Macroeconomic Report of the Central Bank of Montenegro Q1 2015

Podgorica, 2015 PUBLISHED BY: Central Bank of Montenegro Bulevar Svetog Petra Cetinjskog 6 81000 Podgorica Telephone: +382 20 665 331 Fax: +382 20 665 336

WEB SITE: http://www.cbcg.me

CENTRAL BANK COUNCIL: Milojica Dakić, MS, Governor Velibor Milošević, PhD, Vice-Governor Nikola Fabris, PhD, Vice-Governor Asim Telaćević Milivoje Radović, PhD Milorad Jovović, PhD Srđa Božović, PhD

TRANSLATED BY: Translation Services Division

Users of this publication are requested to make reference to the source of information whenever they use data from the Report.

CONTENTS

MACROECONOMIC ENVIRONMENT IN MONTENEGRO 7 1. REAL SECTOR DEVELOPMENTS 11 1.1. Gross Domestic Product 13 1.2. Industries 13 1.3. Prices 20 1.4. Labour Market 22 2. MONETARY DEVELOPMENTS 27 2.1. Banks 29 2.2. Banks interest rates 43 2.3. Micro-credit financial institutions 46 3. MONEY AND CAPITAL MARKET 51 3.1. Money market 53 3.2. Capital market 54 4. FISCAL DEVELOPMENTS 59 4.1. Montenegro’s public finances 62 4.2. Budget of Montenegro 63 4.3. Local Self-Government 66 4.4. State funds 68 5. PUBLIC DEBT 71 5.1. Domestic debt 74 5.2. External debt 74 5.3. Issued guarantees 77 5.4. Debt repayment 78 5.5. Projection and sustainability of public debt 79 6. EXTERNAL SECTOR 81 6.1. Current account 84 6.2. Capital and financial transactions account 92 7. REAL ESTATE MARKET ANALYSIS 95 8. INTERNATIONAL ECONOMY 103 8.1. Advanced countries 107 8.2. Emerging countries 112 8.3. Neighbouring countries 115 8.4. Central banks’ interest rates 118 8.5. Exchange rates 120 9. IMPORTANT EVENTS 121 10. ANNEXES 125

Review of macroeconomic developments

2014 III 2015 % REAL SECTOR DEVELOPMENTS GDP (in current prices in EUR million) * 3,425.0 3,580.0 Industrial output (compared to the same period the year before) -11.4 7.0 Forestry (compared to the same period the year before) 17.9 -56.4 Construction (compared to the same period the year before-measured by effective working hours) -4.6 7.6 Employment Number of employed people (december) 171,158 171,855 Number of unemployed people (december) 34,687 34,903 Inflation rate (in relation to Decembar previous year) Consumer prices in relation to end of previous year -0.3 1.6 Average salary without taxes and contributions (Period average) 477 480 0.6 MONETARY DEVELOPMENTS (EUR million) M11 Total deposits 2,308.1 2,314.6 0.3 Deposits by economy 640.7 635.1 -0.9 Government deposits 103.9 95.5 -8.1 Central government 60.2 61.0 1.4 Institutions and agencies of the Central Government 6.1 5.4 -11.3 Funds and municipalities 37.6 29.1 -22.6 Deposits by financial institutions 53.0 48.1 -9.2 Deposits by households 1,331.8 1,352.7 1.6 Deposits - other 178.7 183.1 2.5 Total loans 2,367.2 2,340.8 -1.1 Loans to economy 917.9 938.0 2.2 Loans to government 111.4 103.7 -7.0 Central government 71.4 62.3 -12.8 Institutions and agencies of the Central Government 3.5 3.7 4.7 Funds and municipalities 36.5 37.8 3.4 Loans to banks and financial institutions 381.1 334.4 -12.3 Loans to private citizens 893.8 904.6 1.2 Other loans 62.9 60.1 -4.4 MONEY AND CAPITAL MARKET Turnover in stock exchanges (EUR million) ** Montenegro stock exchange 54.2 12.2 -77.5 Stock exchange indices MONEX20 11,356.11 12,247.14 7.8 MONEX PIF 3,037.38 2,651.01 -12.7 Average interest rates on 28-day T-bills, last recorded Average interest rates on 56-day T-bills, last recorded Average interest rates on 91-day T-bills, last recorded 3.16% Average interest rates on 182-day T-bills, last recorded 0.37% 1.20% FISCAL DEVELOPMENTS (EUR million) ** Current incomes *** 1,560.5 310.0 Expenditures *** 1,606.7 331.6 Surplus/deficit -46.1 -21.6 Foreign government debt (in EUR million) 1,561.7 2,047.7 31.1 Domestic government debt (in EUR million) **** 381.2 395.9 3.9 Debt of the local governments (in EUR million)**** 128.8 EXTERNAL DEVELOPMENTS ** Current account balance (EUR million) -525.8 -197.0 Trade balance -1,376.4 -270.1 Balance of services 690.3 11.9 % of trade deficit/other balances coverage 61.8 27.1 Current account balance in % of GDP 15.5 -

* Data for 2014 is estimate of the Monstat, data for 2015 is estimate of the Ministry of Finance. ** Data for period I-XII 2014 (in the Report for 2014, External sector data were based on GDP amounting 3,393.2 million euro) and I-III 2015. *** Current revenues and expenditures of the Budget of Montenegro and state funds and local governments. **** 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.

Macroeconomic Environment in Montenegro CBCG Macroeconomic Report Q1 2015

MACROECONOMIC ENVIRONMENT IN MONTENEGRO

Although official data on GDP for the first quarter of 2015 are not available, available statistical- in dicators in most sectors during the first three months of this year were largely on a growing trend. A rough estimate of CBCG indicates that growth in the first quarter stood at 3.4% of GDP. Growth was recorded in the sector of tourism, trade, most forms of transportation, construction, as well as in all three industry sectors. It is estimated that economic growth in 2015 could amount to 3.5%. Current account deficit increased in the first quarter as well as net FDI inflow. The banking system is stable, solvent and liquid, but still burdened with high levels of non-performing loans.

In March, CPI inflation amounted to 1.2% in relation to end-2014. The average rate of consumer prices in the first three months of 2015 compared to the same period of previous year amounted to 0.8%, while on an annual basis prices were higher by 1.6%.

In Q1 2015, the physical volume of industrial output recorded a y-o-y growth amounting to 7%. Production growth was recorded in all three sectors, in mining and quarrying by 16.2%, in the sector of electricity, gas and steam supply by 9.7% and in the manufacturing sector by 3.5%.

According to Monstat data, the number of visitors to Montenegro amounted to 65,275 in Q1 2015, or 19.3% more than in the same period of 2014. The number of domestic tourists arrivals increased by 28.1%, while the number of foreign tourists grew by 16.7%. Some 240.511 overnights were recorded or 16.6% more relative to Q1 2014. The number of overnights of domestic and foreign tourists increased 22.2% and 14.9%, respectively.

A growth was registered in passenger road, rail and air traffic transport. Transport of goods -in creased in air transport while it decreased in rail transport. There has been growth in total turnover in ports. Forestry recorded y-o-y output decrease of 56.4%. According to preliminary Monstat data, construction recorded growth by 9.6%, measured by the value of completed construction works and 7.6% measured by the effective working hours, compared to the first quarter of 2014.

The banking sector was stable during the first quarter of the current year, as evidenced by the -li quidity and solvency ratios that were significantly above the prescribed level. On the assets side, the growth was mainly a result of the increase of banks’ receivables arising from securities, while on the liabilities side, the growth was primarily the result of the increase in deposits. The total amount of non-performing loans, as well as their share in total loans decreased in the reporting period. Nevertheless, these loans still represent the main vulnerability of the banking system.

7 CBCG Macroeconomic Report Q1 2015 Macroeconomic Environment in Montenegro

In March 2015, the weighted average effective interest rate on total loans amounted to 9.11%, representing a decrease of 0.11 percentage points compared to the previous year. Weighted average effective interest rate on new loans was 8.94%, representing a decrease of 0.08 percentage points compared to the end-2014. Weighted average effective interest rate on total deposits was 1.66% in March 2015 and was 0.20 percentage points lower compared to the end of the previous year.

According to preliminary data from the Ministry of Finance, the budget deficit for three months of 2015 amounted to 51.5 million euros or 1.4% of estimated GDP. The deficit was insignificantly lower compared to the same period of the previous year.

According to the Ministry of Finance, at the end of March 2015, the gross public debt of Montene- gro without the amount of debt of local governments amounted to 2,443.6 million euros. A significant increase in government debt in the first three months of 2015 was due to the new issue of Eu- robonds in the amount of 500 million euros. By including deposits of the Ministry of Finance, the net public debt of Montenegro at the end-March 2015 amounted to 1,938 million euros, or 54.1% of GDP. External debt (83.8%) accounted for the main share in the structure of total debt while internal debt made up 16.2% of total debt.

Total guarantees of Montenegro amounted to 320.4 million euros or 9% of estimated GDP. The in- clusion of guarantees, net public debt of Montenegro amounted to 63.1% of GDP.

During the first quarter of 2015, according to preliminary data, the current account deficit amounted to 197 million euros, recording an increase of 6.7% compared to the first quarter of 2014. The increase in the current account deficit is the result of an increase in foreign trade deficit and the decline in surplus at the secondary income account. The movement is expected given the increased investment activity. High level of import dependence is still evident in the international visible trade. In Q1 2015, the deficit in the goods account amounted to 270.1 million euros or 4.8% more than in the previous year. Total visible export amounted to 76.4 million euros or 3% more. Increase in exports of aluminium, iron and steel recorded the highest impact on the growth of exports. To- tal visible import amounted to 346.6 million euros and was 4.4% higher than in the previous year.

In the reporting period, there was an evident increase in net FDI inflow. In Q1 2015, according to preliminary data, net FDI inflow amounted to 86.2 million euros, which is 9.2% more than in 2014. Total FDI inflow amounted to 100 million euros. FDI inflows in the form of equity investments amounted to 52.5 million euros, of which 17.7 million related to investments in the companies, while the inflow from investment in properties amounted to 34.7 million euros. FDI inflow in the form of intercompany debt amounted to 45.3 million euros.

The average number of employees in Q1 2015 amounted to 170.687 in average, and it was 1.1% higher than in the same period of 2014, while the number of employees in March was 0.2% higher in relation to December 2014. Fifteen of nineteen sectors increased the number of employees. The largest growth was recorded in the sector of real estate, with the largest decline in the manufacturing sector.

The number of registered unemployed persons in Q1 2015 averaged to 35,076 or 1% more than in Q1 2014. It increased by 0.6% relative to December 2014. As per the Employment Agency data, the unemployment rate in March 2015 amounted to 15.04%, being 0.10 percentage points higher than the one recorded in March 2014.

8 Macroeconomic Environment in Montenegro CBCG Macroeconomic Report Q1 2015

Monstat data show that in average salary in Montenegro amounted to 727 euros recording 0.3% y-o-y increase. Average salary without taxes and contributions amounted to 480 euros recording growth of 0.6% compared to the same period from the previous year. Compared to countries in the region, Montenegro ranked third as per average salaries behind Slovenia and Croatia, and ahead of Bosnia and Herzegovina, Serbia and Macedonia.

REAL SECTOR DEVELOPMENTS 01

Real Sector DevelopmentsReal Sector

1.1. Gross Domestic Product

Based on preliminary Monstat data, GDP growth in 2014 was 1.5%, which is slightly less than the earlier forecasts. Even though official GDP data for Q1 2015 are not available, it can be stated that for the first three months of 2015, the observed statistical indicators are trending up in the majority of sectors. Growth was recorded in the sector of tourism, trade, most forms of transport, construction regardless it is measured by the value of executed construction works or through effective working hours, while forestry sector decreased production. The total industrial production increased, where the increase in production was recorded in all three sectors. It is estimated that economic growth in 2015 could amount to 3.5%. 1 Table 1.1 This period is characterized by the growth of inflation compared to the end of the previous year as GDP1 - change in % well as observed annually. At the same time, mod- 2014 2015 2016 est growth in gross and net wages was recorded, and during the first quarter of this year there was GDP - real rate 1.5 3,5 3.8 an increase in the number of employees. Source: Monstat and Ministry of Finance

1.2. Industries Graph 1.1 1.2.1. Industrial output Industrial output, annual rate In Q1 2015, the physical volume of industrial output recorded a y-o-y growth amounting to 7%. Production growth was recorded in all three sectors: mining and quarrying by 16.2%, electricity, gas and steam supply by 9.7% and in the manufacturing sector by 3.5%. At the annual level, total industrial output grew by 19.3% due to output growth in all three sectors: electricity, gas and steam supply (31.7%), mining and quarrying (38.9%), and manufacturing industry (9.2%). Observed by months, industrial output growth of 10.1% and 5.3% was recorded in February and March, respectively, while monthly decline was recorded in January (19.1%). Source: Monstat

1 Realistic movement of GDP for the period shown represents the preliminary data, where the GDP growth for 2014 is the estimate of the Monstat, and for 2015 and 2016 it is estimate of the Ministry of Finance - Guidelines for macroeconomic and fiscal policy for the period 2015 -2018. The final data for 2014 will be published in September this year.

13 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

In the manufacturing industry, during the first three months of 2015 compared to the same period of the previous year, the production in ten sectors of the manufacturing industry made up 32.3% of total industrial production. The highest growth was recorded in the following: production of rubber, plastic and metal products other than machinery and equipment (over 100%). Growth was recorded also in the following areas: production of chemicals and chemical products (90.9%), tobacco products (88.3%), repair and installation of machinery and equipment (75%), clothes production (18.8%), machinery and equipment not elsewhere specified (17.9%), manufacture of wood, cork, and the like (11.3%), manufacture of basic metals (6%) and manufacture of other non-metallic minerals (4.8%).

In the same period, six areas, which account for 21.5% of total industrial production, recorded a decline of production: food (-28.3%), beverages (-24.8%), basic pharmaceutical products (-20.4%), paper and paper products (19.8%), printing and reproduction of audio and video files (-15.3%) and furniture manufacturing (-10.9%).

In March 2015, the Government adopted an Action Plan for implementation of the Strategy for the manufacturing industry 2014 - 2018. It defines actions to improve the business and investment environment, the continuation of the privatization process and reconstruction of these companies, strengthening the supply and availability of financial assets, strengthening human resources and adjustment to demands of the labour market, as well as activities to improve the entrepreneurial infrastructure in this area.

Graph 1.2

Industrial output by sectors, Ø 2010 = 100

Source: Monstat

14 Mining and quarrying production increased by Graph 1.3 DevelopmentsReal Sector 16.2%, mainly due to the growth of production in mining metals of 109.7% as a result of a low Industrial output - trends, (Ø 2010 = 100) base, i.e. lower metal production in the first quarter of the previous year. Growth was recorded in other mining areas of 20.1% and coal extraction by 0.7%.

Due to more favourable hydrological situation and the equipment, the electricity, gas and steam supply sector recorded output growth of 9.7% relative to the Q1 2014.

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 showed fluctuations trending downward, especially in the middle of the year, and recorded moderate annual growth in January, February, September and October. In Q1 2015 total industrial output increased.

1.2.2. Tourism

Coastal destinations were the most visited, with Graph 1.4 a share of 50.2% in total arrivals, which represents 2.5% y-o-y increase. The number of ar- Tourist arrivals in the period January- March rivals in the capital increased by 19.3%, in the mountain area by 93.9%, in other tourist resorts by 45.1% and in other places 11.1%. The structure of foreign tourist arrivals in total arrivals shows the highest share of tourists from Alba- nia (14.7%), Serbia (13.6%), Russia (9.2%), Bosnia and Herzegovina (4.5%), Italy (3.7%) and France (2.1%).

The number of overnights amounted to 240,511 in Q1 2015 or 16.6% more than in the same period of 2014. Of this amount, domestic tourists recorded 58.239 overnights or 22.2% more than in Q1 2014, while foreign tourists recorded 182,272 overnights or 14.9% more than in the Source: Monstat

15 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Graph 1.5 previous year. In this period the number of Structure of tourist arrivals by resorts overnights increased in all regions. Coast region, which makes 68.9% of total overnights recorded increase by 8.5% while other tourist regions recorded increase of 36.4%. Number of overnights in the capital increased by 23.6%, in other places by 19.9%, while the largest increase in number of overnights was in mountain region (65.3%) as a result of the good weather conditions that have had a positive effect on winter tourist season.

Compared y-o-y, higher number of overnights was recorded by tourists from Ukraine (118.1%), Source: Monstat Germany (47.2%), Russia (7.7%) and Italy (2%) while observing tourists from neighbouring Graph 1.6 countries, the largest number of number of overnights was recorded by tourists from Albania Tourist overnights in the period January- March (68.9%), Bosnia and Herzegovina (16.9%), Ser- bia (5.1%), Kosovo (4.6%) and Macedonia (1.6%). Number of overnights of tourists from France declined by 15% and Croatia by 7.9%.

Promotion of the national tourist offer at international fairs continued in Q1 2015.

National Tourism Organization of Montenegro and tourist agency “Kompas” from Budva organ- ized a visit of representatives of the German tour operator “RV Touristik” to Montenegro in the period from 26 - 29 March 2015. It is expected that this tour operator will bring a significant number of tourists from Germany to Montene- Source: Monstat gro during this year.

Table 1.2

Fairs and presentations of Montenegrin tourism in Q1 2015

Fairs Dates Ferien 2015 - Vienna 15 – 18 January EMITT 2011 – Istanbul 22 – 25 January “ITF Slovakia” Bratislava 29 January - 1 February “Holiday World” Prague 19 – 22 February IFT - Belgrade 19 – 22 February “UTAZAS 2015” Budapest 26 February - 1 March ITB 2015 - Berlin 4 - 8 March MITT 2011 - Moscow 18 - 21 March

Source: Ministry of Sustainable Development and Tourism and National Tourist Organisation of Montenegro

16 Top-selling German journal „Die Welt“ presented the publication in which Montenegro is presented DevelopmentsReal Sector as the first German destination for investing and tourism in 2015, while the week newspaper “Hörzu” recommended Montenegro as the most beautiful destination for the beach tourism in 2015.

In March, the World Council of Travel and Tourism released a report in which Montenegro takes first place in the forecast of growth in tourism investments in 2015, with a rate of 15.6%. The report states that the total contribution of travel and tourism to GDP in 2015 could grow by 7.9%, while the average annual growth rate of tourism and travel would amount to 7.7% by 2025.

Box 1.1 - Tourism - European market and growth trend

According to the report of the European Travel Graph 1 Commission ( European Tourism in 2015: Trends & Prospects Q1/2015), the European market re- Foreign tourist arrivals in European countries, mains the number one in the world with over change in % 50% share of international tourist arrivals in the world tourism.

In the first months of 2015, most countries increased international arrivals and overnights. Cheaper fuel prices and the weakening of the euro were, inter alia, were stated as sources of growth, which enabled European destinations to become more attractive for international tourists. It is considered that the growth of dollar will increase the number of tourists from the USA to Europe by 6% in 2015. Due to the current political and economic situation, all European destinations, except Montene- gro and Romania, recorded a drop in tourist arrivals from Russia.

