through decrease in housing objects. The demand is still highly differentiated, since specific objects are required more. Table 8.2 Summary statistics of average values; standard deviation; minimum and maximum prices per housing category; in euros Variable Average Housing Price per square meter Average Housing Price per square meter - house Average Housing Price per square meter - apartment No. of observations Medium value Standard deviation Minimum price Maximum price , , , ,500 The observed sample includes 439 housing units from Podgorica, i.e. 180 houses and 259 apartments (Table 8.2). The sample was collected from three zones in Podgorica: 125 housing units from Zone 1, 119 apartments from Zone 2, and 195 from Zone 3 (Table 8.3). The price of individual housing units ranged between 2,500 euros/m 2 at high-end city locations and 400 euros/m² at locations further away from the city centre (Stari Aerodrom, Konik, Masline, Tološi, etc.). Table 8.3 Summary statistics of average values; standard deviation; minimum and maximum prices per housing category; in euros Variable Average Housing Price per square meter Average Housing Price per square meter Average Housing Price per square meter No. of observations Medium value Standard deviation Minimum price Maximum price 125 1, , , ,

107 Descriptive statistics, Model sustainability testing, and Results of the econometric model of the hedonic index According to available data, the econometric model, which assesses the effect of qualitative characteristics of apartment to the price of object, was made. Graphs 8.1 and 8.2 show that both time series, these being prices of housing units and their respective floor area sizes, had a similar distribution. Due to their upper and lower limits, (the floor area size of an apartment may not be smaller than 10 m² or larger than let us assume 1,000 m², same as the related prices), the econometric models had to include logarithms of the price and floor size variables. Graph 8.1 Histogram of distribution of housing unit prices Graph 8.2 Histogram of distribution of floor area size variables Table 8.3 shows that, measured by the level of significance, the zone in which the housing unit is placed primarily influences the price of a housing unit. To wit, the housing units in Zone 1 are more expensive in relation to Zone The prices of apartments are more expensive compared to houses. Moreover, the average and the control of other factors show that the price of a housing unit is more expensive if it is aged up to 10 years than if it is aged more than 10 years. Other qualitative features that significantly affect the housing unit prices in Podgorica include the existence of a garage, and the number of balconies. To wit, the results indicate that the price of housing units with over two balconies is higher in relation to those with just one or no balconies. At the end, price of a garage significantly influences the price of housing objects. Real Estate Market Analysis 49 Zone 3 was taken as the basis. 107

108 Central Bank of Montenegro CBCG Macroeconomic Report Q Table 8.4 Empirical results of average housing price model, September 2015 Variables Ratio Standard Error t-value P>t lnmetar 0.971*** podgorica *** podgorica Apartment 0.215*** under_65msqr msqr up to 6_stories up to do 5yrs_old 0.188** _years 0.108** balcony_ , balcony_ ** balcony_ ** room_ room_ room_ garage_available 0.155*** Constant 6.740*** Note: *** significance at 1%, ** significance at 5%, * significance at 10% Diagnostics: No. of observations 439; R-squared=0.8; VIF=2.6; Ramsey RESET test Prob > F = The robustness tests showed that the model had been specified very well; there was problem neither with its multicollinearity (extremely low values of the variance inflation factor - VIF) nor with the functional form (Ramsey Reset test). The heteroscedasticity problem was corrected using robust standard errors. The table below shows the real estate prices trends in selected countries according to the Global Property Report. As the table shows, there were divergent trends in real estate prices in Q4 2016: the highest annual growth was recorded in China (21.34%) and the most significant decline was recorded in Montenegro (12.95%). 108

