Interview of Vice Governor Nikola Fabris for the News Agency Mina-Business

Interview of Vice Governor Nikola Fabris for the News Agency Mina-Business

10/01/2022

Fabris: This Year's Budget is the First Post-Pandemic

Economically speaking, this year's budget is the first post-pandemic budget. Although the pandemic is still on, it can hardly cause economic consequences as significant as 2020, said the Vice Governor of the Central Bank (CBCG) Nikola Fabris.

"Significant recovery from the pandemic crisis was recorded in the first eleven months of last year. Therefore, this year's fiscal policy can turn to stabilising public finances and balancing the budget in the medium term," Fabris said in an interview with the Mina-Business news agency.

He said that the Europe Now project, implemented in this year's budget, brought significant fiscal measures that would impact the entire economic system.

"The goals of the Europe Now programme itself are well defined and needed. However, such major reforms in the Montenegrin public finance system require a more detailed and careful ex-ante analysis of the impact on fiscal indicators," said Fabris.

He added that the CBCG shared the International Monetary Fund (IMF) opinion that the programme should have been implemented gradually in carefully selected phases to avoid the possible adverse effects risk. At the same time, it would take into account the realisation of planned revenues, necessary for the stability of the public finances.

Commenting on economic events last year, Fabris said that it was evident that the Montenegrin economy was susceptible to external shocks as it was a small, highly open and euroised economy with an undiversified production structure.

In such conditions, as he explained, it would entail an even deeper Montenegro's recession if its most important partners, primarily the European Union (EU) and the region's countries, fall into recession.

"If those countries are recovering from the crisis or are expanding, our recovery, i.e. expansion, is even faster. This was shown during the global financial crisis and the pandemic when we had the highest decline and the fastest recovery. Therefore, we can conclude that our euroised system's nature and the economy's structure amplify all external shocks, either positive or negative," said Fabris.

In that context, as he said, Montenegro had a quick recovery last year. Public finances stabilised, all banking parameters significantly improved, the balance of payments imbalances was reduced, and high GDP growth was achieved.

"According to the above, we had a much higher decline in 2020 than the countries in the region and a much faster recovery last year," added Fabris.

According to him, given the achievements in the first nine months of 2021 and the trend of available economic activity indicators for the fourth quarter, real GDP last year could amount to about 12 percent.

Fabris explained that this growth was driven by a strong recovery in tourism and complementary activities and a personal consumption recovery and development.

Speaking about the economic growth forecasts for this year, Fabris said that the CBCG projections are not finished yet. They depend on the form in which the Europe Now programme will be adopted because it can significantly impact GDP growth.

"Certainly, we are pleased that the reputable international institutions' announcements on the Montenegrin economy's growth this year are optimistic. They indicate the forecasted growth ranging from 5.6 percent (the IMF and the World Bank) to 6.4 percent (the European Commission)", Fabris specified.

Asked about Montenegro's public debt expectations for this year, he answered that the CBCG did not make official public debt projections because it is the Ministry of Finance and Social Welfare's competence.

"The Government has not planned new borrowing this year. The public debt can be expected to decline in absolute terms unless a significant deficit increase due to the lacking planned revenues or unplanned higher budget expenditures occurs," said Fabris.

In any case, according to him, the Government's determination to reduce public debt in the medium term is encouraging.

"According to the latest projections, the projected public debt at the end of this year is 75.3 percent of GDP. It is projected that gross public debt will fall to 71.7 percent of GDP at the end of next year, and amount to 67.6 percent of GDP at the end of 2024," Fabris precised.

According to him, the public debt projection for the next medium-term period shows that its decline depends solely on GDP growth. In nominal terms, it will still be above four billion euros.

"If this trend is materialised, it would significantly contribute to fiscal stability. However, it should be borne in mind that a large number of projections on the movement of public debt have not been realised in the past, both for objective and subjective reasons," Fabris reminded.

He stated that through timely, transparent, and well-profiled measures within ten packages of measures, the CBCG protected the citizens and entrepreneurs' financial position. Moreover, it preserved the banking system's stability that achieved high growth rates of key balance positions last year.

The EC and the IMF reports confirmed that the CBCG packages of measures resulted in the banking system's stability preservation.

"Given the Montenegrin economy's strong recovery last year, the limited duration of temporary measures and that they served their purpose, it was estimated that most measures were no longer required," said Fabris.

He explained that the CBCG has decided to abolish some measures gradually. It will continue to closely monitor the situation and not refrain from adopting new measures if some economic disturbances appear.

Asked whether banks should pursue a more relaxed credit policy this year, Fabris answered to bear in mind extremely high credit activity last year. At the end of November, loans increased by just over ten percent compared to the end of last year.

Moreover, at the end of November, loans reached a record amount of 3.48 billion euros, i.e. they were over 400 million higher than in the pre-pandemic 2019.

"In this context, I do not think that banks should pursue a more relaxed credit policy. We felt the consequences of such a policy after the global financial crisis when non-performing loans accounted for almost a quarter of all loans at one point," said Fabris.

He said that most key banking indicators reached record amounts last year.

At the end of the third quarter, the solvency ratio was 18.5 percent, even 8.5 percentage points more than the statutory minimum of ten percent.

"At the end of November, non-performing loans accounted for six percent of total loans and increased slightly. Still, given the current pandemic and the structure of the Montenegrin economy, it is lower than we expected," Fabris said.

He added that banks' liquidity is exceptionally high since liquid assets at the end of November accounted for 27.9 percent of total assets, compared to 22.1 percent from end-November 2020.

Banks' profitability for the first three quarters was substantial, with a return on capital of 10.5 percent, much better than in 2020 yet only slightly worse compared to 2019.

"Concerning the balance sheet dynamics, the main feature last year was the strong growth of deposits that amounted to 4.18 billion euros at the end of November. It means that they recorded annual growth of 24.3 percent. On the other hand, loans grew by over ten percent," Fabris said.

Last year two banks on the Montenegrin banking market merged, i.e. the merger of Komercijalna banka to NLB banka was approved.

Asked whether an acquisition or perhaps the entry of a new financial institution into the Montenegrin banking market can be expected this year, Fabris answered that it cannot be ruled out. Still, there were no such announcements at the moment.