Source: TourMIS, As in previous years, Iceland increased for- * data vary (January-March) in different countries eign tourist arrivals by 30% in the first three months of 2015. The growth of tourist arrivals in the first three months was recorded in Croatia (25%), while two main ski destinations, Switzerland and Austria, recorded a growth of tourists by 2.4% and 11.4% in the first two months of 2015. Other major destinations such as Germany and Spain also recorded an increase in tourist arrivals in 2015 by 5.9% and 4.5%, respectively. The fall in tourist arrivals was recorded in Slovakia (-3.6%), mainly due to the departure of low cost companies from the country, as well as in Finland (-21.9%) and Estonia (-11.4%).

In the first quarter of 2015, Montenegro was visited by 19.3% more tourists than in the same period of 2014, while the number of overnights increased by 16.6%. Arrivals of foreign tourists in Montenegro have a growth trend in the first three months as a result of favourable weather conditions and good winter tourist season. There has been a growth of 16.7% of foreign tourists compared to the same period of the previous year, while the number of overnights of foreign tourists increased by 14.9%. (Graph 1 for Montenegro shows data for the first two months).

17 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

1.2.3. Forestry

The production of wood products amounted to 9.247 m³ in Q1 2015, which was 56.4% less than in Q1 2014.2

Graph 1.7 In February 2015, the Government of Montene- gro adopted the Forest Management Programme Production of forests assortments, in m³ 2015, which realization, among other things, will preventively protect forests against fire and negative impacts, increase afforestation of areas with the worst state forest and control the implementation of the annual plans of forest exploita- tion.

Representatives of the Ministry of Agriculture and Rural Development signed a Memorandum of Understanding on “Balkan Forest Forum” held in Sofia from 17 to 20 February, which tend to associate forestry sectors of the Balkan countries through joint projects and allocate the IPA funds. Source: Monstat

1.2.4. Construction

The value of executed construction works amounted to 64.2 million euros in the Q1 2015, recording a 9.6% y-o-y growth, and construction activity measured by effective working hours grew by 7.6%.

Graph 1.8

Construction activity

Source: Monstat

2 This is presented in weighted index, while presented in non-weighted index the output was 52.3% lower in the same period.

18 Monstat records show that the value of new construction contracts for buildings amounted to 4.9 mil- DevelopmentsReal Sector lion euros, which is a 62.7% y-o-y growth and the value of other new construction contracts amounted to 4.7 million euros, which is a y-o-y fall of 32.5%.

The Montenegrin delegation participated in the international real estate fair “MIPIM 2015” which was held from 10-13 March in Cannes. Event in Cannes is the largest international fair of investments and real estate, and Montenegro is recognized as one of the most stable countries of South East Europe with great advantages to attract investors.

1.2.5. Transport

According to Monstat data, in the first quarter of 2015, road passenger transport3 recorded 4.2% more passengers than in the same period of the previous year, while passenger transport measured in passenger kilometres increased by 8.9%.

In the reporting period, railway passenger transport grew 0.4%, while railway cargo transport (in thousand tonnes) decreased by 2%4 compared y-o-y.

In Q1 2013, air passenger transport recorded 170,032 thousand passengers, or 10.6% more than in Q1 2014, while air cargo transport grew 12.7%.

Total turnover in ports amounted to 305,496 thousand tonnes, recording a 25.5%% y-o-y decrease, whereby exports accounted for 50.7% and imports accounted for 48.9%5. In the observed period, exports grew 64.3%, and imports increased 0.2%.

Graph 1.9 Graph 1.10

Road passenger transport Air passenger transport

Source: Monstat Source: Monstat

3 At the time of writing this report were not available indices for road freight traffic. 4 Freight transport measured in tonne kilometres increased by 13.2%. 5 The sum of exports and imports does not give figure 100 due to the difference referring to the goods transit.

19 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

1.3. Prices

In March, CPI inflation amounted to 1.2% in relation to end-2014. The highest growth was recorded in prices of food and non-alcoholic beverages (2.9%) and other products and services (1.1%). Observing monthly trend in consumer price index, the highest increase was recorded in March and February of 1.1% and 0.3%, respectively, while price decline of (-0,2%). was recorded in January. Average consumer prices rate in the first three months of 2015 amounted to 0.8% y-o-y, while at the annual level, the prices recorded increase of 1.6%.

Graph 1.11 Prices from the category of food and non-alcoholic beverages in March compared to December last year Consumer prices recorded the highest growth of 2.9%. Within this category, there has been increase in prices of fruit (17.6%), vegetables (15.0%), other food products (1.8%), meat (1.4%), the price of sugar, jam, honey, chocolate and confectionery (1.4%), oils and fats (0.5%), fish (0.5%), bread and cereals (0.3%), while the prices of milk, cheese and eggs decreased by 0.9%. Prices of non-alcoholic beverages increased by 0.1%, while prices of alcoholic beverages and tobacco increased by 0.6%, due to higher prices of alcoholic beverages by 1.8%. During this period there was a growth in prices in the categories: housing, water, electricity, gas and other fuels by 0.1%, household equipment and routine household maintenance by 0.4%, health care 0.9%, recreation and culture by 0.3% and the price in the category of miscellaneous

Source: Monstat goods and services by 1.1%. The fall in prices was recorded in the following categories: clothing and footwear (-0.1%), transportation (-0.4%) and hotels Graph 1.12 and restaurants (-0.4%). In categories communication and education there was no change in prices in Total and core inflation trends (monthly rate) March this year compared to December 2014.

Monthly core inflation in February and March recorded lower level than the official monthly inflation, while in January, both rates were the same. Core inflation as well as the officially published inflation rate had negative growth only in January.

Annual inflation in March was 1.6%, while annual inflation measured by the harmonized index of consumer prices stood at 0.9%.

The price growth on an annual basis, in the category of food and non-alcoholic beverages of 3.3%, which otherwise makes 38.6% of total products structure for the calculation of inflation was mostly affected Source: Monstat and CBCG calculations by the overall annual inflation of 1.6%. Within this

20 category, there was increase in prices of bread and cereals (6.4%), meat (1.1%), fish (2.0%), milk, cheese and DevelopmentsReal Sector eggs (0.2%), oils and fats (0.6%), fruit (3.4%), vegetables (15.2%), sugar, jam, honey, chocolate and confec- tionary products (2.3%), and other food products (2.2%), while only the prices of non-alcoholic beverages decreased by 0.7%. The growth in prices was recorded in the category of clothing and footwear by 5.8%, mainly due to higher prices of clothing by 5.7% and prices of footwear by 5.9%, followed by the category alcoholic beverages and tobacco (1.3%), housing, water , electricity, gas and other fuels (1.6%), health care (2.7%), communications (0.1%), recreation and culture (2.7%) and other products and services (0.9%). Graph 1.13 Categories that registered a decline in annual inflation in March are transportation (-5.2%), hotels and Annual price changes in the category food and restaurants (-0.6%) and household equipment and non-alcoholic beverages in selected countries routine maintenance (-0.5%), while the prices in the category education did not change.

Prices of food and non-alcoholic beverages had high fluctuation in the countries of the region, as graph 1.13 shows. As for the neighbouring countries, Serbia recorded the highest annual price increase in this category of 4.7%, followed by Montenegro, Bosnia and Herzegovina, and Croa- tia and Macedonia amounting to 3.3%, 0.7%, and 0.4% each, respectively. Only Macedonia recorded annual price in this category also in March 2014, while other selected countries recorded negative rate in the category food and non-alcoholic beverages, which in addition to transport prices, deter- Source: Monstat and the statistical offices of the selected mined the total inflation level in 2014 and 2015.6 countries

Table 1.3

Share of selected categories in total inflation6

Weights III 15/XII 14 Growth rate Contribution

TOTAL 1000 101.2 1.2 1.2 Food and non-alcoholic beverages 386.4 102.9 2.9 1.1 Alcoholic beverages and tobacco 37.9 100.6 0.6 0.0 Clothing and footwear 70.7 99.9 -0.1 0.0 Housing, water, electricity gas and other fuels 153.1 100.1 0.1 0.0 Furnishing, household equipment and routine 46.9 100.4 0.4 0.0 household maintenance Health care 38.2 100.9 0.9 0.0 Transport 101.0 99.6 -0.4 0.0 Communication 57.1 100.0 0.0 0.0 Recreation and culture 27.2 100.3 0.3 0.0 Education 15.7 100.0 0.0 0.0 Hotels and restaurants 23.0 99.6 -0.4 0.0 Other goods and services 42.8 101.1 1.1 0.1

Source: Monstat and CBCG calculations

6 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.

21 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Graph 1.14 Annual inflation in the Euro area was -0.1%, whereby the greatest impact on inflation was re- Oil prices, monthly growth rate corded by telecommunications with an annual drop of 2.1%, oil with the decrease of 19.3%, and prices of fuel with a drop of 9.0%, and tobacco prices, which recorded an annual growth of 2.8%, prices of services in restaurants and cafes with an annual growth of 1.3%, and the like.

In Q1 2015, the oil prices at global markets declined in relation to Q4 2014. The average price of the OPEC reference basket in Q1 2015 amounted to 50.3 USD/barrel, which is a 31.4% lower relative to December 2014. The average price of Brent in Q1 2015 was 54.0 USD/barrel, or 29.2% lower relative to Q4 2014. Oil prices at the world market during the first three months were at a fairly low level, with the lowest recorded rate in January below the level of price from March 2009. This trend Monstat and “Monthly Oil Market Reports”, OPEC was mainly due to the increase in oil production by applying new technologies, slowing economic growth in China, as well as reducing the demand for that energy generated due to the stocks.

In March, prices of manufactured products, increased by 0.2% compared to December 2014, while the prices in manufacturing industry increased by 0.3%, while prices of mining and quarrying and supply Electricity, gas and water supply remained unchanged The producers` prices of manufactured products recorded an annual growth of 0.5%.

1.4. Labour Market Graph 1.15 The average number of employees in Q1 2015 amounted to 170,687 and it was 1.1% higher than Number of employees in the same period of 2014, while the number of employees in March 2015 was 0.4% higher relative to December 2014. Thirteen of the nineteen sectors increased the number of employees, and observed by individual sectors, the highest growth was recorded in the real estate sector (13.6%), professional, scientific and technical activities (6.1%), arts, entertainment and recreation (4.5%), wholesale and retail trade, repair of motor vehicles and motorcycles (2.9%), accommodation and food services (2.6%). The highest decline in the number of employees as recorded in manufacturing industry (5.8%), electricity, gas, steam and air conditioning (4.1%), agriculture, forestry and fishery (2.6%), water supply, waste water management, control of Source: Monstat the waste removal and the like (2.1%).

22 Graph 1.16 The structure of persons in employment in Janu- DevelopmentsReal Sector ary-March 2015, shown through nineteen sectors of new classification of activities (the former clas- Structure of persons in employment, in % sification contained fifteen sectors), shows that the highest number of persons was employed in the trade sector (20.8%), public administration (12.3%), while the least number of persons was employed in real estate businesses sector (1%) and mining and quarrying sector (1.1%).

The Government of Montenegro and the Euro- pean Commission signed an agreement on implementation of the EU Programme for employment and social innovation (EaSI). EaSI program provides to private persons and the private sector from Montenegro to propose projects in the field of social policy, innovation and entrepreneur- ship, promotion of labour mobility for obtaining funds in amount of 920 million euros in the period from 2014 to 2020.

In February, the Government adopted measures and activities for achieving the goals of labour market reforms defined in the Programme of Economic Reforms of Montenegro for the period 2015-2017. The objectives of future reforms of the labour market are related to the harmonization of the education system with the requirements of the labour market, strengthening active labour Source: Monstat market policies and increasing the flexibility of the labour market. In the function of the achieve- ment of stated objectives, measures are defined Graph 1.17 relating to the development of qualifications in accordance with the requirements of the labour Number of unemployed persons market, increasing labour force participation in lifelong learning, improving vocational training for young people, increasing funding for active employment policy and the improvement of the legislative framework in the labour market.

The number of registered unemployed persons in Q1 2015 averaged to 35,076 or 1% more than in Q1 2014. It increased by 0.6% relative to Decem- ber 2014.

As per the Employment Agency data, the unemployment rate in March 2015 amounted to 15.04%, being 0.10 percentage points higher than the one recorded in March 2014. Monstat Source: Employment Agency of Montenegro publishes different unemployment rate through

23 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Graph 1.18 quarterly Labour Force Survey, which is in compliance with the EUROSTAT recommendations. Unemployment Graph 1.18 shows trends of these two rates.

Seasonal employment fair in tourism “Summer Job 2015” was held in March 2015 in Podgorica, Kotor and Bijelo Polje. Project “Summer Job” en- ables seasonal employment of Montenegrin stu- dents and graduates in domestic companies and institutions in an effort to increase the participation of local labour force and youth employment. The fair was attended by 60 companies from trade, tourism, construction and other business areas.

Wages and Salaries

Monstat data show that average salary in Mon- tenegro amounted to 727 euros recording 0.3% y-o-y increase. Average salary without taxes and contributions amounted to 480 euros, or 0.6% Source: Monstat and Employment Agency of Montenegro more than the average salary without taxes and contributions in the same period of 2014.

Table 1.4

Average wages and salaries without taxes and contributions, by sectors

Salaries without taxes and contributions Index

ØI-III 15 Ø I - III 14 Ø I - III 15 Ø I - III 14 TOTAL 477 480 100.6 Agriculture, forestry and fishery 476 489 102.7 Mining and quarrying 617 579 93.8 Manufacturing industry 438 439 100.2 Electricity supply 788 831 105.5 Water and waste management 450 472 104.9 Construction 430 436 101.4 Wholesale and retail trade 336 340 101.2 Transport and warehousing 498 494 99.2 Accommodation and food service activities 383 403 105.2 Information and communications 653 661 101.2 Financial and insurance activities 863 878 101.7 Real estate activities 684 637 93.1 Professional, scientific and technical activities 412 399 96.8 Administrative and assisting services 375 355 94.7 State administration and defence, social insurance 495 509 102.8 Education 453 459 101.3 Health care and social protection 480 484 100.8 Arts, entertainment and recreation 375 381 101.6 Other service activities 462 386 83.5

Source: Monstat

24 The highest salary without taxes and contributions were recorded in the financial activities and in- DevelopmentsReal Sector surance (878 euros), electricity supply sector (831 euros), information and communication (661 euros), while the sector of retail and wholesale trade recorded the lowest salaries (340 euros). The highest growth of salaries without taxes and contributions was recorded in the sector of electricity supply by 5.5%, while the lowest salaries were in manufacturing sector (0.2%). The decline in salaries without taxes and contributions was recorded in six sectors, with the largest decrease in the sector other services (16.5%), while the lowest decline was in the sector transportation and storage (0.8%).

Box 1.2 – Average wages and salaries in the former Yugoslav countries, March 2015

Data on average salaries in March 2015 showed substantial difference in the amount of income by individual countries of the former Yugoslavia. Salaries without taxes and contributions in Slovenia, Croatia, Bosnia and Herzegovina, Montenegro and Macedonia recorded growth compared to the same month of the previous year, while in Serbia they declined on an annual basis. The highest nominal growth in net annual salaries was recorded in Croatia with growth of 4%, followed by Macedonia 1.9% and Slo- venia 1.1%, Bosnia and Herzegovina 0.8% and in Montenegro 0.4%. Net earnings in Serbia decreased by 1.1% compared to March 2014. 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.

Table 1

Salaries in former Yugoslav countries, in euros (ranked as per net amount)

Country Net wages and salaries Gross wages and salaries Slovenia 1.008 1.550 Croatia 749 1061 Montenegro 476 721 Bosnia and Herzegovina 425 661 Serbia 359 492 Macedonia 348 511

Source: Statistical offices and central banks of the selected countries

MONETARY DEVELOPMENTS 02

Monetary Developments Monetary

During the first quarter of 2015, the banking system of Montenegro was liquid and solvent. A positive financial result in the amount of 2.3 million euros was recorded at the level of the banking system.

During the first quarter of 2015, the balance sheet of banks recorded a growing trend. On the assets side, the growth was mainly a result of the increase of banks’ receivables arising from securities, while on the liabilities side, the growth was primarily the result of the increase in deposits. Total loans granted by banks, as well as borrowings from banks continued with negative tendency during the reporting period.

However, if we observe new loans during Q1 2015, it can be concluded that the banks’ credit activity was more intense than in the same period of the previous year. In the reporting period, 12.1 million euros was granted which is 6.8% more than in the first quarter of the previous year.

Although bad loans still represent a significant portion of banking loans, loan portfolio of banks improved over the observed period. The improvement is reflected in the decline in the amount of non- performing loans, as well as the decline of their share in total banking loans in relation to the comparative period of 2014.

Average weighted lending and deposit interest rates in the first quarter of this year continued downward trend. Still, the decline in interest rates on banks’ deposits recorded in this period bore more relevance, resulting in keeping the interest rate spread on and uptrend in Q1. In March 2015, the difference between lending and deposit interest rates on total loans and deposits amounted to 7.45 percentage points representing an increase of 0.37 percentage points on the annual basis.

In April 2015, a new bank has begun operations and it is expected that another new bank which obtained license will begin operations during the year. With the entrance of new banks , it is realistic to expect that the greater competition in the banking market will act as an additional catalyst of the decline in lending interest rates, and the intensification of lending activity in the future.

2.1. Banks

2.1.1. Banks’ liquidity

During the first quarter of 2015, the banking sector in Montenegro was characterized by a high level of liquidity. According to the key liquidity indicators, in this period, all the banks regularly discharged of their current obligations and maintained their daily and ten-day ratios above the statutory minimum7.

7 The Decision on Minimum Standards for Liquidity Risk Management in Banks (OGM 60/68), which defines the obligation for banks to maintain minimum daily (0.9%) and ten-day (1.0%) liquidity ratios, is in force.

29 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Graph 2.1 Graph 2.2

Aggregate daily liquidity indicator Aggregate ten-day liquidity indicator

Source: Banks’ daily reports Source: Banks’ ten-day reports

Although during Q1 2015 they were at a level Graph 2.3 above the prescribed minimum, liquidity ratios recorded a decreasing trend. At the end of the Liquid assets in million euros (left scale) and observed period, both ratios were at a level lower share of liquid assets in total assets (right scale) than at the end of 2014, and compared y-o-y.

Liquid assets of banks amounted to 583.7 million euros at end-March 2015. In relation to end-2014, banks’ liquid assets declined by 16.3%, while it increased by 9.1% at the annual level. At end Q1 2015, the share of liquid in total assets amounted to 18.02%, which is a decline compared to end- 2014 when it amounted to 22.23%, and an increase in relation to end-Q1 2014, when it totalled at 18.02%.

At end-March 2015, loans to deposits ratio amounted to 1.01 being lower in relation to end- 2014, when it amounted to 1.03 as well as compared to end-March 2014, when it amounted to Source: CBCG 1.14.

30 2.1.2. Aggregate balance sheet of banks

At end-March 2015, total banks’ assets amounted Graph 2.4 to 3,138.6 million euros, recording a 2.4 million euros or 0.1% increase in relation to end-2014, Total assets, loans and banks’ deposits, Monetary Developments Monetary and a y-o-y increase of 169 million euros or 5.7%. in million euros Bank’s assets structure reveals that in the observed period, total banking loans accounted for the main share of 73.7%, while on the liabilities and capital side the main share of 73.7% was recorded by deposits.

The increase in banks’ assets was mainly a result of the increase in securities, which were by 97.3 million euros or 40.1% higher compared to end- 2014, and by 116.4 million euros or 52.1% higher compared to end-March 2014.

Banks’ loans - a major item in the assets structure - recorded decline in the observed period, whereby they recorded decrease of 1.1% in relation to end-2014, and an annual decrease of 2.7%.