109 Table 8.5 Real estate prices in selected countries (ranged according to annual growth in Q4 2016) Country Annual change, Q4 2015, in % Trend assessment Annual growth rate Q4 2016, in % Quarterly change, Q42016, in % China -Shanghai Iceland Romania Canada New Zealand Japan-Tokyo Ireland Estonia-Tallinn Germany Hong Kong Norway Slovak Republic Latvia -Riga Israel Lithuania Sweden The Netherlands Mexico US (FHFA) Portugal US (Case Shiller) Turkey Great Britain Vietnam Guersey France Egypt Finland Spain Greece South Korea 2, Indonesia Switzerland Macedonia Thailand UAE Dubai Chile Taiwan Puerto Rico Singapore Ukraine-Kiyv Mongolia Brazil Sao Paulo Qatar Russia Montenegro Real Estate Market Analysis 1 The Federal Housing Finance Agency of the USA 2 Standard&Poor s national index of real estate prices in the USA Note: = increase in houses prices by more than 1 percentage point = decline in houses prices by less than 1 percentage point = decrease in houses prices by more than 1 percentage point = decline in houses prices compared to y-o-y price change by less than 1 percentage point, Source: Global Property Guide,

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111 INTERNATIONAL ECONOMY 09

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113 9.1. Global economic trends Table 9.1 Overview of selected global indicators, % Real GDP growth Indicator 2015 Estimation for 2016 Projection Difference in relation to January 2017 projections, percentage points World Advanced economies USA Euro area Germany France Italy Spain Great Britain Japan Emerging and Developing economies China India Russia Emerging and Developing economies Prices of stock exchange goods, average rate Oil Non-energy items Consumer prices, average rate Advanced economies Emerging and Developing economies World trade volume Source: IMF, April 2017 Expectations for the future are trending towards a more dynamic global growth of 3.5% and 3.6% in 2017 and 2018, respectively. The acceleration of growth will be driven by the rapid growth in the advanced economies, primarily due to the expected faster growth in the USA, as well as faster growth in developing and emerging economies, while the expected slowdown in China will be offset by faster growth in other economies. For a group of European developing and emerging economies including Montenegro, the same growth rate as in 2016 is expected for %, and a slight acceleration of growth to 3.3% in Moreover, the IMF s expectations are that the global trade, led by developing and emerging economies, will reach the annual growth of almost 4% over the period International Economy 50 Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Hungary, Kosovo, Macedonia, Montenegro, Poland, Romania, Serbia, and Turkey 113

114 Central Bank of Montenegro CBCG Macroeconomic Report Q Graph 9.1 Commodity prices (2005 = 100), Q Source: IMF Graph 9.2 Yields to maturity on 10-year government bond yields, 2016 Q Source: Bloomberg According to the IMF, commodity prices were at the same level as in December 2016, whereby the prices of non-fuels increased by 3.1%, and prices of fuels decreased by 4.1%. The structure shows that prices of metals recorded the highest increase (6.2%), with the highest increase of aluminium prices of 10.1% (from 1,728 to 1,901 USD/tonne). Price of crude oil, which is the commodity bearing the highest weight, decreased by 3.2%. The IMF forecasts that the commodity prices in 2017 will highly recover led by the expected rise in oil prices following the agreement of OPEC member countries and other major oil producing countries to limit the offer. Price recovery of non-energy items, as a heterogeneous group of stock exchange commodities, will be significantly lower. The expected average price increase of aluminium in 2017 amounts to 18% in the period , about 1.8% per year (the arithmetic mean), after the fall of prices of this metal by 10.9% and 3.7% in 2015 and The decline in leading stress and risk indicators on financial markets - TED spread, Libor-OIS spread and VIX index averaged to over 20% at end-q compared to already calm values recorded in end On the other hand, as an indicator of markets uncertainty, the price of gold increased from 1,249.2 USD/fine ounce, i.e. by 8.9% compared to end Interest rates on the 10-year government bonds of leading euro area member states have generally increased during Q In addition, although percentage increases were high, yields remained at relatively low levels, as changes in percentage points were not dramatic. The differences between the yield on the German government debt and the debt of other major Eurozone economies are now also less compressed than before. The yield on German debt at the Q1 was 0.33%, and the yield on French, Spanish and Italian debt was 0.97%, 1.67%, and 2.32%, respectively. The yields on the British and US debt amo- 51 TED spread is the difference between three-month LIBOR and the interest rate on three-month US Treasury bills, in percentage points. LIBOR OIS spread is the difference between the quarterly LIBOR and overnight indexed swap (OIS) for three months, in percentage points. 114