On the liabilities and capital side, total deposits recorded an increase of 0.3% in relation to De- Graph 2.5 cember 2014, and an increase of 10% in rela- Non-performing assets, in million euros tion to March 2014. With the share of 14.2%, the (left scale), the share of non-performing in banks’ capital takes second place in the structure total banks’ assets, in % (right scale) of banks’ liabilities and capital, increasing in relation to end-2014 (0.7%) as well as at the annual level (6%). Banks’ total borrowings accounted for 7.9% of the banks’ liabilities and capital, recording an increase of 0.2% in relation to end-2014, while in relation to the same period of 2014, they declined by 23.6%.

The positive trend is present in the movement of non-performing assets of banks. Thus, at the end of the first quarter of the current year, of the total assets of banks, 427.7 million euros or 13.6% were non-performing assets, representing a decrease of 1.8% compared to the previous year, and annual decrease of 5.9%.

In Q1 2015, banks recorded positive financial result totalling 2.3 million euros. Return on average assets (ROA) amounted to 0.30% at end Q1, while return on average equity (ROE) amounted to 2.45%. Both indicators declined in relation to end-2014, when they amounted to 0.79% and 5.35%, respectively, as well as in relation to the same period of 2014 when they amounted to 1.30% and 9.27%, respectively.

31 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

2.1.3. Banks’ lending activity

Graph 2.6 During the first quarter of 2015, total banks’ loans had a negative trend, and declined at an Banks’ loans structure by sectors in average monthly rate of 0.4%. At end-March, million euros banks’ loans amounted to 2,340.8 million euros, which is by 26.4 million euros or 1.1% less than at end-2014, i.e. 64.2 million euros or 2.7% less than at end-March 2014.

Out of the total amount of banking loans, the main share of 40.1% was granted to corporate sector, followed by the share of 38.6% granted to household sector, 14.3% granted to financial institutions, 4.4% to General Government, while the share of 2.6% referred to the “other” category.

At end-Q1 2015, resident legal persons’ debt arising from loans amounted to 1,063.4 million euros, which is 0.9% more than at end-2014, i.e. 5% lower y-o-y. Observed by industries, the main share of 38.7% referred to wholesale and retail Graph 2.7 trade loans and repair of motor vehicles and motorcycles, followed by construction with the Loans to resident legal persons by industries, share of 10.6%, and manufacturing industry with in million euros 10.5%.

Observed by purpose, the main share of banks’ loans referred to liquidity (20.5%), cash loans (16.2%), housing loans (13.6%), loans for the purchase of fixed assets (7.2%), and loans for construction and renovation of buildings (6.4%). Banks’ funds were considerably less used through consumer loans, overdrafts, credit cards, loans for refinancing of obligations to other banks, loans for the preparation of tourist season, purchase of cars, purchase of securities and other purposes.

Banking loans are mostly granted in euros for a period over one year. Therefore, at end-March, 2,183.3 million euros or 93.3% of total granted loans referred to loans granted in euros. Ob- served by maturity, a total of 1,697.4 million euros i.e. 72.5% of banks’ loans referred to long- term loans.

32 Graph 2.8 Graph 2.9

Non-performing loans and loan value adjustment, Structure of banks’ loans by purpose, in % in million euros (left scale), share of non- performing loans in total loans, in % (right scale) Monetary Developments Monetary

At end-March 2015, banks’ non-performing loans amounted to 369.4 million euros. Non-performing loans showed positive trends reflected in the decline of 1.7% in relation to end-2014, and in the y-o-y decline of 6.2%. Non-performing loans in total banks’ loans amounted to 15.78% at end- March this year, and it decreased by 0.09 percentage points compared to the previous year, and by 0.60 percentage points on an annual basis. Total value adjustments of the banking loans amounted to 169.9 million euros and it accounted for 46% of banks’ non-performing loans. The percentage of coverage of non- performing loans by loan value adjustment increased in relation to end-2014 while it decreased in relation to the same period of 2014, when it amounted to 46.7%.

At the end of the observed period, past due loans amounted to 492.2 million euros or 21% of total banking loans. Past due loans increased by 10.6% in relation to end-2014, while observed annually, they declined by 11.6%.

New loans

During the first quarter of 2015, banks approved a total of 190.3 million euros of new placements in the form of loans. Lending activity of banks during the period was more intense than in the same period of the previous year, as indicated by the fact that 12.1 million or 6.8% more loans were approved compared to the first quarter of the previous year.

The maturity structure of new loans shows that the dominant part of these loans (70.2%) was granted for a period longer than 1 year. The share of long-term loans in the structure of new loans has significantly increased compared to the same period of 2014 when it amounted to 54.4%.

33 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Graph 2.10 Graph 2.11

New loans, maturity structure, New loans, structure by sectors, in thousand euros in thousand euros

During the first quarter of the current year, observed by sectors, most of the loans were granted to the corporate sector (56.2%) and households (37.1%).

Earmarked structure of new loans shows that during the first quarter of the current year the dominant part of the 76 million or 40% of total new loans were approved for liquidity, followed by cash loans (49.3 million euros or 25.9% of the total new loans).

2.1.4. Deposits

Banks’ deposits in Q1 2015 increased, record- Graph 2.12 ing the average monthly growth at a rate of 0.1%. At the end of March 2015, deposits with banks Deposits with banks by sectors, in million euros amounted to 2,314.6 million euros, which is 6.5 million euros or 0.3% more than at end-2014 or 210.4 million or 10% more than in the previous year.

The largest depositors in the Montenegrin banking system are households and corporate sectors. Deposits of these two sectors accounted for 85.9% of total deposits at the end of the period, where both sectors increased funds deposited in banks by 9.2% and 17%, respectively at the annual level. General government is the third most important depositor in Montenegrin banking system with 4.1% of total deposits in banks, and thereby recording decrease of deposits by 0.5% at the annual level. Deposits of financial institutions made up 2.1% of total deposits in banks recording decline of 30.3% at the annual level.

34 Graph 2.13 Demand deposits amounted to 1,065.4 million euros or 46% of total deposits in banks, while Maturity structure of deposits, % 1,247.5 million euros or 53.9% referred to time deposits. The maturity structure of term deposits with banks shows an evident positive trend re- Developments Monetary flected in the increase of share deposits with maturity over one year, and simultaneous decline in the share of short-term deposits. The share of long-term deposits in total deposits was 30% or 30 percentage points at the annual level, while 23.9% referred to deposits with maturity of up to one year, which recorded decrease in total deposits by 9.5 percentage points. Minor part of banks’ deposits (0.1%) referred to funds at “escrow” account.

The increase in the share of deposits with maturity over one year in the deposits’ structure is significant from the aspect of improvement of maturity match of assets and liabilities, which remains mismatched.

2.1.5. Corporate and retail sector

2.1.5.1. Retail sector

Total debt of the household sector based on loans taken from banks amounted to 904.6 million euros at end-March 2015. Indebtedness of this sector based on loans increased by 10.8 million euros or 1.2% in relation to end-2014, and it recorded an annual increase of 17.5 million euros or 2%. The average monthly loans of this sector grew at a rate of 0.4% during the first three months of the current year, while in the same period of the previous year the average monthly growth rate was 0.2%. The household sector is mostly indebted with banks for a period longer than one year. At end-March 2015, household sector accounted for 94.8% of long-term loans.

Broken down by type of loan at the end of March 2015, the dominant part of the 457.7 million or 50.6% of total loans to households was earmarked, with the largest share (64.3%) earmarked loans related to housing loans In addition to earmarked loans, significant share of 39.3% in total loans referred to cash loans, while mortgage loans made up 5.9%. Indebtedness of households on the basis of credit cards made up 3.3% of the total debt of the sector to banks at the end of the first quarter of 2015, while the minor part related to leasing (0.4%).

Analysis of new loans reveals that the banks’ lending activity to the household sector was more intensive in Q1 2015 in relation to the same period of 2014. Thus, during the observed period a total of 70.5 million euros of new loans was allocated, which was 9.9 million euros or 16.4% more than in the same period of the previous year. Observed by the purpose of the new loans, household sector mainly asked for cash loans (65.7%), followed by loans for liquidity (14%) and loans for the purchase and renovation of dwellings (9%), while the remaining 11.3% of new loans accounted for all other

35 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Graph 2.14 purposes. In the maturity structure of new loans New loans, maturity structure, during the first three months of 2015, loans in thousand euros granted with a maturity of over one year (94.9%) were dominant.

At the end of March 2015, household deposits amounted to 1,352.8 million, which was 21 million euros or 1.6% more than at the end of the previous year, i.e. 113.6 million euros or 9.2% more than in same period of the previous year. The growth of household deposits is more intense than in the same period of the previous year, as indicated by higher recorded average monthly growth rate of deposits in the first quarter of the current year (0.5%) compared to the same period of the previous year (0.05%).

At the end of the first quarter of 2015, demand deposits accounted for 36.5% of total household deposits, short-term deposits 27.3%, while 36.2% referred to the funds deposited for a period longer than one year. Retail sector deposits maturity structure shows continuation in the decline of short-term deposits an d the increase of long-term deposits. Thus, households’ long-term deposits recorded the most significant annual increase of 105.8 million euros or 27.5%, the increase in demand deposits amounted to 85.4 million euros or 21%, while short- term deposits declined by 77.6 million euros or 17.4%.

At end-Q1 2015, household sector net savings amounted to 448.2 million euros, being 10.2 million euros or by 2.3% higher than at end-2014, while at the annual level it increased by 96.1 million euros or 27.3%.

Graph 2.15 Graph 2.16

Loans, deposits and net household savings, Retail deposits, maturity structure, % in million euros

36 Loans to deposits ratio for this sector amounted to 0.67 at the end of the observed period retaining the value recorded at end-2014, while declining in relation to end Q1 2014, when it amounted to 0.72.

2.1.5.2. Corporate sector Monetary Developments Monetary The corporate sector, as the most significant loans’ beneficiary, reported debt based on loans totalling 938 million euros, accounting for 40.1% of total loans granted by banks . Corporate loans were 20.1 million euros or 2.2% higher than at the end of the previous year, while the annual level they decreased by 9.7 million euros or 1%.

When comparing new loans of banks in the first quarter of the current and prior-year quarter, it can be concluded that banks’ lending to the corporate sector improved. Banks in this sector approved a total of 106.9 million euros of new loans, which is 10.6 million euros or 11.1% more than in the same period of the previous year. In the structure of total new loans to this sector loans granted for a period longer than 1 year with 61% share were dominant.

Graph 2.17 Graph 2.18

Corporate loans, in million euros (left scale), New corporate loans, maturity, monthly change in corporate loans, in thousand euros in % (left scale)

37 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Box 2.1 - Debt from frozen accounts

Graph 1 Some 69,774 accounts of companies and en- Number of legal persons and entrepreneurs with trepreneurs were registered in the Central frozen accounts, amount of debt arising from Registry of Accounts at end-March 2015. Some frozen accounts in million euros (left scale) 20.6% or 14,381 of total number of registered accounts were frozen. Number of frozen accounts has increased by 221 compared to the previous year, as well as on an annual basis. by 925.

Total debt arising from the blockade amounted to 501.2 million euros at the end of the first quarter of the current year, and his movement is there was negative trend that was reflected in an increase in debt on frozen accounts in relation to the previous year in the amount of 5.1 million euros or 1%. Compared to the same period of the previous year there was an increase in debt on frozen accounts in the amount of 19.4 million euros or 4%. Source: CBCG

Corporate sector was the second most important depositor in Montenegro’s banking system. At end- March 2015, total amount of corporate sector’s deposited funds stood at 635.1 million euros, making up 27.4% of total deposits. Corporate deposits de- Graph 2.19 creased by 5.6 million euros or 0.9% in relation to end-2014, whereas at the annual level they in- Net corporate debt, in million euros creased by 92.3 million euros or 17%.

With the debt arising from loans exceeding 302.9 million euros in relation to its funds deposited in banks, corporate sector was the most significant net debtor at end-Q1 2015. A net debt of this sector was 9.2% higher than at the end of 2014, while compared to March 2014 was lower by 25.2%.

Loan to deposit ratio for this sector was 1.48 at end of Q1 2015, and it deteriorated relative to the 2014 year-end (when it amounted to 1.43), yet it improved relative to March 2014 (when it amounted to 1.75).

38 2.1.6. Banks’ foreign assets and liabilities

Foreign assets of banks at end-March 2015 amounted to 572.6 million euros, recording a drop of 40.4 million euros or 6.5% compared to the end of 2014, while compared to the same period of the previous year it recorded an increase of 10.9 million euros or 1.9%. Monetary Developments Monetary

Compared to the previous year, the decrease in foreign assets was a result of the fall in bank deposits of non-residents, totalling 49.5 million euros or 13.3%, and partly due to the decrease of securities of non- residents, which were 5.3 million euros or 5.9% lower. Other positions of foreign assets recorded Graph 2.20 an increase, while the cash was 11.6 million euros or 14.2% higher, loans 2.1 million euros or 3.4% Structure of banks’ foreign liabilities, higher, while all other receivables of non-residents in thousand euros recorded an increase of 751,000 euros or 8.2%.

On an annual basis, the growth of foreign assets is primarily the result of growth of securities, which were 22.3 million or 36.7% higher, followed by cash, which was 15 million euros or 19.2% higher, and category „other“ which recorded an increase of 531,000 euros, or 5.7%. At the same time, annual decline was recorded by deposits of foreign banks (20.3 million or 5.9%) and loans (6.6 million euros or 9.3%).

The most important category in the structure of foreign assets were banks’ deposits with foreign banks, which amounted to 322.4 million euros and accounted for 56.3% of foreign assets at end- Q1 2015. Graph 2.21 Foreign liabilities of banks amounted to 695.9 million euros at the end of the first quarter of Structure of banks’ foreign liabilities, 2015, and recorded an increase of 9.3 million eu- in thousand euros ros or 1.4% compared to the previous year and a decrease of 34.8 million euros or 4, 8% y-o-y.

In the structure of foreign liabilities, the dominant share of 64.2% was recorded by deposits of non-residents, while the borrowings accounted for 32.8%, securities 2.2%, and the rest (0.8%) referred to other items in foreign liabilities.

The growth of foreign liabilities compared to the end of 2014 is the result of growth in deposits of non-residents in the amount of 20.4 million euros or 4.8%. At the same time, securities were at the same level, while borrowings recorded a decrease of 9.3 million euros or 3.9%. All other li-

39 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Graph 2.22 abilities to non-residents amounted to 1.8 million The structure of non-resident deposits by euros or 23.8% lower. sectors, in thousand euros At the annual level, the decline in foreign liabilities was a result of decline of foreign borrowings of banks in the total amount of 101.1 million euros or 30.7%. At the same time, the most significant growth was recorded by banks’ deposits in the amount of 62.4 million euros or 16.2%.

The most important foreign source of financing for banks, non-resident deposits, recorded the growing trend during the observed period. In the structure of foreign deposits, deposits of natural persons non-residents were dominant, which in the reporting period recorded a constant growth. Also, the funds deposited in local banks by foreign companies recorded growth. Insignificant portion of foreign deposits was deposited by foreign financial institutions and other sources.

During the first quarter of 2015, foreign assets were consistently lower than foreign liabilities, and at the end of the observed period, foreign assets amounted to -123.3 million euros. This is largely a result of the aforementioned growth in deposits of non-residents in local banks and a decrease in deposits of domestic banks abroad.

Foreign liabilities to total assets ratio of banks shows that non-residents financed 22.2% of total bank assets, while 18.2% of banks ‘assets related to banks’ claims of non-residents. The gap between foreign assets and foreign liabilities of banks amounted to -3.9% at the end of March 2015.

Graph 2.23 Graph 2.24

Share of foreign assets, foreign liabilities and Structure of banks’ foreign liabilities, net foreign banks’ assets in total assets and in thousand euros liabilities, %

40 2.1.7. Banks’ capital

At end-March 2015, total banks’ capital amount- Graph 2.25 ed to 447.1 million euros, which was a y-o-y increase of 3.1 million euros or 0.7% (graph 2.26). Aggregate financial result, in thousand euros Developments Monetary The increase in capital over the observed period was induced mostly by the recapitalisation of one bank in February, and the profits recorded in the observed period.

The total financial result at the end of the first quarter of 2015 was positive and amounted to 2.3 million euros, which represents a significant decrease (76.2%) compared to the same period of the previous year. Seven banks recorded profit, while five reported loss at end-Q1 2015.

During the first quarter of 2015, one bank increased capital in the total amount of 2.3 million by issuance of shares.

Solvency ratio of the banking system was above legally prescribed minimum of 10%. At the end of the period, the solvency ratio stood at 15.94% and recorded a decline compared to the previous year, when it stood at 16.18%, while growth was recorded compared to the same period last year, when it stood at 15.05%.

The ownership structure of banks’ capital was dominated by foreign capital with 81.4%, domestic private capital accounted for 16.1%, while the state had a share of only 2.5% in the capital of the banking system.

Graph 2.26 Graph 2.27

Total capital of banks (left scale) in million Aggregate ROE, % euros and the solvency ratio (right scale), in %

41 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Return on average equity of the banking system (ROE) at the end of the period was positive and amounted to 2.45%. The value of ROE recorded a significant decline compared to the first quarter of 2014 when it stood at 9.27%. This indicator was positive in seven banks, while five banks had a negative ROE.

2.1.8. Banks’ reserve requirements

Graph 2.28 In the observed period, increase in deposits with banks lead to the increase in banks’ allocations for Reserves requirement (right scale) and total reserve requirement. At the end of the observed deposits (left scale), in million euros period, the reserves amounted to 216.1 million euros or 1.2 million euros or 0.6% more compared to the end of 2014, while compared to the same period of the previous year 19.9 million euros or 10.1% was allocated as reserves requirement.

The effective reserve requirement rate, measured by the ratio of reserve requirement and total deposits amounted to 9.34% at the end of the first quarter of 2015, and increased compared to the end of 2014 when it stood at 9.31%, and in relation to same period of the previous year when it stood at 9.33%. The ratio of required reserves to deposits plus borrowings at the end of the first quarter of 2015 was 8.47% and was significantly increased, primarily due to reduced levels of loans, on the one hand, and growth of reserve requirements, on the other hand.

Graph 2.29 Graph 2.30

Reserve requirements to total deposits and Structure of allocated reserve requirements, % borrowings ratio, %

42 The structure of allocated reserve requirement changed significantly in relation to 2014. At the end of March 2015, 47.4% was allocated to the reserve requirement account in the country, 26.6% was in the form of treasury bills, while 26.1% was allocated to the CBCG account in the country.

During the first quarter of 2015, no bank used reserve requirement for liquidity, and all banks were allocated reserve requirement in the prescribed amount. Developments Monetary

2.2. Banks interest rates

2.2.1. Lending interest rates Graph 2.31

On total loans Lending interest rates on total loans at the system level, annually, % The weighted average nominal interest rate (WANIR) on total banks’ loans in the first quarter of 2015 continued downward trend from the last quarter of 2014. Therefore, in March 2015, WANIR on total loans granted amounted to 8.30% recording a drop of 0.11 percentage points compared to the previous year and a decrease of 0.35 percentage points on an annual basis.

Also, weighted average effective interest rate (WAEIR) on total loans granted during the first three months of 2015 decreased constantly, thus continuing the trend from the last quarter of 2014. This rate in March stood at 9.11% and was lower by 0.11 percentage points compared to De- cember 2014, and by 0.31 percentage points on the annual basis. Evidently, the reduction in nominal and effective lending rates of banks is the result Graph 2.32 of recommendations of the Central Bank in July 2014 on the reduction of interest rates and inten- WAEIR on loans by maturity, annual level, % sified competition in the banking system.

WAEIR on short-term loans during the first quarter of 2015 recorded significant fluctuations and in March 2015 reached the amount of 8.88%. So this rate at the end of March 2015 was by 0.33 percentage points below the level recorded at the end of 2014, or by 0.38 percentage points below the level recorded in March 2014. WAEIR on long-term loans, on the other hand, has been steadily declining during the first three months, and in March stood at 9.13%, and compared to December and March last year was lower by 0.09 percentage points and 0.31 percentage points, respectively.

43 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Graph 2.33 On new loans

Interest rates on new loans at system level, WANIR on new loans in the first two months in- annually, % creased, while in March it recorded a significant monthly decline. In March 2015, WANIR on new loans amounted to 7.80% recording an increase of 0.02 percentage points compared to the end of 2014, and decrease of 1.27 percentage points on an annual basis. On the other hand, WAEIR on new loans recorded growth in January, and then monthly decline in February and March. This rate was 8.94% in March and dropped by 0.08 percentage points compared to the end of 2014, and 1.34 percentage points compared to March last year.

Observed by maturity, WAEIR on short-term loans in March 2015 stood at 9.03% and was by 1.20 percentage points and 0.37 percentage points lower than in December and the same month of the previous year. At the same time, the interest rate on long-term loans was 8.92%, increasing by 0.40 percentage points compared to the end of 2014 and recording a significant decline of 2.11 percentage points at the annual level.

If we observe interest rates on new loans by sectors, we can conclude that at the end of the first quarter of 2015 effective interest rate on new loans to businesses and households was the lowest in the last three years. WAEIR on loans to households in March 2015 amounted to 10.93% and dropped by 0.22 percentage points compared to December 2014, and decreased by 0.93 percentage points compared to the same month of the previous year. On the other hand, WAEIR on loans granted to the corporate sector was at a lower level than the rate at which banks granted loans to households. The new rate in March stood at 7.91% and decreased by 0.19 percentage points compared to December last year, and decreased by 1.42 percentage points on an annual basis.

Graph 2.34 Graph 2.35

Interest rates on new loans by maturity, Interest rates on new loans by sectors, annually, % annually, %

44 Observed by the purpose for which the loans were granted by banks during the first three months of 2015, the highest WAEIR was recorded on loans for the purchase of consumer goods (16.02% in Febru- ary), followed foreign payments (11.74% in March), cash loans (11.54% in January) and for the preparation of the tourist season (11.44% in March). Monetary Developments Monetary 2.2.2. Deposit interest rates Graph 2.36 WAEIR on deposits continued downward trend in the first quarter of 2015. In March, the rate was WAEIR on deposits, annually, % 1.66% and was 0.20 percentage points lower than at the end of 2014, and by 0.68 percentage points compared to March last year.

Observed by maturity, compared to December of the previous year, only the interest rate on deposits with maturity up to 3 months increased by 0.26 percentage points. Interest rates for all other deposits’ maturities ended at lower levels, with the largest drop of rate on deposits over 5 years (0.49 percentage points). At the annual level all rates recorded a decline, with the largest drop of interest rate on deposits with maturity from one to three years (1.33 percentage points), while the smallest decrease was recorded by the interest rate on demand deposits (0.08 percentage points).

WAEIR on deposits of natural persons in March 2015 was 2.03% and compared to the end of the previous year it decreased by 0.26 percentage points, while compared to the same month of 2014 it was lower by 0.82 percentage points. During the Graph 2.37 first quarter of 2015, the highest rates were recorded in household deposits with maturity over WAEIR on loans and deposits, and interest five years. WAEIR on deposits of natural persons spread, % in March 2015 was 1.14% and compared to the end of the previous year it decreased by 0.14 percentage points, while compared to the same month of 2014 it was lower by 0.47 percentage points.

Despite the recorded decline, WAEIR on total loans in the first quarter of the current year, and as a result of a significant decline of WAEIR on banks’ deposits, interest rate spread still has growing trend in the first quarter. In March 2015, the difference between lending and deposit interest rates (interest rate spread) on total loans and deposits amounted to 7.45 percentage points, recording an increase of 0.09 percentage points compared to the end of 2014, and 0.37 percentage points on an annual basis.

45 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

2.3. Micro-credit financial institutions

Total assets and liabilities of micro-credit financial institutions (MFIs) amounted to 41 million euros in Q1 2015, and it grew by 0.9 million euros or 2.5% relative to end-2014, and by 4.9 million euros or 13.7% relative to Q1 2014.

Graph 2.38 At end-March 2015, total MFIs loans amounted to 41.5 million euros, which is by 2.2 million eu- MFIs loans by sectors, in thousand euros ros or 5.5% more than at end-2014, i.e. 3.1 million euros or 8.2% more at the annual level. Sectoral allocation shows that the dominant part (93.3%) of MFI loans related to the household sector, while 4.2% referred to non-financial institutions, and the remaining 2.5% to financial institutions.

During the first quarter of 2015, banks approved a total of 10.1 million euros of new loans. Credit activity is so intensified in the reporting period, recording growth of new loans in amount of 2 million euros or 24.1% compared to the same period of the previous year. The largest part of new MFIs loans (98.6%) was granted to the household sector.

In the structure of total liabilities, dominant share of 49.4% was recorded by total capital of the MFIs, while borrowings accounted for 45.7%, and other liabilities 5% of the balance sheet. At the end of the first quarter of 2015, MFIs capital amounted to 20.2 million euros, which is by 434,000 or 2.2% more than at the end of 2014, while on an annual basis it decreased by 230,000, or 1.1%. Capital from donations accounted for 69.8% of total capital, while retained earnings made up 28% and profit from the current year made up 2.3%.

At the end of the first quarter of 2015, MFIs loans amounted to 18.7 million euros and recorded an increase of 2.2 million or 13.3% compared to the end of 2014, while the annual growth was 4.9 million euros or 35%. The largest part of the loans (74.5%) MFIs took from foreign financial institutions, while 25.3% referred to loans taken from domestic banks.

At the aggregate level, MFIs recorded a net profit of 461,000 euros.

2.3.1. MFIs interest rates

On total loans

During the first quarter of 2015, WANIR and WAEIR continued the downward trend on total MFIs loans from the last quarter of the previous year. In March 2015, WANIR on total MFI loans amounted to 21.11% and was lower than at the end of 2014 by 0.22 percentage points, while it was higher than in the same month of the previous year by 0.20 percentage points. On the other hand, WAEIR in March stood at 25.24% and recorded a decrease compared to the end and the same month of the previous year by 0.42 percentage points and 0.92 percentage points, respectively.

46 At end-Q1 2015, WAEIR on total short-term loans was 26.36%, while on long-term loans it amounted to 25.14%. Both rates recorded a decline compared to the end of 2014 (by 0.33 percentage points and 0.42 percentage points, respectively), as well as on an annual basis (by 0.86 percentage points and 0.88 percentage points, respectively). Graph 2.39 WANIR on MFIs loans granted to the corporate Developments Monetary sector8 amounted to 17.11%, representing a de- WANIR and WAEIR on total MFIs loans, crease of 0.62 percentage points compared to the system level, annual level, % previous year, and a decrease of 0.95 percentage points compared to the March of the previous year. WAEIR on MFIs loans originated to the corporate sector amounted to 21.78%, and recorded a decline compared to December and March 2014 of 0.05 percentage points and 4.52 percentage points, respectively.

WANIR and WAEIR on loans to households amounted to 21.15% and 25.28%, respectively, where the nominal rate was 0.20 percentage points lower than at the end of 2014, and 0.15 percentage points higher on an annual basis, while effective interest rate declined by 0,41 percentage points or 0.88 percentage points, respectively.

On new loans

WANIR on new loans of MFIs in March 2015 Graph 2.40 stood at 20.90%, which was 0.40 percentage points more than at the end of 2014, while on Interest rates on new loans at system level, the annual level it recorded decline of 1.00 per- annual level, % centage points. WAEIR on new loans of MFIs in March was 24.78%, representing an increase of 0.16 percentage points compared to December of the previous year and a decrease of 1.95 percentage points on an annual basis.

Observed by maturity, WAEIR on new short- term loans amounted to 26.01% and in relation to December and March 2014 decreased by 0.21 percentage points and 1.68 percentage points, respectively. WAEIR on loans with maturity over one year in March amounted to 24.55%, recording an increase of 0.19 percentage points compared to December 2014 and decline of 1.85 percentage points at the annual level.

8 Pursuant to Article 153 of the Banking Law (OGM 17/08, 44/10, 40/11), MFIs may grant loans for specified purposes for development projects to business organizations, for business improvement to entrepreneurs and specified purpose loans to natural persons, from its own funds and from the funds borrowed on the money market.

47 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Observed by the purpose for which the loans were granted during the first quarter of 2015, the highest WAEIR rates were on loans for the purchase of land (30.34% in February) and for the purchase of apartments and remodelling (27.70 % in February).

Box 2.2 – Comparison of banks’ and MFIs lending interest rates

Interest rates at which banks and MFIs granted loans differed significantly. Namely, WANIR with banks amounted to 8.30% and WANIR amounted to 9.11%, while the same rates with MFIs amounted to 21.11% and 25.24%, respectively.

Banks granted short-term loans at WAEIR of 8.88%, while MFIs WAEIR was 26.36%; as regards long- term loans, banks’ WAEIR was 9.13%, and the same rate of MFIs was 25.14% (Table 1, Graph 1).

Table 1

Banks and MFIs interest rates on total loans, March 2015, %

Short-term Long-term Total

Banks MFIs Banks MFIs Banks MFIs WANIR 9.08 21.33 9.04 21.14 9.04 21.15 Households WAEIR 12.01 26.34 10.00 25.18 10.02 25.28 WANIR 7.59 14.58 7.68 17.44 7.67 17.11 Corporate WAEIR 8.72 27.90 8.21 20.97 8.29 21.78 WANIR 7.59 21.24 8.35 21.10 8.30 21.11 Total loans WAEIR 8.88 26.36 9.13 25.14 9.11 25.24

Graph 1 Banks and MFIs interest rates on total loans, %

48 There are large discrepancies with regard to interest rates on new loans granted by banks and those granted by MFIs. Namely, WANIR on banks’ new loans amounted to 7.80% and WAEIR amounted to 8.94%, while the same rates with MFIs amounted to 20.90% and 24.78%, respectively. Monetary Developments Monetary Banks granted short-term loans at WAEIR of 9.03% and MFIs at a rate of 26.01%. WAEIR on long-term loans with banks amounted to 8.92%, while it was 24.55% with MFI (Table 2 and Graph 2).

Table 2

Banks and MFIs interest rates on new loans, March 2015, %

Short-term Long-term Total

Banks MFIs Banks MFIs Banks MFIs WANIR 8.17 21.05 9.56 20.94 9.51 20.96 Households WAEIR 11.57 25.93 10.91 24.60 10.93 24.81 WANIR 7.23 16.08 6.85 18.88 6.96 18.34 Corporate WAEIR 9.41 29.49 7.32 21.86 7.91 23.32 WANIR 6.91 20.93 8.06 20.90 7.80 20.90 Total loans WAEIR 9.03 26.01 8.92 24.55 8.94 24.78

Graph 2 Banks and MFIs interest rates on new loans, %

MONEY AND CAPITAL MARKET 03

3.1. Money market Money and Capital Market and Capital Money During the first quarter of 2015, four auctions of Treasury bills with a maturity of 182 days were held.

Total value of issued T-bills was 72.2 million euros at end-Q1 2015. Compared to the same period of the previous year, the amount of T-bills was lower by 26.8%, reflecting the reduced need for short-term funds from domestic market.

In the reporting period, demand for T-bills was 10.2% lower than in the same period of the previous year. Total demand amounted to 109.9 million euros and exceeded the value of issued T-bills by 52.3%.

In the first quarter of 2015, T-bills were sold in Graph 3.1 the amount of 97.5 million euros, which means The amount of sold Treasury bills (left scale) that sold T-bills exceeded the total value of issued and the corresponding interest rate T-bills.9 Buyers at all T-Bills auctions were Mon- (right scale), the first quarter of 2015 tenegrin banks, while the Deposit Protection Fund was the buyer at two auctions.

The decreasing trend in weighted average interest rate on T-bills that began in 2012 continued in 2015. Thus, realized weighted average interest rate on total sold treasury bills amounted to 0.51% in the first quarter of 2015, which was 1.19 percentage points less than the weighted average interest rate on sold T-bills in the first quarter of the previous year. However, at the last auction held in March of this year, significantly higher weighted average interest rate has been achieved (1.20%).

Total state debt based on T-bills amounted to 107 million euros at 31 March 2015. Source : CBCG

9 At auctions held during the first quarter of 2015, the Ministry of Finance issued treasury bills with maturity of 182 days in the amount of 72.2 million euros, with the possibility of selling a larger number of T-bills than the number which was issued. Thus, the total sale in the amount of 97.5 million euros exceeded the total value of issued T-bills.

53 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

3.2. Capital market

Graph 3.2 In Q1 2015, only 12.2 million euros of turnover was achieved at Montenegro Stock Exchange, Total turnover in million euros (left scale) and number of transactions (right scale) at the which is 77.5% less compared to the same peri- Montenegro Stock Exchange od of the previous year. However, when arrang- ing transport one should bear in mind the fact that the turnover in the same period of the previous year was significantly higher due to the sale of government bonds in March 2014, totalling 43.2 million euros, which accounted for 79.6% of total turnover in the this period. If we exclude this sale, turnover in the first quarter of the current year would be 10.6% higher than in the first quarter of the previous year.

Average monthly turnover in the first quarter of 2015 amounted to 4.1 million euros, which is significantly less than the average monthly turnover in the same period of 2014 (18.1 million euros).

Total number of transactions in the first quarter of 2015 amounted to 1,193 and recorded a decrease of 22.7% compared to the same period Source: Montenegro Stock Exchange of the previous year. Overall turnover in Q1 2015 was made through secondary trade.

Turnover structure

Graph 3.3 In the structure of turnover in the first quarter of 2015, the largest share of 71.4% was recorded Structure of turnover at the Montenegro Stock Exchange, first quarter of 2013, 2014 and 2015, by turnover with various types of bonds, which in thousand euros is 8.7 percentage points less than in the same period last year, while the share of turnover with different types of shares amounted to 27.5 %, recording an increase of 16.4 percentage points on an annual basis. The remaining 1.1% percent of total turnover referred to shares of investment funds, which share decreased by 7.7 percentage points. There was no block trade in this period.

The total turnover of companies in the amount of 3.4 million euros was realized through 936 transactions, representing 78.5% of total transactions in the reporting period. Turnover in companies’ shares decreased by 44.3 in one-year period, while the number of transactions declined by Source: Montenegro Stock Exchange 10.9%.

54 Graph 3.4 Graph 3.5

Turnover in thousand euros (left scale) and Turnover in thousand euros (left scale) and number of transactions of companies’ shares, number of transactions of joint investment first quarter of 2013, 2014 and 2015 funds, first quarter of 2013, 2014 and 2015 Money and Capital Market and Capital Money

Source: Montenegro Stock Exchange Source: Montenegro Stock Exchange

In the first quarter of 2015, the most traded were shares of Crnogorski Telekom AD Podgorica and shares of Crnogorski elekroprenosni sistem AD Podgorica, whose turnover for this period made 66,5% of the total companies’ shares. Graph 3.6 At the end of the first quarter of 2015, turnover Turnover in thousand euros (left scale) and of joint investment funds’ shares amounted to number of bonds’ transactions (right scale), 131,908 euros and was 36.1 times lower than in first quarter of 2013, 2014 and 2015 the same period in 2014. Total turnover was realized through 220 transactions.

Bonds’ turnover in the first quarter of 2015 totalled 8.7 million euros, which is 5 times less than in the same period last year. Total bonds’ turnover was realized through 37 transactions.

Of the total bonds’ turnover, the largest part related to government bonds with 93.5%, followed by corporate bonds with 5.8%, while an insignificant part related to frozen foreign currency deposits with 0.5% and restitution bonds with 0.2%.

Source: Montenegro Stock Exchange

55 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Stock exchange indices Graph 3.7 During the first quarter of 2015, stock in- 10 Montenegro Stock Exchange indices dex Monex20 had a positive trend. In Janu- ary, MONEX20 recorded a slight monthly decline, while in February and March it recorded a monthly growth. The value of the index at the end of the first quarter amounted to 12,247.14 and was 891.03 index points or 7.8% higher than the value achieved in the previous year. Com- pared with the same period of the previous year, the value of this index is higher by 1,859.12 index points or 17.9%.

On the other hand, during the first two months of 2015, the index of investment funds, MONEX- PIF declined, and in March it recorded a slight increase. The value of the index stood at 2,651.01 index points and it decreased by 386,37 index points or 12.7% compared to the end of 2014, Source: Montenegro Stock Exchange while compared to March 2014 it fell by 530.31 index points or 16.7%.

Capitalization Graph 3.8 Market capitalisation at Montenegro Stock Ex- Capitalisation, in million euros change amounted to 3,030.1 million euros at end-March 2015. In relation to end-2014, market capitalization increased by 2.3% in relation to end-2014, while it increased by 3.3% at the annual level.

Measured by the turnover coefficient on the Montenegro in March 2015, liquidity amounted to 0.001487, and was higher compared to Decem- ber 2014 when it amounted to 0.000511, while lower compared to March 2014 when it amounted to 0.015379.

Source: Montenegro Stock Exchange

10 As of 1 April 2015, the Montenegrin capital market, within the observation of price movements of companies, used two indices: MONEX and MNSE10. Monex is the successor of MONEX20, which with the new methodology, has more companies in its index basket. New MNSE10 index is a blue-chip index and its composition has ten “best” company from the Montenegrin market.

56 Box 3.1 - Regional stock exchanges, selected operating indicators

During the first quarter of 2015, the majority of stock exchanges in the region recorded a fall in turnover, while two stock exchanges recorded growth compared to the same period of the previous year. Montenegro Stock Exchange recorded the largest drop in turnover (77.5%), while the highest growth was recorded at Belgrade Stock Exchange (31.3%). The number of transactions at all stock exchanges in the region declined in one-year period. Money and Capital Market and Capital Money Table 1

Changes in turnover and transactions at regional stock exchanges

Relative coefficient of the number Relative turnover coefficient Stock exchange of transactions I-III 15/I-III 14 I-III 15/I-III 14 Belgrade Stock Exchange 31.3 -34.6 Zagreb Stock Exchange -5.1 -2.2 Sarajevo Stock Exchange 0.3 -35.0 Macedonian Stock Exchange -49.1 -15.4 Ljubljana Stock Exchange -29.0 -4.5 Montenegro Stock Exchange -77.5 -22.7

Source: Reports of regional stock exchanges

The highest growth of the stock exchange index was registered at the Belgrade Stock Exchange (18.2%), while a decrease was recorded only by the index of the Zagreb Stock Exchange (2.6%).