115 unted to 1.14% and 2.39% respectively, while the Japanese and Swiss debt remained very low, slightly above and/or below 0%. The stock market was quite optimistic, and the leading indices recorded growth compared to end- 2016, while some, like New York DJIA recorded historical peak. During the Q1 2017, DJIA grew by 4.6% as well as Frankfurt DAX by 7.2%, whereas the MSCI index, which includes all developed financial markets, grew by 5.9%. The MSCI index, which refers to emerging and emerging markets, recorded a more significant growth of 11.1% over the Graph 9.3 same period. MSCI global indices, Q Given record high values of stock exchange indices, the immovable properties values are in many countries recorded historical peaks, like in the USA, where nominal immovable properties prices are above the pre-crisis level of sub-prime mortgage loans. A factor that undoubtedly influenced the growth in prices of financial assets and real estate in the post-crisis period is was the policy of historical nadir in leading central banks interest rates. Certain parameters show that there are no bubbles formed, which is, among other things, the stance of the FED s President. However, there seems to be some unrealistic optimism, thus the expected gradual increase in the FED s interest rates will have a calming effect on the prices of financial assets and immovable properties, at least in the USA. Source: Bloomberg 9.2. Advanced countries In Q1 2017, GDP in the euro area recorded quarterly increase of 0.5%. The y-o-y comparison shows an increase of 1.7%. 52 Table 9.2 GDP growth rate (based on seasonally adjusted data) Percentage change in relation to the corresponding Percentage change in relation to the previous quarter quarter of the previous year Q2 Q3 Q4 Q1, in % Q2 Q3 Q4 Q1, in % International Economy Source: Eurostat 52 Eurostat, d2c3786d7cf7 115

116 Central Bank of Montenegro CBCG Macroeconomic Report Q Investments were on an uptrend at end-2016 and the positive trend continued in Q In March 2017, industrial output recorded a monthly decline of 0.1%, however, y-o-y comparison shows a 1.9% growth. 53 Situation in the labour market improved. In March 2017, the unemployment rate in the euro area amounted to 9.5%, which is the lowest recorded unemployment rate in the euro area since April The unemployment rate was lower than in March 2016, when it amounted to 10.2% 54 Youth unemployment (under 25 years) also declined. In comparison to March 2016, youth unemployment rate declined from 21.3% to 19.4%. 55 Table 9.3 March 2016 October 2016 Annual inflation rate in the euro area, % November 2016 December 2016 January 2017 February 2017 March Source: Eurostat Graph 9.4 Share of individual components of inflation in the Euro area, annual change Source: ECB Bulletin, 3/2017 The Eurostat data shows that at end-march 2017, the annual inflation in the euro area amounted to 1.5% being lower in relation to February when it amounted to 2%. In March 2016, inflation amounted to 0.0%. 56 Lower price increases are fuelled by reduced inflation rates for variable components of HIPC - energy and unprocessed food. At the same time, the inflation rate excluding food and energy prices reduced to 0.7% in March 2017, from 0.9% in February, being significantly below the long-term average of 1.4% 57. Based on current estimates of future price developments in fuel prices, the inflation rate in the Eurozone will gradually increase in the medium term, stimulated by the ECB s monetary policy measures and the expected economic growth. The results of the latest ECB s Survey of Professional Forecasters (SPF) for Q taken in comparison to the survey for Q show that inflation estimates for 2017 and 2019 were revised down and amounted to 1.6% and 1.7%, respecti- 53 Eurostat, 54 Eurostat, 55 Eurostat, 56 Eurostat, 57 ECB Bulletin, 116