Table 2

Changes in selected regional stock exchange indices

Index value % of change Stock exchange Index March 2015 31 March 2015 31 March 2014 March 2014 Belgrade Stock Exchange BELEX15 666,67 564,18 18.2 Zagreb Stock Exchange CROBEX 1,712.82 1,758.44 -2.6 Sarajevo Stock Exchange SASX-10 718,87 699,70 2.7 Macedonian Stock Exchange MBI10 1,755.47 1,724.51 1.8 Ljubljana Stock Exchange SBITOP 795.87 716.49 11.1 Montenegro Stock Exchange MONEX 20 11,247.14 10,388.02 17.9

Source: Reports of regional stock exchanges

Market capitalization at all stock exchanges in the region increased in one-year period. The highest increase in market capitalization was recorded on the Ljubljana Stock Exchange (28.3%).

57 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Table 3

Comparison of market capitalizations of regional stock exchanges

Market capitalization% of change Stock exchange 31 March 2015/31 March 2014 Belgrade Stock Exchange 0.8 Zagreb Stock Exchange 11.2 Sarajevo Stock Exchange 7.7 Macedonian Stock Exchange 1.2 Ljubljana Stock Exchange 28.3 Montenegro Stock Exchange 3.3

Source: Reports of regional stock exchanges

58 FISCAL DEVELOPMENTS 04

Continued fiscal adjustments measures, intensive combating the shadow economy and increased dis- cipline of taxpayers characterised public finance in 2014. Although fiscal revenues increased relative to the plan, the result would have been more favourable if there had not been price deflation and postponing of announced investment projects, which ultimately led to lower economic growth than the planned one. Fiscal Developments

The pursuing of fiscal policy harmonised with the principles of predictability and accountability will continue in 2014, with the continuous work on harmonising the legislation with the requirements of acceding to the EU. In addition to the aforementioned, by adopting of the Analysis of taxation system, Montenegro officially started the taxation system reform, which foresees the change in taxation structure, i.e. transfer to taxes having less adverse effect on the economic growth.

Moreover, the set of the following consolidation measures continued in 2015: public procurement ra- tionalisation, additional taxation burden on property not put into function and on illegally construct- ed objects. The application of the “crisis tax on salaries” continued in 2015, by reducing it from 15% to 13%.

Starting this year, the category of capital expenditures has been considerably increasing, owing to the implementation of the highest infrastructural project in the last few decades - the Bar-Boljare highway.

Box 4.1 - Assumptions for the assessment of the implementation of public revenues and expenditures in the upcoming middle-term period

In line with the macro-economic framework, and the set of planned and implemented changes in fiscal regulatory framework, these are the assumptions for assessing the implementation of public revenues and expenditures in the upcoming middle-term period:

General measures:

- continuing intensive combating against shadow economy, focusing on labour and excise products markets; - postponing the implementation of the measure considering taxation evasion for labour market (non-paying of taxes and contributions for employees in the full amount) as crime; - cancelling the practice of “pensioning under more favourable conditions”;

61 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Measures on the income side of the Budget:

- crisis tax remains in force in 2015, by reducing the rate from 15% to 13%; - VAT will amount to 19% during the upcoming three-year period, whereby containing lower taxation rates of 0% and 7% on some products; - introduced taxation on coffee and gains from lottery; - enabling tax incentives for investments in strategic development branches - high-end tourism, energy and agriculture; - increased contributions for health insurance by 0.5 percentage points;

Measures on the expenditure side of the Budget:

- cancelling the validity of measures for non-adjusting of pensions (according to existing and forecasted macroeconomic indicators affecting the amount of pension, pensions should be decreased in 2015 owing to some lower average wage compared to the previous year and to deflation). However, pensions would not decrease in 2015, to protect pensioners’’ standard; - the most important current infrastructural project in the country, the highway route Smokovac - Mateševo will be realised during the projected time horizon, and it will be financed through the capital budget, by borrowing from Chinese Exim Bank at the value of 85% of the investment and Montenegro’s contribution of 15% of the project value.

Source: Ministry of Finance

4.1. Montenegro’s public finances11

In Q1 2015, according to the estimate of the Ministry of Finance, public revenues12 amounted to 310 million euros, i.e. 8.7% of the estimated GDP for 201513. Compared to the same period of 2014, public revenues increased by 3.3%, showing nominal growth of 10 million euro resulting from increased income from contributions by 8.8 million euro, and revenues from loan repayment, and funds transferred from the previous year by 7.5 million euros.

As for the structure of public revenues, taxes accounted for the main share (57.8%) followed by contributions (27%), whereas the remaining public revenues accounted for 15.2%.

Public spending in Q1 2015 amounted to 331.6 million euros, i.e. 9.3% of the estimated GDP. Public spending increased by 2% compared to the same period of 2014. Expenditures increased due to increased expenditures for transfers to institutions, individuals, NGO and public sector, and capital expenditures.

11 The structure of Montenegrin public finances comprises of the Budget of Montenegro with the State funds (Pension and Disability Fund, Health Insurance Fund, Restitution Fund, Employment Agency, Labour Fund, and Investment and De- velopment Fund) and local government budgets (Old Royal Capital Cetinje, Capital Podgorica and 19 municipalities). 12 Total public revenues include revenues from budget, state funds and local governments. 13 Source: Ministry of Finance Estimated GDP for 2015 amounts to 3.58 billion euro (preliminary data).

62 The lacking funds amounted to 88.5 million euro as at end-March 2015. In Q1 2015, the state’s borrowed at the amount of 496,9 million euros, using foreign sources of financing, and by 37,1 million euro using local sources of financing.

Graph 4.1 Current public spending14 amounted to 308.7 million, or 8.6% of GDP recording a 0.2% y-o-y decrease. Consolidated public spending, in million euros

Observed by economic classification, the largest expenditures items were social transfers (120.8 million euro or 3.4% of GDP, mainly due to expenditures for pensions) and gross salaries (97.4 million euro or 2.7% of GDP), while the capital

budget amounted to 22.9 million euros or 0.6% Fiscal Developments of GDP.

As at Q1-2015-end, the level of public revenues was lower than the recorded public spending, so that the public sector deficit amounted to 21.6 million euro or 0.6% of the estimated GDP, while it amounted to 25.2 million euros in the same period of 2014. (Annex D, table 12) Source: Ministry of Finance 4.2. Budget of Montenegro

Total revenues of the Budget and State Funds, Graph 4.2 as per preliminary data of the Ministry of Fi- nance, amounted to 792.1 million in Q1 2015, Source revenues, in million euros or 22.1% of the estimated GDP. In the structure of fiscal revenues, source revenues accounted for 32.6%, borrowings and loans from foreign sources accounted for 72.1%, while remaining revenues from privatisation and borrowings and loans from local sources amounted to 4.7% (table 4.1).15

Source revenues of the Budget amounted to 258.4 million euros, or 7.2% of the estimated GDP. Relative to the plan, these revenues increased by 2.5% as the result of higher realisation of revenues from contributions, fees and receivables from loan repayment and funds transferred from the previous year. Compared y-o-y, source revenues increased by 1.9%. Source: Ministry of Finance

14 Public spending minus total capital expenditures 15 Revenues include source revenues (direct and indirect taxes and non-tax revenues), borrowings and loans from domestic and foreign sources, and revenues from privatisation.

63 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

In the source revenues structure, tax revenues accounted for the main share (62.2%), followed by contributions (32.5%), while the remaining 5.3% referred to revenues from fees, duties, other revenues, loan repayment revenues and donations.

Collection of tax revenues (taxes and contributions) amounted to 244.4 million euros, of which direct taxes accounted for 112.8 million euros and indirect taxes accounted for 131.6 million euros.

Tax based revenues amounted to 160.6 million euros, recording a 2.2% decrease both relative to the plan and compared y-o-y.

Nominally, the highest y-o-y increase of revenues was realised in VAT, amounting to 4.9 million euros or 5%, and with corporate profit tax amounting to 3.5 million euros or 23.8%. Revenues from personal income tax decreased by 3.4% or 0.6 million euros compared y-o-y.

Table 4.1

Revenues of the Budget of Montenegro and state funds, January – March 2015

Recorded Plan Recorded Recorded in Recorded Share in Share in relative to January- January- relation to January- revenues GDP January- Type of revenue March 2015 March 2015 the Plan March 2014 March 2014 EUR million EUR million % % index EUR million index Taxes 164.13 160.60 62.2 4.5 97.8 164.26 97.8 Personal income tax 19.08 17.86 6.9 0.5 93.6 18.48 96.6 Corporate profit tax 13.83 11.12 4.3 0.3 80.4 14.60 76.2 Property turnover tax 0.37 0.33 0.1 0.0 88.7 0.36 92.2 Value added tax 96.37 93.37 36.2 2.6 96.9 98.25 95.0 Excise Duties 29.43 32.08 12.4 0.9 109.0 27.64 116.1 Tax on international trade and transactions 4.06 4.59 1.8 0.1 113.0 3.90 117.8 Other republic taxes 0.99 1.25 0.5 0.0 126.6 1.03 121.1 Contributions 72.93 83.83 32.5 2.3 115.0 75.02 111.8 Contributions for pension and disability 44.26 50.56 19.6 1.4 114.2 46.63 108.4 insurance Contributions for health insurance 24.81 28.78 11.1 0.8 116.0 24.79 116.1 Contributions for unemployment insurance 2.06 2.32 0.9 0.1 112.8 1.99 116.9 Other contributions 1.80 2.17 0.8 0.1 120.9 1.61 135.4 Duties 4.94 2.52 1.0 0.1 51.0 4.57 55.1 Fees 2.68 3.27 1.3 0.1 122.0 2.89 113.0 Other revenues 5.90 4.49 1.6 0.1 76.1 5.29 85.0 Receipts from loan repayment and funds 0.39 2.80 1.1 0.1 717.9 0.55 509.1 transferred from the previous year Grants and transfers 1.14 0.82 0.3 0.0 71.9 1.05 78.1 SOURCE REVENUES 252.11 258.35 32.6 7.2 102.5 253.62 101.9 Revenues from sale of property 0.00 1.45 0.2 0.0 0.29 503.0 Borrowings and loans from foreign sources 158.52 496.89 62.7 13.9 313.5 0.71 69,988.7 Borrowings and loans from domestic 0.00 35.40 4.5 1.0 77.95 45.4 sources TOTAL REVENUES OF THE BUDGET OF 410.63 792.09 100.0 22.1 192.9 332.57 238.2 MONTENEGRO AND STATE FUNDS

Source: Ministry of Finance

64 Positive deviation was recorded in taxes on international trade, by 13% relative to the plan and 17.8% compared y-o-y, as well as with excise duties (by 9% relative to the plan and 16.1% compared y-o-y).

Revenues from contributions amounted to 83.8 million euros, recording a 15% increase relative to Q1 2015 plan, and a y-o-y increase of 11.8% (they increased by 8.8 million euros in relation to 2014), which comes as a result of reduced grey economy.

Total Budget expenditures in Q1 2015 amounted to 359.6 million euro or 10% of estimated GDP. Com- pared to Q1 2014, budget spending was 12.2% higher, and 26.7% lower relative to the plan (Table 4.2).

Consolidated Budget expenditures16 amounted to 309,9 million euros, and made up 8.7% of the estimated GDP. Recorded expenditures for Q1 2015 were 20.8% lower than planned, and 1.2% or 3,7 million euros higher compared to the plan for Q1 2014. Fiscal Developments Current budget spending amounted to 293.2 million euros or 8.2% of GDP, while the capital budget amounted to 16.7 million euros or 0.5% of GDP.

During the reporting period, current expenditures amounted to 136.2 million euros or 13.8% less than planned. Almost all expenditures, with the exception of expenditures for rent were lower than planned.

Expenditures for gross earnings reduced by 1.2% compared to Q1 2014. Expenditures for material and subsidies recorded decrease in expenditures compared to the same period of previous year.

The budget spending structure (Table 4.2) shows that the biggest share referred to transfers for social welfare (some 39%), followed by gross salaries (29.5%), and transfers to institutions, individuals, NGOs and public sector (9.6%). Other purposes accounted for 21.1% of budget expenditures, out of which 5.4% belongs to capital budget, expenditures for material and services amounted to 4.4%, 3.3% for interests and subsidies made up 1.5% of budget spending.

Repayment of debt amounted to 49.8 million eu- Graph 4.3 ros and increased in relation to Q1 2014 by 35.5 million. Budget spending in Q1 2015, in million euros

In Q1 2015, borrowings and loans from domestic sources (primarily issuing of bonds) amounted to about 35.4 million euros, while borrowings and loans from foreign sources amounted to 496.9 million euros.

In Q1 2015, the Budget of Montenegro recorded a deficit17 of 45.5 million euros or 1.4% of GDP, while deficit amounted to 52.5 million euros in the corresponding period of 2014.

Source: Ministry of Finance

16 Total expenditures minus debt repayment 17 Methodology for surplus/deficit calculation, OGRM, 53/09

65 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Table 4.2

Revenues of the Budget of Montenegro and state funds, January – March 2015

Recorded Plan Recorded Recorded in Recorded Share in Share in relative to January- January- relation to January- expenditures GDP January- D E S C R I P T I O N March 2015 March 2015 the Plan March 2014 March 2014 EUR million EUR million % % index EUR million index Current expenditures 157.96 136.20 44.0 3.8 86.2 132.84 102.5 Gross salaries and contributions paid by the 94.84 91.55 29.5 2.6 96.5 92.69 98.8 employer Other personal income 2.90 2.58 0.8 0.1 89.0 2.21 116.7 Expenditures for material 7.35 5.42 1.7 0.2 73.7 5.77 93.9 Expenditures for services 10.38 8.30 2.7 0.2 80.0 8.18 101.5 Expenditures for current maintenance 5.20 3.58 1.1 0.1 68.8 2.01 178.1 Interests 18.94 10.22 3.3 0.3 54.0 8.05 127.0 Rent 2.08 2.46 0.8 0.1 118.3 2.11 116.6 Subsidies 5.31 4.80 1.5 0.1 90.4 6.09 78.8 Other expenditures 7.47 5.30 1.7 0.1 71.0 4.92 107.7 Capital expenditures in current budget 3.46 1.99 0.6 0.1 57.5 0.81 245.7 Transfers for social welfare 126.21 120.72 39.0 3.4 95.7 122.89 98.2 Transfers to individuals, NGOs and public 32.07 29.63 9.6 0.8 92.4 20.34 145.7 sector Capital budget of Montenegro 71.17 16.68 5.4 0.5 23.4 8.57 194.6 Borrowings and loans 0.56 0.32 0.1 0.0 57.1 0.54 59.3 Reserves 3.26 0.85 0.3 0.0 26.1 4.27 19.9 Repayment of guarantees 0.00 0.00 0.0 0.0 9.68 Repayment of obligations from earlier years 0.00 5.45 1.7 0.2 7.01 77.7 Net increase in obligations 0.00 0.00 0.0 0.0 0.00 BUDGET EXPENDITURES 391.24 309.85 86.3 8.7 79.2 306.14 101.2 Repayment of securities and loans to 11.68 20.23 5.5 0.6 173.2 7.40 273.4 residents Repayment of obligations from earlier years 8.45 0.00 0.0 0.0 0.0 0.00 Repayment of securities and loans to 79.44 29.56 8.2 0.8 37.2 6.92 427.2 residents TOTAL EXPENDITURES 490.81 359.64 100.0 10.0 73.3 320.46 112.2

Source: Ministry of Finance

4.3. Local Self-Government

Pursuant to the Law on Local Self-Government Financing, municipalities are obliged to submit their quarterly reports on planned and recorded revenues, planned and executed expenditures and budget leverage to the Ministry of Finance, not later than 30 days following every quarter-end. Considering that only a number of municipalities submitted their reports, the data for Q1 2015 is based on the estimate carried out by the Ministry of finance.

Estimated local government expenditures for Q1 2015 amounted to 23.2 million euros or 0.6% of GDP, which is a y-o-y decrease of 3.8% or 0.9 million euros. The most significant growth of expenditures was recorded in capital budget, which was by 0.9 million lower in relation to the previous year, and amounted to 6.2 million euros.

66 For Q1 2015, total current revenues of local governments are estimated in the amount of 52.9 million euros or 1.5% of GDP, which is 13.1% more compared to the corresponding period of 2014 . The highest growth relative to 2014 was recorded in revenues from repayment of loans and funds transferred from the previous year amounting to 4.8 million euros.

Local government surplus for Q1 2015 was estimated in the amount of 29.9 million euros or 0.8% of GDP. Outstanding obligations and repayment of debt amounted to 17.1 million euros (Table 4.3).

Table 4.3

Current revenues and expenditures of local governments, January-March 2015

Plan Recorded Recorded relative Recorded January- January-March to January-March January-March 2015 Type of revenue March 2015 2014 2014 Fiscal Developments EUR million % of GDP EUR million EUR million index SOURCE REVENUES 52.92 1.5 47.91 46.81 113.1 Taxes 18.59 0.5 28.25 18.10 102.7 Duties 1.61 0.0 1.73 1.07 151.3 Fees 11.08 0.3 13.74 10.66 103.9 Other revenues 2.60 0.1 3.43 2.28 114.3 Receipts from loan repayment and funds transferred 18.56 0.5 0.00 13.80 134.5 from the previous year Donations 0.47 0.0 0.75 0.90 52.2 EXPENDITURES 23.22 0.6 36.61 24.15 96.2 CURRENT SPENDING 17.03 0.5 26.61 17.04 99.9 Current expenditures 10.45 0.3 15.95 9.72 107.4 Gross salaries and contributions paid by the employer 5.89 0.2 9.07 5.73 102.7 Other personal income 0.34 0.0 0.58 0.40 87.1 Expenditures for material 1.29 0.0 1.57 1.01 128.0 Expenditures for services 1.14 0.0 1.96 1.00 114.4 Current maintenance 0.60 0.0 1.06 0.40 148.8 Interests 0.78 0.0 1.03 0.84 92.8 Rent 0.06 0.0 0.12 0.05 113.5 Subsidies 0.06 0.0 0.15 0.08 72.6 Other expenditures 0.28 0.0 0.42 0.21 131.6 Transfers for social welfare 0.03 0.0 0.15 0.04 77.1 Transfers to institutions, individuals, NGO and public 5.98 0.2 9.19 6.22 96.1 sector Capital expenditures 6.19 0.2 10.00 7.11 87.2 Borrowings and loans 0.25 0.0 0.56 0.69 35.9 Reserves 0.33 0.0 0.75 0.37 88.5 Surplus/Deficit 29.88 0.8 11.80 27.37 109.2 Primary deficit 30.66 0.9 12.83 28.21 108.7 Transfers from the Budget of Montenegro 0.18 0.0 0.50 4.71 3.9 Debt repayment 17.05 0.5 14.38 13.28 128.3 Borrowings and loans from domestic sources 1.68 0.0 1.25 0.61 277.1 Borrowings and loans from foreign sources 0.03 0.0 0.75 0.00 Privatization revenues 0.45 0.0 2.50 0.59 76.5 Increase/decrease in deposits -15.00 -0.4 -1.92 -15.28 98.1

Source: Ministry of Finance

67 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

4.4. State funds

According to the Pension and Disability Insurance Fund of Montenegro data, in Q1 2015, total revenues amounted to 97.1 million euros or 3.5% more than in the same period of 2014. The share of contributions in total revenues, which are the main source of the Pension and Disability Insurance Fund financing, amounted to 54.9%. This category of revenues was 11.7% higher compared to Q1 2014. At the same time, transfers from the budget, which account for 45% of total revenues, recorded a 4.9% decrease relative to the comparative period of 2014.

Total expenditures of the Pension and Disability Insurance Fund of Montenegro amounted to 97.1 million euros, which is a 3.5% y-o-y decrease, yet 0.6% below the plan. Expenditures for pensions, accounting for 99.3% of total expenditures, represented the most significant expenditure item, while 0.7% was administrative expenses and repayment of loans. Pension-based expenditures increased by 3.7% in relation to Q1 2014.

Comparing the recorded revenues and expenditures, the Pension and Disability Insurance Fund ran a balanced budget.

According to Employment Agency of Montenegro data, total revenues amounted to 6.3 million euros in Q1 2015, or 7.7% more than in Q1 2014.

Expenditures of the Agency amounted to 3.2 million euros, and they were 13.9% lower compared to Q1 2014, and 39.3% below the plan. In total expenditures, 23.2% referred to current expenditures, while 56.1% referred to social welfare transfers, 18,6% were transfers to individuals, institutions and public sector and 2.1% were capital expenditures, borrowings and loans granted.

Comparing revenues and expenditures recorded in Q1 2015, the Agency operated with a surplus amounting to 3.1 million euros.

Outstanding liabilities of the Agency amounted to 2 million euros.

According to the Pension and Disability Insurance Fund of Montenegro data, in Q1 2015, total revenues amounted to 36.7 million euros or 10.2% more than in the same period of 2014, and by 14.3% lower than relative to the plan for Q1 2015.

Total expenditures of the Health Insurance Fund amounted to 36.7 million euros; therefore the Fund ran a balanced budget in Q1 2015. The main share in total expenditures referred to expenditures based on regular activities (transfers to institutions, individuals, non-governmental and public sectors in the amount of 29.8 million euros and transfers for social welfare in the amount of 6.3 million euros), while the remaining funds were spent for the operations of the Fund.

Outstanding liabilities of the Fund amounted to 34.2 million euros.

According to the Investment and Development Fund of Montenegro data, total revenues amounted to 1,124,098 euros in Q1 2014 or 12.3% less compared y-o-y. Total expenditures of the Fund amounted to 1,143,404 million euros and they were higher by 219.4% compared y-o-y.

68 Comparing revenues and expenditures recorded in Q1 2015, the Agency operated with a deficit in the amount of 19.3 thousand euros.

Outstanding liabilities of the Fund amounted to 47 million euros as at 31 March 2015.

The Labour Fund, being a typical budget beneficiary financed from municipal and earmarked revenues, in Q1 2015, recorded revenues in the amount of 1 million euros and the equal amount of total expenditures, which is by 10.7% below the plan.

Expenditures referring to social welfare transfers, i.e. funds for redundancies in the amount of 968.8 thousand euros represented the most important expenditure item.

Outstanding liabilities of the Fund amounted to 5.2 million euros as at 31 March 2015. Fiscal Developments In Q1 2015, the Restitution Fund recorded total revenues in the amount of 19.3 thousand euros, which is 7.5% less in relation to Q1 2014.

Total expenditures of the Fund amounted to 17.4 million and they were by 11.5% higher compared y-o-y.

Outstanding liabilities of the Fund amounted to 1.9 thousand euros as at 31 March 2015

PUBLIC DEBT 05

According to Ministry of Finance data, gross public debt18 amounted to 2,443.6 million euros at end- Q1 2015, being higher by 502.4 million euros, or 25.9% compared y-o-y. The significant increase in public debt in Q1 2015 resulted from new issue of Eurobonds at the amount of 500 million euros in March 2015 (Box 5.1).

Of total amount of gross public debt, some 2,047.7 million euros or 83.8% referred to external debt, while the remaining 395.9 million euros or 16.2% referred to internal debt.

If deposits of the Ministry of Finance were included, as well as the 38,477 ounces of gold, the net state Public Debt debt of Montenegro would amount to 1,938 million euros, or 54.1% of the estimated GDP.19 Compared to end-2014, net public debt increased by 2.4%.

Table 5.1

Structure of public debt, in million EUR

December 2014 March 2015 GDP in EUR million Domestic debt 381.2 395.9 External debt 1,561.7 2,047.7 Public debt (gross) 1,942.9 2,443.6 Deposits of Ministry of Finance, 49.5 505.6 including 38,477 ounces of gold 1,893.4 1,938.0 Government debt (net) 55.3% of GDP 54.1% of GDP

Source: Ministry of Finance

The currency structure of the public debt is favourable. The major portion of debt is in euros (around 95.2%), whereas a portion of the obligations toward the Paris Club, and the obligations for IDA loans and the debt to EUROFIMA are in other currencies.

18 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. Public debt includes central government debt and debt of state companies. Unlike previous periods, public debt does not include debt of local government. 19 According to preliminary estimate of the Ministry of Finance, the GDP for 2015 amounts to 3,580 million euros.

73 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

5.1. Domestic debt

As at end-March 2015, domestic debt amounted to 395.9 million euros or 11.1% of estimated GDP, which is 14.7 million euros higher in relation to end-2014. The growth of domestic debt was primarily a result of increased debt based on T-bills in the amount of 29.3 million euros, and of insignificant increase in liabilities from restitution (1,8 million euros). Other internal debt positions recorded decrease during the selected comparable period (table 5.2).

Table 5.2

Domestic public debt structure

Share in Debt status Debt status Change Change domestic 31 December 2014 31 March 2015 debt Public debt structure 1 2 1,177.1 1,177.1 5 million euros % % Foreign currency deposits 55.7 55.4 -0.3 -0.5 14.0 Restitution 89.9 91.7 1.8 2.0 23.2 Loans with commercial banks 71.4 62.2 -9.2 -12.8 15.7 Loans with non-financial institutions 6.7 4.7 -2.0 -29.9 1.2 Accrued pensions 1.8 1.8 0.0 0.0 0.5 T-bills 77.7 107.0 29.3 37.8 27.0 Labour Fund bonds 3.8 3.8 0.0 0.0 1.0 Government bonds 38.2 33.1 -5.1 -13.4 8.4 Legal persons and companies 36.1 36.1 0.0 0.0 9.1 TOTAL 381.2 395.9 14.7 3.9 100.0

Source: Ministry of Finance and CBCG calculations

In the domestic debt structure as at Q1 2015, the highest share was in obligations from sold T-bills – 27%. Four auctions of T-bills were conducted in Q1 2015, during which 97.5 million euros of T-Bills were sold, which resulted in increase.

5.2. External debt

External debt continued its long-term growth in Q1 2015. Thus, as at end-Q1 2015, external debt amounted to 2,047.7 million euros or 57.2% of estimated GDP. Compared to 2014 year-end, it increased by 31.1% (486 million euros), recording the highest quarterly growth.

External debt growth in Q1 2015, compared to 2014 year-end, was the result of:

- issue of Eurobonds amounting to 500 million euros20 - Withdrawal of KfW funds amounting to 3,3 million euros (Phases III, IV and V, and for the energy efficiency needs,

20 Detailed explanations in Box 5.1

74 - Withdrawal of funds from IBRD in the amount of 2.3 million euros (for projects Lamp, Midas, education and research for innovations and competitiveness and for Managing industrial waste and cleaning.

On the other hand, external debt decreased due to repayment of due liabilities to non-residents (principal) in the amount of about 29.6 million euros.

Table 5.3

Structure of external debt, as at 31 March 2015

External debt Share in external Share in public Creditor Debt status GDP debt debt EUR million % International bank for Reconstruction and 231.3 6.5 11.3 9.5 Development (IBRD) Member countries of the Paris Club of creditors 100.6 2.8 4.9 4.1 International Development Association (IDA) 65.9 1.8 3.2 2.7 European Investment Bank (EIB)1 103.1 2.9 5.0 4.2 Public Debt EBRD 15.7 0.4 0.8 0.6 Council of Europe Development Bank 9.1 0.3 0.4 0.4 European Union 4.5 0.1 0.2 0.2 Kreditanstalt für Wiederaufbau – Germany 28.5 0.8 1.4 1.2 (KFW)2 Loan from Hungary 8.8 0.2 0.4 0.4 Loan from Poland 8.3 0.2 0.4 0.3 Loan from France - Natixis3 7.2 0.2 0.4 0.3 EUROFIMA - debt of “AD Željeznica Crne Gore” 19.6 0.5 1.0 0.8 Czech EXIM - debt of “AD Željeznica Crne Gore” 14.6 0.4 0.7 0.6 Steiermarkische Bank und Sparkassen AG4 13.2 0.4 0.6 0.5 Erste Bank 18 0.5 0.9 0.7 Credit Suisse Bank 204.0 5.7 10.0 8.3 Loan from Spain for the construction of landfill 4.8 0.1 0.2 0.2 Loan from Austria 6.8 0.2 0.3 0.3 EUROBOND 1,138.6 31.8 55.6 46.6 Deutsche Bank 45.0 1.3 2.2 1.8 TOTAL 2,047.7 57.2 100.0 83.8

1 EIB loans totalling to 47 million euros in total servicing state enterprises (“Monteput”, “Airports of Montenegro” and “EPCG”) are not calculated in external debt, but are treated as guarantees. 2 Municipalities use loans with KfW for the needs of water supplies, but these are considered a part of external debt. 3 Merchandise loan - EPCG 4 Loan for financing the purchase of fire engines for Ministry of Interior. Source: Ministry of Finance

It should be noted that there are granted credit line funds that have not been withdrawn. The total amount of available, non-withdrawn assets amounts to 227.7 million euros (Table 5.4).

75 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Table 5.4

External debt and the amount of non-withdrawn assets, in million EUR

Creditor Debt status Non-withdrawn assets International bank for Reconstruction and Development (IBRD) 231.3 63.7 Member countries of the Paris Club of creditors 100.6 0.0 International Development Association (IDA) 65.9 0.0 European Investment Bank (EIB) 103.1 58,0 European Bank for Reconstruction and Development (EBRD) 15.7 13.6 Council of Europe Development Bank 9.1 10.0 European Union 4.5 0.0 Kreditanstalt für Wiederaufbau – Germany (KFW) 28.5 82.3 Loan from Hungary 8.8 0.0 Loan from Poland 8.3 0.0 Loan from France - Natixis 7.2 0.0 EUROFIMA 19.6 0.0 Czech EXIM 14.6 0.0 Steiermarkische Bank und Sparkassen AG 13.2 0.0 Erste Bank 18 0.0 Credit Suisse Bank 204.0 0.0 Loan from Spain for the construction of landfill 4.8 0.0 Loan from Austria 6.8 0.0 EUROBOND 1,138.6 0.0 Deutsche Bank 45.0 0.0 TOTAL 2,047.7 227.7

Source: Ministry of Finance

Box 5.1 - The fifth issue of Montenegro’s Eurobonds

In March 2015, Montenegro again accessed the international financial market issuing Eurobonds at the amount of 500 million euros. The bonds were issued to the five year period with the interest rate of 3.875%, representing the lowest interest rate on Eurobonds recorded so far (Table 1). The leading arrangers were reputable banks: Citi, Deutsche Bank AG, London Branch, Erste Group Bank AG Graph 2 and Société Générale. Structure of investors during the Eurobond When issuing Eurobonds, the demand amounted to some 1.39 billion euros, exceeding the offer by almost three times. The enormous interest of investors (180 from over 20 countries) proves the confidence into Montenegro’s economy. Large demand and favourable issuing conditions were the result of favourable situation at the market, as a result of ECB’s quantitative easing policy. Investors participating in the Eurobond issue were mostly from UK, USA, Germany and Austria.

76 The state’s borrowing from Eurobond issue is Graph 2 foreseen in the 2015 Budget, and the funds Regional structure of investors will mostly be used for servicing debt for Eu- robonds issued in 2010 and 2011. A portion of funds will be used to cover fiscal deficit and repayment of outstanding debts.

The latest issue of Eurobonds will significantly reduce state’s obligations, since the price of Eurobonds almost halved, from respective 7.875% and 7.25% in 2010 and 2011 to 3.875% in 2015, which will contribute to decreasing costs for interest in state budget.

Concerning the State’s obligations from Eu- Source: Ministry of Finance robonds, it pays annual interest (some 19,4 million), returning the total amount after five years. Public Debt Table 1

Issue of Eurobonds and recorded interest rates

Amount in euros Interest rates Maturity September 2010 200,000,000 7.875% 5 years April 2011 180,000,000 7.25% 5 years 3 years December 2013 80,000,000 5,95% + 3M EURIBOR (with grace period of 1 year) May 2014 280,000,000 5.375% 5 years March 2015 500,000,000 3.875% 5 years

Source: Ministry of Finance

5.3. Issued guarantees

As at Q1 2015, total guarantees of Montenegro amounted to 320.4 million euros or 9% of estimated GDP, and they increased by 2% compared to end-2014. Public debt, together with guarantees amounted to 63.1% of GDP as at end-Q1 2015.

Foreign guarantees of Montenegro amounted to 312 million euros or 8.7% of GDP. If foreign guarantees were included into the external debt, the external debt of Montenegro would amount to 65.9% 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 492 million euros.

At Q1 2015, total domestic guarantees amounted to 8.4 million euros (0.2% of GDP). Domestic debt with the guarantees amounted to 11.3% of GDP.

77 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Graph 5.1 Graph 5.2

Issued foreign guarantees, in thousand euros Issued domestic guarantees, in thousand euros

Source: Ministry of Finance Source: Ministry of Finance

Although there were no calling of guarantees in Q1 2015, prudence and caution are necessary in the upcoming period with regard to issuing of new guarantees because they represent a potential public debt.

Graph 5.3 5.4. Debt repayment Debt repayment in Q1 2015, in million euros In the first three months21 of 2015, debt repayment amounted to 65.3 million euros or 1.8% of estimated GDP for 2015. Debt repayment (principal) was financed from foreign and domestic borrowings, donations, privatization revenues and use of government’s deposits, while the repayment of guarantees was financed by borrowing from domestic and foreign banks.

Source: Ministry of Finance

21 Total loan repayment comprises principals, interests and guarantees.

78 5.5. Projection and sustainability of public debt

During the upcoming three years, according to the projections of the Ministry of Finance22, increase of the public debt may be expected. Increase of the public debt will result from caused by the increased external debt, while domestic debt will have favourable trend and decrease by the end of 2017 (Table 5.5). The need of financing the route of the highway Bar-Boljare will largely affect to the public growth in the upcoming period.

Table 5.5

Public Debt of Montenegro, 2015-2018

2015 2016 2017 2018 GDP (million euros) 3.580* 3.737 3.964 4.165 External debt (million euros) 1,899.84 2,222.18 2,489.49 2,647.69 External debt (% of GDP) 53.07 59.46 62.80 63.57 Domestic debt (million euros) 308.02 233.66 172.82 183.36

Domestic debt (% of GDP) 8.60 6.25 4.36 4.40 Public Debt Public debt (million euros) 2,207.86 2,455.84 2,662.31 2,831.05 Public debt (% of GDP) 61.67 65.72 67.16 67.97

Note: *In comparison with the source document “Macroeconomic and fiscal policy Guidelines, 2015-2018”, the new data for the estimated GDP, published by the Ministry of Finance in June 2015, was used. Source: Ministry of Finance: “Macroeconomic and fiscal policy Guidelines, 2015-2018”, March 2015, and CBCG calculation

The Budget Law for 2015 foresaw new borrowing amounting to 635 million euros. Of this amount, the largest portion will be used for debt repayment (399 million euros), then for financing the priority route of Bar-Boljare highway, the Smokovac - Mateševo (up to 206 million euros), while 30 million euros will be used for financing deficit.23

In Q1 2015, of the foreseen 635 million euros of new borrowings, 500 million euros were provided through the issue of Eurobonds, pursuant to the Law on Budget, which led to the external debt increase. A portion of funds will be used for repaying debt from Eurobonds issued in 2010, while a portion will be used for repayment of debt from the previous period, this it is expected that the public debt will amount to 61.67% of GDP.

In addition to abovementioned borrowings in 2015, significant funds will be required in 2016 and 2017 for financing debt (380 and 180 million euros in 2016 and 2017, respectively). As a result, the increase in public debt is expected in the upcoming period amounting to respective 65.72% and 67.97% in 2016 and 2018. The withdrawal of funds for highway Bar-Boljare (the priority route Smokovac-Mateševo) will have strong effect on public debt trends in the upcoming period (amounting to 200 million euros). The debt amount is expected to have a decreasing trend after the period of constructing the routes.

22 Source: Ministry of Finance: “Macroeconomic and fiscal policy Guidelines, 2015-2018”, March 2015 23 Source: Government of Montenegro: “Programme of economic reforms for Montenegro, 2015-2017”, January 2015.

EXTERNAL SECTOR 06

External sector trends in Q1 2015 were characterised by the current account deficit increase, increase of surplus in the services account and in net FDI inflow. According to preliminary data, current account deficit amounted to 19724 million euros, recording a 6.7% growth compared to Q1 2014. Current account deficit increase resulted from the increase in foreign trade deficit as well as the surplus decrease recorded in secondary income account.

External trade is still showing high dependence of visible trade on import. Deficit in goods account in Q1 2015 amounted to 270.1 million euros, being 4.8% higher than one year ago. Total export of goods amounted to 76.4 million euros, showing an increase of 3%. It was mostly affected by the increased export of aluminium, iron and steel. Total import of goods amounted to 346,6 million euros, and it was 4,4% higher than in 2014. The coverage of foreign trade deficit with the surplus recorded in other current account subaccounts amounted to 27.1% recording 1.3% percentage points y-o-y decrease. External Sector External The volume of services exchange in Q1 2015 was 158.1 million euros, or 12.9% higher than in the same period of 2014, Trends at the transport and travel-tourism sub-accounts had the strongest effect on increasing the exchange volume. During the Q1 2015, the increasing trend in foreign tourists’ arrivals and overnights was recorded, showing an encouragement for the future tourist season. During the reporting period, the surplus at the services account amounted to 11.9 million euros, and it was at the approximately same level as in 2014, i.e. by 0.7% higher.

Positive trend was recorded at the primary (factor) income account from abroad, which recorded net inflow of 40 million euros, showing an increase of 15.8%. Despite recorded net inflow amounting to 21.2 million euros, secondary income account recorded decline in net income by 20.7%. The trends in these two sub-accounts largely contributed to diminishing the external trade deficit.

Capital and financial account recorded net FDI inflow and portfolio investments, and other investments. Net FDI inflow in Q1 2015 amounted to 86.2 million, or 9.2% more than in the same period of the previous year. The portfolio investments account recorded higher inflow of monetary assets, due to increased state’s borrowings at the international capital market, resulting in net inflow of 405.5 million euros, with the simultaneous net inflow of 16.9 million euros recorded at the other investments account. Decrease of obligations of the state and banks for loans decreased, while other sectors increased their obligations.

24 Montenegro’s balance of payments’ data published in accordance with the new IMF methodology (IMF Balance of Pay- ment Manual, sixth edition - BMP 6)

83 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Table 6.125

Balance of Payments of Montenegro, thousand euros25

Q1 2014 Q1 2015 Change in % A. CURRENT ACCOUNT -184,584 -197,000 6.7 GOODS -257,743 -270,150 4.8 1. Export f.o.b. 74,240 76,443 3.0 2. Import f.o.b. 331,983 346,593 4.4 SERVICES 11,865 11,947 0.7 1. Revenues 75,945 85,013 11.9 2. Expenditures 64,080 73,066 14.0 PRIMARY INCOME 34,505 39,957 15.8 1. Revenues 54,566 56,693 3.9 2. Expenditures 20,062 16,736 -16.6 SECONDARY INCOME 26,789 21,245 -20.7 1. Revenues 41,688 39,251 -5.8 2. Expenditures 14,899 18,006 20.9 B. CAPITAL AND FINANCIAL ACCOUNTS 101,071 117,192 16.0 CAPITAL ACCOUNT -6 0 FINANCIAL ACCOUNT 101,078 117,192 15.9 1. Direct investments-net 78,919 86,208 9.2 1.1. Assets 137 -3,836 1.2. Liabilities 78,782 90,044 14.3 2. Portfolio investments-net -554 405,522 2.1. Assets -4,620 -1,678 -63.7 2.2. Liabilities 4,066 407,200 9,914.8 3. Other investments-net 13,922 16,895 21.4 3.1. Assets -12,498 20,092 3.2 Liabilities 26,421 -3,197 4. Change in CBCG reserves 8,791 -391,433 C. NET ERRORS AND OMISSIONS (-A-B) 83,513 79,808 -4,4

Source: CBCG

6.1. Current account

Current account recorded increase in deficit in Q1 2015. Trends at this result mostly depended on trends at the goods sub-account. During the reporting period, the coverage of goods import with export amounted to 22.1%, being almost the same as in 2014 (22.4%). Trend of positive balance at the services account was recorded in Q1 2015, when the highest surplus during the last several years was recorded for the observed period. Revenues from services were 11.2% higher than goods export,

25 Montenegro’s balance of payments’ data for 2013, 2014 and 2015 are published in accordance with the new IMF methodology (IMF Balance of Payment Manual, sixth edition - BMP 6, 2009).

84 Graph 6.1 pointing to the sector’s importance for the Mon- tenegro’s economy. Current account structure, in thousand EUR

The surplus at primary and secondary income sub-accounts of 61.2 million euros resulted in diminishing the current account deficit in Q1 2015.

6.1.1. Visible trade26

According to preliminary Monstat data, total visible trade of Montenegro amounted to 431.2 million euros in Q1 2015, showing a y-o-y increase of 4.9%. This resulted from the simultaneous growth in goods export and import.

Preliminary Monstat data shows that the total visible export amounted to 74.5 million euros, recording a 7.2% y-o-y growth, while the import Source: CBCG amounted to 356.8 million euros recording a 4.4% y-o-y growth. The main share in export was in products of aluminium industry, while imports showed more diversification with prevailing consumer goods. The export growth was mainly the re- External Sector External sult of the prevailing categories in its structure: aluminium, and iron and steel.

In the export structure, according to SITC27, products classified by materials recorded the highest share of 37.4% of total export, followed by mineral fuels and lubricants (18.5%) and raw materials, except fuels (13.4%). Within the category products classified by materials, non-ferrous metals (aluminium) accounted for the largest share of 20.5 million euros, followed by iron and steel with 6.1 million euros. The category as a whole recorded a 40.1% growth in export. Export in the category mineral fuels and lubricants declined by 24.4%, whereas the largest share of export goes to electricity in the amount of 16.7 million euros, followed by oil and oil derivatives in the amount of 1.4 million euros.

Observed by SITC subcategories, the growth in export mostly resulted from aluminium export, which amounted to 20.5 million euros recording a 20.6% y-o-y growth, as well as iron and steel which export amounted to 6.1 million euros, or 4.5 times higher.

26 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, Fifth edition, IMF, 1993). Data on visible import and export are presented by f.o.b. 27 Standard International Trade Classification

85 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Table 6.2

Structure of import of goods in January-March 2015, in thousand euros

Sector Jan-March 2014 Jan-March 2015 Change Share 0 Food and live animals 4,591.29 5,123.16 11.6% 6.9% 1 Beverages and tobacco 4,078.70 5,373.82 31.8% 7.2% 2 Crude materials, inedible, except fuels 11,542.42 10,009.75 -13.3% 13.4% 3 Mineral fuels and lubricants 18,207.05 13,766.24 -24.4% 18.5% 4 Animal and vegetable oils and fats 1,105.08 102.97 -90.7% 0.1% 5 Chemical products 2,492.48 2,172.14 -12.9% 2.9% 6 Products classified by materials 19,881.79 27,859.50 40.1% 37.4% 7 Machinery and transport equipment 4,676.04 7,103.35 51.9% 9.5% 8 Miscellaneous manufactured articles 2,542.60 2,951.47 16.1% 4.0% Commodities and transactions not classified 9 316,88 0.00 -100.0% 0.0% elsewhere in the SITC TOTAL: 69,434.34 74,462.41 7.2% 100.0%

Source: Monstat

Montenegro’s economy has significant room and the need for improving its export sector. Although total export increased, some categories recorded significant decline and should be promoted since they play significant role in recovering export and competitiveness in the upcoming period. Subcat- egories with increased export include: vegetables and fruits; coffee, tea, cocoa, spices, and manufactures thereof; tobacco and tobacco manufactures; Medicinal and pharmaceutical products. There is high potential for exporting food and victuals, as well as wood industry products, and it should be further enhanced. The FDI inflow into production activities should be fostered, particularly focusing on the production for export and continue financial and non-financial support to exporters.

Total export of goods in Q1 2015, according to preliminary Monstat data, amounted to 356.8 million euros, or 4.4% more compared y-o-y. The following sectors dominated in export structure: food and live animals (21.4%), Machinery and transport equipment (21%), and Manufactured goods classified chiefly by material (16.9%). Export of food and live animals amounted to 76.4 million euros, growing by 13.2%. Under this category, the most representing categories include: Meat and meat preparations and vegetables and fruits with the respective amounts of 19.6 and 10.8 million euros. The highest value of export under machinery and transport equipment was in road vehicles and Electrical machinery, apparatus and appliances at the amount of 22.3 and 17.5 million euros.

In the import structure, according to SITC, the following categories recorded the largest contribution: Electrical machinery, apparatus and appliances, coffee, tea, cocoa, spices, and manufactures thereof, and vegetables and fruits and meat and meat preparations.

Not only export, but the structure of import also needs to be improved. Import should be more directed towards importing equipment and machinery for investment purposes, and less towards importing consumer goods.

86 Table 6.3

Structure of goods import in January-March 2015, in thousand euros

Sector Jan-March 2014 Jan-March 2015 Change Share 0 Food and live animals 67.520,36 76.440,07 13.2% 21.4% 1 Beverages and tobacco 8,848.33 9,855.70 11.4% 2.8% 2 Crude materials, inedible, except fuels 10,501.18 10,732.23 2.2% 3.0% 3 Mineral fuels and lubricants 46,356.69 35,722.56 -22.9% 10.0% 4 Animal and vegetable oils and fats 2,686.00 2,280.34 -15.1% 0.6% 5 Chemical products 36,167.82 36,172.66 0.0% 10.1% 6 Products classified by materials 55,138.45 60,416.98 9.6% 16.9% 7 Machinery and transport equipment 68,101.99 74,795.56 9.8% 21.0% 8 Miscellaneous manufactured articles 46,280.84 50,339.30 8.8% 14.1% Commodities and transactions not classified 9 0.00 1.53 0.0% 0.0% elsewhere in the SITC TOTAL: 341,601.66 356,756.92 4.4% 100.0%

Source: Monstat

Regarding the export by regions in Q1 2015, the main external trade partners of Montenegro were CEFTA countries with 48%, the EU (39%), followed by EFTA countries (3.2%) and other countries (9.7%). In terms of import, the largest share belongs to EU with 41.2%, followed by CEFTA countries (37%), EFTA (0.7%) and other countries (21,1%). Observed by individual countries, the biggest export Sector External partners were: Serbia (16.9 million euros), Italy (13.2 million euros) and Bosnia and Herzegovina (13.1 million euros). In terms of import, the most goods were imported from Serbia (93.2 million euros), followed by China (33.7 million euros) and Bosnia and Herzegovina (28,2 million euros). The visible trade was the largest with signatories of CEFTA agreement and the EU.

Graph 6.2

Structure of goods export and import in January-March 2015., by countries

Source: Monstat

87 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Box 6.1 - International visible trade

According to World Trade Organisation (WTO) Graph 1 estimates, global visible trade will record slight Visible trade growth rates in the World increase in 2015 and 2016, amounting to respective 3.3% and 4.6%. Therefore, trade expansion will remain significantly lower than the estimate published in 1990 when it amounted to 5.1% at the annual level. Modest growth was recorded in 2014, which was the third consecutive year where this growth did not exceed 3%. The average growth of 2.4% between 2012 and 2014 is the lowest three-year annual growth income (not calculating 1975 and 2009, with the peak of global crises). Within short-term period, trade expansion will not exceed economic growth as it was the case for decades. Growth of 2.8% exceeded the GDP growth for one-year period, and the projections for 2015 and 2016 indicated that the visible exchange Source: WTO may exceed the expected growth with a small difference.

It is estimated that the developing countries Graph 2 will record exports growth of 3,6% in 2015, Export and import goods growth rate outlook for while import growth is expected at 3.7%. Ad- 2015, in % vanced countries will record a 3.2% increase in both export and import. Compared to other regions, Asia is expecting the highest export (5.0% this year, followed by North America (4.5%). Export in Europe is expected to grow 3.0% in 2015 compared to 2014, when it amounted to 1.9%. The lowest export growth in 2015 is expected in South America (0.2%), and other regions that may record decline of 0.6% (Africa, Close East, and CIS).

It is expected that North America and Asia will have the imports growth of 5.0% each in 2015, while Europe will have imports decline of 3.0%. South America and Other regions are expecting the respective decline of 0.5% and 2.4%. Source: WTO

The World trade may grow faster than expected, if strong economic recovery boosts in the Euro area, as the result of recently announced ECB’s quantitative easing programme aimed at mitigating monetary policy. Any recovery by the EU Member States would have strong impact on world trade.

88 6.1.2. Services Graph 6.3 International invisible trade of Montenegro recorded surplus amounting to 11.9 million euros Structure of revenues from services in in Q1 2015, or 0.7% y-o-y increase. Increased January-March 2015 revenues in transport-tourism contributed to recording positive balance on this account. The volume of services exchange in Q1 2015 was 158.1 million euros, or 12.9% higher than in the same period of 2014.

Revenues from services amounted to 85 million euros or 11.9% more compared y-o-y. The highest revenues were recorded in transport (36.1 million euros), followed by revenues from travel-tourism (15.2 million euros), other business services (10 million euros) and construction services (9.2 million euros). Source: CBCG

In Q1 2015, expenses from services amounted to 73.1 million euros, or 14% higher compared y-o- Graph 6.4 y. The structure of expenditures shows the highest increase in expenses from transport (29.5 The structure of expenditures from services in Sector External million euros, or 40.3%). Expenses from other January-March 2015 business services amounted to 13.5 million euros and accounted for 18.4% of total expenses. Under these services, the highest expenses were recorded from professional and consulting services (7.8 million euros) and different technical, trade and other business services amounting to 4.8 million euros.

The transport services account recorded surplus of 6.6 million euros in Q1 2015, being 11.3% compared y-o-y. Transport income amounted to 36.1 million euros, or 17,7% higher. The highest income was recorded in road (30.4%) and mari- Source: CBCG time transport (27.6%). Income in road transport amounted to 11 million euros, and it was by two times higher compared to 2014, when income amounted to 5.1 million euros. Income increase in mari- time transport amounted to 29.3%. Income from air and railway transport amounted to respective 6.8 and 2.3 million euros, and declined compared y-o-y.

89 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Graph 6.5

Transport revenues and expenditures in January-March 2015, in thousand euros

Source: CBCG

Total transport expenses amounted to 29.5 million euros or 27% higher compared y-o-y. The highest expenditures were recorded in road and air transport. Expenses in road transport amounted to 16,6 million euros, or 34.3% higher, while expense in air transport amounted to 6.2 million euros (being 6.4% higher).

In Q1 2015, estimated revenues from travel-tourism amounted to 15.2 million euros or 13.7% more, which contributed to recording surplus at the travel-tourism account of 8.4 million euros or 6.1% compared y-o-y. Increased number of arrivals and overnights in the pre-season will largely contribute to recording favourable results in tourism in 2015.

Total income from construction services amounted to 9.2 million euros or 4.3% less compared y-o-y. Simultaneously, expenses for construction services amounted to 2.6 million euros, being lower by almost two times compared to 2014. This services sub-account recorded surplus in Q1 2015 amounting to 6.7 million euros, or 34.6% more.

Revenues from other business services amounted to 10 million euros, which largest portion of income was recorded from providing different professional and consulting services amounting to 6.9 million euros. Expenses for other business services amounted to 13.5 million euros, resulting in recording deficit on this account amounting to 3.5 million euros.

6.1.3. Primary income

In Q1 2015, the primary income account recorded surplus amounting to 40 million euros, or 15.8% more compared y-o-y. The surplus increase mostly resulted from decreased outflow from paid dividends and loan repayment.

90 Graph 6.6 Revenues from factor income amounted to 56.7 Structure of revenues from factor income in million euros, which is 3.9% more relative to Q1 January-March 2015 2014. The main portion of the revenues referred to employees’ compensations in the amount of 52.5 million euros, which is a y-o-y increase of 5.6%. Revenues arising from international investment income amounted to 2.6 million euros, with the main share referring to unpaid interest in the amount of 1.7 million euros.

Expenditures from factor income amounted to 16.7 million euros, of which the largest portion were income from international investments (13.6 million euros), while wages of non-residents employed in Montenegro amounted to 3.1 mil- Source: CBCG lion euros. Expenditures arising from interest repayment amounted to 12 million euros. Outflow for paid dividends amounted to 1.7 million euros, which was almost two times lower than in Q1 2014 (3 million euros). Recorded decline in expenditures outflow for paid dividends resulted in total outflow decrease by 16.6% compared to 2014.

6.1.4. Secondary income Sector External

Decrease in surplus at the secondary income account resulted from increased expenditures and decreased income. Surplus on the secondary income account amounted to 21.2 million euros in Q1 2015, recording a 20.7% y-o-y decrease.

In Q1 2015, transfer inflow amounted to 39.2 mil- Graph 6.7 lion euros. In the revenues structure, 36.5 million Secondary income account trends, euros referred to other sectors, while 2.7 million in thousand euros euros referred to the government sector. Of total inflow of other sectors’ transfers, 26.9 million euros arose from personal transfers to Montenegro, which is at almost the same level (i.e. 0.1% less) than one year before, while the inflow from other current transfers grew 11.3% and amounted to 9.7 million euros. In the same period transfers from Montenegro amounted to 18 million euros, recording a 20.9% y-o-y increase, of which the state sector accounted for 4.4 million euros, while 13.6 million euros referred to other sectors. Outflow of monetary assets arising from personal transfers amounted to 8.5 million euros, or 6.4% more than in 2014, while the outflow arising from other current transfers amounted to 5 million euros, or 1.4% less than in Q1 2014. Source: CBCG

91 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

6.2. Capital and financial transactions account

In Q1 2015, capital and financial account recorded net inflow of 117.2 million euros. Net inflow was recorded at the direct, portfolio and other investments’ subaccounts.

Preliminary data shows that FDI net inflow increased in Q1 2015. Net FDI amounted to 86.2 million euros, recording y-o-y increase of 9.2% percent. Total FDI inflow amounted to 100 million euros, while the outflow amounted to 13.8 million euros.

Graph 6.8 In the structure of FDI inflow, equity investments inflow amounted to 52.5 million euros, making Structure of financial account by investment 52.5% of total inflow recorded in Q1 2015. Some categories, in thousand euros 17.7 million euros referred to investments in companies and banks, while the inflow arising from investments in real estate amounted to 34.7 million euros. FDIs inflow in the form of intercompany debt amounted to 45.3 million euros, recording the share of 45.3% in total inflow, while the inflow of monetary assets arising from the withdrawal of cash invested by residents abroad amounted to 2.2 million euros.

Total FDI outflow amounted to 13.8 million euros which is by 48.5% lower compared y-o-y. In the outflow structure, the outflow arising from residents’ investments abroad amounted to 6 million euros, while the withdrawal of non-res-

Source: CBCG idents’ funds invested in Montenegro amounted to 7.8 million euros.

Graph 6.9 Graph 6.10

Structure of total FDI inflow Total FDI inflow, in thousand euros in the period January-March 2015

Source: CBCG Source: CBCG

92 In Q1 2015, total inflow arising from portfolio investments amounted to 510.9 million euros, recording a significant y-o-y increase (21.6 million euros)28. Investments in domestic securities amounted to 470.2 million euros, while investments into equity securities amounted to 5.7 million euros, whereby investment into debt securities amounted to 464.4 million euros (of which the largest portion referred to the issue of Eurobonds at the international market of 450 million euros). The inflow arising from the withdrawal of funds invested in foreign securities amounted to 40.8 million euros. Simultane- ously, the outflow of funds based on portfolio investments amounted to 105.4 million euros, being significantly higher than in 2014 (22.1 million euros), resulting from increased investments of residents into foreign securities. Residents’ investments into foreign securities amounted to 42.4 million euros, recording increase of 139% (or 2.4 times). Residents’ investments into both equity and debt foreign securities increased. Resulting from higher inflow than outflow, the portfolio investments account recorded net inflow of 405.5 million euros in Q1 2015.

Theother investments account recorded net outflow of 16.9 million euros. During the reporting period, banks’ deposits abroad decreased by 49.5 million euros, as well as their liabilities for borrowing by 9.3 million euros. Corporate sector’ foreign borrowing recorded y-o-y increase. Inflow arising from the withdrawal of funds by the corporate sector amounted to 42.5 million euros, which is an increase of 12.8%, while the outflow arising from the repayment of principal was higher, amounting to 39.6 million euros (it amounted to 19.5 million euros in 2014).

IN Q1 2015, the CBCG monetary assets in foreign accounts and in the vault increased by 391.4 million euros compared to 31 December 2014. External Sector External

28 Significant increase in portfolio investments inflow resulted from the issue of Eurobonds.

REAL ESTATE MARKET ANALYSIS 07

HEDONIC INDEX OF REAL ESTATES IN MONTENEGRO MARCH 2015

In early 2014, the CBCG conducted its regular research on the real estate prices trend in Podgorica. The survey questions concerned the qualitative characteristics of housing units (manner of heating; internet connection; number of rooms; number of balconies; etc.), aiming to assess relative effects of such qualitative characteristics on the value of a housing unit. A subjective value of a housing unit 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 calculating the Hedonic index of real estate prices, which measures the effect of such qualitative characteristics on the value of a housing unit.

Table 7.1

Summary statistics of average values of apartments per square meter in Podgorica

Period Price in euros Chain index Base index September 2007 1,697.6 100.0 100.0

March 2008 1,738.3 102.4 102.4 Analysis Market Estate Real September 2008 1,525.5 87.8 89.9 March 2009 1,402.1 91.9 82.6 September 2009 1,223.1 87.2 72.1 March 2010 1,128.3 92.2 66.5 June 2010 1,191.5 105.6 70.2 September 2010 1,177.1 98.8 69.3 December 2010 1,185.2 100.7 69.8 March 2011 1,171.2 98.8 69.0 June 2011 1,163.0 99.3 68.5 September 2011 1,174.0 100.9 69.2 December 2011 1,151.2 98.1 67.8 January 2012 1,168.3 101.5 69.0 June 2012 1,179.6 102.5 69.5 September 2012 1,172.3 99.4 69.1 December 2012 1,171.6 99.9 69.0 March 2013 1,169.4 99.9 68.88 June 2013 1,069.8 91.48 63.10 March 2014 971.4 90.80 57.22 September 2014 950 97.8 55.96 March 2015 920.8 96.9 54.24

Source: CBCG

97 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

The calculation of an average price per square meter in March 2015 was based on a sample of 55,827 apartments in the locations Podgorica 1, Podgorica 2 and Podgorica 3. The survey included a random sample of 5,073 housing units of which 456 questionnaires were successfully completed. This means that the total response rate was 9%.

The results of the March 2015 survey showed that the average price of a square meter of real estate units in Podgorica amounted to 920.8 euros, which is 3.1% less than in September 2014. The real estate prices chain index shows that the decline in real estate prices decline (which started in June 2013) continued in March 2015, after three-year stagnation of real estate prices.

In March 2015, it is obvious that the real estate market continued the trend of adjusting the large offer to the limited demand, reflected through decreased prices of apartments. The low demand of real estates resulted from still low households’ purchasing power and the restrictive lending policy in the banking sector, as well as relatively high interest rates on mortgage loans.29

Table 7.2

Summary statistics of average values; standard deviation; minimum and maximum prices by housing category; in euros No. of Medium Standard Minimum Maximum Variable observations value deviation price price Average Housing Price 456 920.8 253.8 150 2000 per square meter Average Housing Price 185 778.7 254.5 150 2000 per square meter - house Average Housing Price 271 1017.7 202.8 468.8 1800 per square meter - apartment

The observed sample includes 456 housing units from Podgorica, i.e. 185 houses and 271 apartments (Table 7.2). The sample was collected from three zones in Podgorica, 113 apartments from Zone 1, 101 from Zone 2, and 242 from Zone 3. The price of individual housing units ranged between 2,000 at exclusive city locations to 150 euros per square metre at locations further away from the city centre (Zagorič, Konik, Stari aerodrom, etc.).

Descriptive statistics, Model sustainability testing, and Results of the econometric model of the hedonic index

According to available data, the econometric model assessing the effect of qualitative characteristics of apartment to the price of object was made. Observation of variable distribution variables - prices of housing objects and square area - shows the limitations on the top and bottom (apartments cannot be smaller than 10 m2 or larger than 1000 m2 as well as their prices). The econometric model includes the logarithms for price and square area, so that the histogram would have the normal distribution shape, as the necessary precondition for applying the lowest average squares (OLS).

Table 7.3 shows the results of the econometric model (OLS). Measured by the importance level, the zone where the housing unit belongs and the age of object significantly influence the price. To wit, the housing units in Zone 1 are more expensive in relation to Zone 3, while prices of housing units in Zone

29 During the period January 2012 - March 2015, the effective interest rate on mortgage loans ranged between 7.4% and 9.1%.

98 Graph 7.1 Graph 7.2

Histogram of distribution of housing unit prices Histogram of distribution of area

2 are lower than those in Zone 3.30 Moreover, the sample and the control of other factors show that the price of apartments is more expensive if the apartment is aged up to 10 years than if it were aged more than 10 years. Other qualitative characteristics of the housing objects significantly influencing the price of a housing unit in Podgorica included internet connection, type of heating, whether and object were a house or an apartment.

Table 7.3

Empirical results of average housing price model, September 2014 Real Estate Market Analysis Market Estate Real

Robust lncij_kvad Coef. t P>|t| [95% Confidence intervals] St. errors pg1 | 0.196*** 0.024 8.170 0.000 0.149 0.244 pg2 | 0.130*** 0.032 - 4.112 0.000 -0.192 -0.068 lnkvadr | -0.050 0.053 -0.940 0.348 -0.153 0.054 apart | 0.099*** 0.038 2.627 0.009 0.025 0.174 age_5 | 0,169*** 0.034 4.988 0.000 0.102 0.235 age_510 | 0.096*** 0.033 2.882 0.004 0.131 0.162 balcony0 | -0.101*** 0.060 -1.672 0.095 -0.220 0.018 balcony1 | -0.021 0.037 -0.558 0.577 -0.093 0.052 balcony2 | -0.028 0.032 -0.874 0.382 -0.092 0.035 room_0 | 0.007 0.082 0.083 0.934 -0.155 0.169 room_1 | -0.048 0.047 -1.026 0.306 -0.140 0.044 room_2 | -0.020 0.031 -0.662 0.508 -0.081 0.040 heating | -0.068*** 0.031 -2.191 0.029 -0.130 -0.007 internet | 0.160*** 0.023 2.650 0.008 0.016 0.105 garage | 0.045 0.042 1.068 0.286 -0.038 0.128 _cons | 6.926 0.263 26.313 0.000 6.408 7.443

Note: *** significance at 1%, ** significance at 5%, * significance at 10% Diagnostics: Number of observations : 454; R-squared = 0.469; VIF= 2.33; Ramsey test F(3, 435) = 0.2440; Prob > F = 0.0000

30 Zone 3 was taken as the basis.

99 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

The sample decreased by two observations (N=454), due to the exemption of extreme values of real estate prices which disturbed normal distribution of residuals and dependable variables. The diag- nostic tests showed that the model had been specified very well; there were problems 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.

Table 7.4

Real estate prices in selected countries (ranged according to annual growth in Q4 2014) Annual change, Q4 Annual growth rate Quarterly change, Country Trend assessment 2013, in % Q4 2014, in % Q4 2014, in % Ireland 6.18 ↑ 16.62 4.92 UAE –Dubai 21.52 ↓ 12.98 -1.14 Estonia-Tallin 16.55 ↓ 12.59 3.21 Sweden 3.80 ↑ 8.78 1.07 Israel 5.38 ↑ 8.65 2.11 Japan-Tokyo 3.91 ↑ 8.34 6.36 Turkey 5.73 ↑ 8.05 2.11 Hong Kong 3.30 ↑ 8.03 2.38 UK 4.88 ↑ 7.33 -0.00 Australia 7.42 ↓ 5.25 1.76 ICELAND 4.33 → 5.18 0.89 NEW ZEALAND 8.02 ↓ 4.60 7.34 Philippines - Makati CBD 9.86 ↓ 4.29 1.51 The Netherlands -4.16 ↑ 4.12 0.41 US (Case Shiller) 9.10 ↓ 3.85 1.01 Thailand 3.87 ← 3.72 -0.27 Latvia 3.44 → 3.70 0.25 US (FHFA) 6.39 ↓ 3.65 2.20 Lithuania - 5 largest cities 0.76 ↑ 3.61 0.08 Norway -1.14 ↑ 3.61 -0.89 Canada 2.53 → 3.47 0.75 South African Republic -1.30 ↑ 2.62 1.95 Czech Republic 0.82 ↑ 2.26 -0.50 Bulgaria 0.38 ↑ 2.05 0.14 Switzerland 3.24 ↓ 1.80 1.07 Croatia -14.06 ↑ 1.69 -0.19 Taiwan 14.46 ↓ 1.26 -0.25 South Korea -0.81 ↑ 0.86 0.83 Mexico 0.39 → 0.84 -0.70 Brazil – Sao Paulo 7.59 ↓ 0.83 -0.80 Indonesia 2.93 ↓ 0.39 -0.52 Slovak Republic -3.01 ↑ 0.25 0.34 Portugal -0.68 → -0.52 -2.42 Romania -10.43 ↑ -1.78 -2.39 Finland -0.09 ↓ -1.88 -0.51 Spain -9.44 ↑ -1.96 1.01 Puerto Rico 7.96 ↓ -2.76 8.31 Singapore -0.90 ↓ -3.85 -0.89 Greece -8.06 ↑ -4.34 -0.55 China - Beijing 16.93 ↓ -5.67 1.05 Russia -5.86 ← -6.15 -1.37 Ukraine-Kiyv 0.95 ↓ -48.85 -9.70

↑ = increase in houses’ prices by more 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, → = decline in houses’ prices by less than 1 percentage point Source: Global property guide, 2014.

100 The table 7.4 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 2014: the highest annual growth was recorded in Ireland (16,62%) and the lowest one in Ukraine (-45.85%). The Balkan states included in the Report recorded mild increase in prices compared to Q4 2013. Real Estate Market Analysis Market Estate Real

101

INTERNATIONAL ECONOMY 08

According to April IMF Report, global economy may this year grow at the rate mildly higher than those recorded the year before, whereby more intensive growth may be expected in advanced economies (0,6 percentage points growth to 2.4%), with slightly worse predictions for emerging economies (decline by 0,3% to 4.3%).

In Q1 2015, global economy continued to grow at lower pace, and insufficiently strong signals on future growth were present in many key economies. In Q1 2015, the US economy grew at the negative rate, while China’s economy is slowing down. Japan and the Euro area recorded growth encouraged with the expansive monetary policies.

Table 8.1

Key global indicators, y-o-y, in %

Differences in relation to Projection projections from January Indicator 2013 2014 2014, in percentage points 2015 2016 2015 2016 GDP growth WORLD 3.4 3.4 3.5 3.8 0.0 0.1 Advanced economies 1.4 1.8 2.4 2.4 0.0 0.0 Developing economies 5.0 4.6 4.3 4.7 0.0 0.0 USA 2.2 2.4 3.1 3.1 -0.5 -0.2 Euro area -0.5 0.9 1.5 1.6 0.3 0.2 Germany 0.2 1.6 1.6 1.7 0.3 0.2 France 0.3 0.4 1.2 1.5 0.3 0.2 Italy -1.7 -0.4 0.5 1.1 0.1 0.3 Spain -1.2 1.4 2.5 2.0 0.5 0.2 International Economy Japan 1.6 -0.1 1.0 1.2 0.4 0.4 UK 1.7 2.6 2.7 2.3 0.0 -0.1 Canada 2.0 2.5 2.2 2.0 -0.1 -0.1 Advanced economies outside G7 and Euro area 2.2 2.8 2.8 3.1 -0.2 -0.1 Developing economies 2.8 2.7 2.9 3.1 0.1 -0.2 Central and Eastern Europe 2.9 2.8 2.9 3.2 0.0 0.1 Russia 1.3 0.6 -3,8 -1.1 -0.8 -0.1 China 7.8 7.4 6.8 6.3 0.0 0.0 India 6.9 7.2 7.5 7.5 1.2 1.0 Latin America and the Caribbean 2.9 1.3 0.9 2.0 -0.4 -0.3 Middle East, North Africa, Afghanistan, and Pakistan 2.4 2.6 2.9 3.8 -0.4 -0.1 Sub-Saharan Africa 5.2 5.0 4.5 5.1 -0.4 -0.1 Volume of global trade (goods and services) 3.5 3.4 3.7 4.7 -0.1 -0.6 Consumer prices Advanced economies 1.4 1.4 0.4 1.4 -0.6 -0.1 Developing economies 5.9 5.1 5.4 4.8 -0.3 -0.6

Source: MMF, WEO, updated in April 2015

105 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Graph 8.1 Inflation in many advanced economies was low or negative in Q1 2015. As the result of certain Aggregate monthly price indices of stock exchange items, 2005=100 geopolitical and/or financial turmoil, some developing countries recorded extremely high inflation rates. A significant drop in oil prices in H2 2014 resulted in global deflation trends in Q1 2015. On the other hand, oil price corrected in Q1 2015, which will have positive effect on further global inflation trends. According to April IMF report, the projected level of consumer prices for advanced economies will amount to 0.4% this year, i.e. 1.0 percentage points lower than in 2014. According to the report, consumer prices in developing economies will amount to 5.4%, or 0.3 percentage points higher compered y-o-y.

Some countries, either advanced or developing, have the applicable policies aimed at fostering economic recovery and/or prices growth. In- creased liquidity at the local level has its side ef- Source: IMF fects, which is the reason why most of funds did not end as planned by these policies (e.g. growth in equity market and decline in yields). Many Graph 8.2 markets conditionally depend on monetary poli- Indicators of volatility/stress at the financial cies and their abrupt cancelation would have its markets, 2013-2015 Q1 adverse effects.

On the contrary, Federal Reserves (FED) ended the quantitative easing policy and announced increase in reference interest rate, which will be the first increase after the crisis appeared. Mar- ket expectations and that the growth will not exceed 0.25 percentage points. FED’s upcoming moves will mostly depend on market data, primarily inflation and unemployment. The main question raised is whether the pace of monetary policy change will be in line with the changes in real economy, and/or what it requires.

Financial market volatility indices (e.g. VIX), as well as indicators of lending and liquidity risks at the money markets (like TED spread and LIBOR- OIS spread) in Q1 2015 recorded historically low Source: Bloomberg levels31. VIX index pointed to the period of low-

31 VIX is the measure of implicit volatility of options to the stock exchange index S&P 500, and consequently the measure of expected volatility of share prices (in the upcoming 30 days). TED spread is the difference between 3-month USD LIBOR and US T-bills with the same maturity, while LIBOR-OIS spread is the difference between LIBOR and overnight swap (fixed) rate, which is practically market expected value of some reference overnight interest rate (in US, usually effective “rates on Federal funds”) during the future specific period.

106 er volatility, i.e. smaller instability. TED spread increased in this quarter as well, resulting from 3-month US LIBOR increase, but these are not index values to be concerned about.

Aggregate stock exchange index for global markets (MSCI World) increased during this quarter. If index for G7 countries were observed, the growth would be even higher. Stock exchange indices in USA were, in addition to small oscillations, remained almost unchanged during the reporting period. Japa- nese and main Euro area indicators recorded significant growth in Q1 2015. As the result of increased liquidity, Shanghai SSE composite index recorded strong growth and doubled its value during the last year, which opens the viability issue.

8.1. Advanced countries

8.1.1. The USA

Compared q-o-q, the economic activity in the USA decreased by 0.7%32 in Q1 2015. It recorded growth of 2.7% compared y-o-y. Positive effects of output and investments growth were annulled with the decline in public spending and significant exports drop. Current account deficit increased from 2.2% to 2.6% of GDP in Q4 2014, and deficit of goods and services increased in Q1 2015. Wages and savings increased, but the consumer reliability index declined during the quarter. US Dollar continued to appreciate compared to the most global currencies, and consequently it reached its maximum value relative to euro in early March this year, and strong currency largely affected exports and corporative profits.

Graph 8.3 Graph 8.4

Quarterly GDP, % Current account balance International Economy

Source: US Bureau of Economic Analysis Source: US Bureau of Economic Analysis

32 Annualized GDP growth rate, US Bureau of Economic Analysis

107 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Graph 8.5 Industrial output and manufacturing recorded mild decline in Q1 2015, and the same trend Industrial output and manufacturing industry, was present during the last two months of 2014, 2007=100 whereby these values were above the 2007 level. Capacity utilization also declined during the reporting period. Capacity utilization is still below the long-term average utilization and before the value from the pre-crisis period.

Labour market indicators are generally positive. Unemployment is still declining, and it amounted to 5.5% in Q1 2015 (5.4% in April). The current rate is similar to pre-crisis rights. The number of new jobs in the private sector still point to the labour market dynamics. However, the labour force activity rate has been declining for several years, although it may be said that the decline stopped in 2014.

Deflation trends from the previous year contin- Source: FED ued in Q1 2015, thus the annual inflation in the first two months of 2015 was negative. Prices of fuels strongly affected the inflation rate decline; yet, if effects of food and fuels were excluded, annual inflation at the end of this quarter amounted to 1.8% and was near the central bank’s targeted values.

Graph 8.6 Graph 8.7

Unemployment, in % (right scale) and change of employment in the private sector (left scale), Annual inflation, in % in thousands

Source: US Bureau of Labour Statistics Source: US Bureau of Labour Statistics

108 8.1.2. Euro area

Euro area countries recorded significant recovery in Q1 2015. Monetary measures taken by the ECB, decline in fuels price, and the depreciation of the euro had positive effects on trends in Euro area’s financial markets.

At end-2014, GDP grew by 0.3% compared to Q3 2014, i.e. by 0.9% compared y-o-y. The Q1 2015 outlook points to the continued economic recovery. According to Eurostat data, the GDP growth of 0.4% was recorded in Q1 2015, which is 1% more compared y-o-y, when GDP growth amounted to 0.3%.33 According to expert assessments, the forecasted rate will amount to 1.4% in 2015, and to respective 1.7 and 1.8 in 2016 and 2018.34

Table 8.2

GDP growth, change in %, q-o-q and y-o-y

GDP growth - change in %, q-o-q GDP growth - change in %, y-o-y 2014 2015 2014 2015 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Euro area 0.1 0.2 0.3 0.4 0.8 0.8 0.9 1.0

Source: Eurostat

Unemployment in the Euro area has been declining since the middle of 2013, and it amounted to 11.3% in February 2015. According to the forecast, the unemployment will amount to respective 10.9% and 10.3% in 2016 and 2017.

Inflation in the Euro area has been trending down in Q1 2015. Annual inflation in March was -0.1%, after even lower rates of -0.6% and -0.3% recorded in January and February, respectively. Forecasts indicate that the inflation will be very low or negative until significant growth appears in H2 2015.35 It is expected to reach the targeted middle-term level of or near 2%. However, the expert assessments forecast annual inflation to average to respective 0.1%, 1.25%, 1.6% and 1.8% in 2015, 2016, 2017 and International Economy 2019.36

33 http://ec.europa.eu/eurostat/documents/2995521/6829212/2-13052015-BP-EN.pdf/1444bdf1-65ba-457d-829b- dee843b0c861 34 http://www.ecb.europa.eu/stats/prices/indic/forecast/shared/files/reports/spfreport2015_Q1.en.pdf?11480be3ed37058f 7b23600d89c5e1b1 35 ECB, Report 3/2015 36 The ECB Survey of Professional Forecasters from April 2015 reduced average inflation forecasts for 2015 from 0.3% (previous January survey) to 0.1%. http://www.ecb.europa.eu/press/pr/date/2015/html/pr150416.en.html

109 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Table 8.3

Results of the ECB Survey of Professional Forecasters compared with other forecasts and projections (annual change) HICP inflation 2015 2016 2017 long-term1 SPF Q2 2015 0.1 1.2 1.6 1.8 Previous SPF Q1 2015 0.3 1.1 1.5 1.8 ECB Macroeconomic projections (March 2015) 0.0 1.5 1.8 - Economic consensus 0.0 1.2 - 1.9 Euro area - barometer (March 2015) 0.0 1.2 1.5 1.9 Real GDP-growth 2015 2016 2017 long-term SPF Q2 2015 1.4 1.7 1.8 1.7 Previous SPF Q1 2015 1.1 1.5 1.7 1.7 ECB Macroeconomic projections (March 2015) 1.5 1.9 2.1 - Economic consensus 1.4 1.7 - 1.6 Euro area - barometer (March 2015) 1.4 1.8 1.6 1.5 Unemployment rate2 2015 2016 2017 long-term SPF Q2 2015 11.1 10.6 10.1 9.2 Previous SPF Q1 2015 11.3 10.9 10.3 9.4 ECB Macroeconomic projections (March 2015) 11.1 10.5 9.9 - Economic consensus 11.2 10.8 - - Euro area - barometer (March 2015) 11.1 10.7 10.1 9.5

1 Long-term expectations refer to 2019. Economic consensus of long-term projections was taken from 2014. The long- term projections for Euro area barometer were taken from January 2015 survey. 2 Labour force percentage Source: ECB, The ECB survey of professional forecasters, 2nd Quarter of 2015, April 2015

In Q1 2015, lending conditions for enterprises improved and contributed to the loans granted growth. The Bank Lending Survey (BLS) is conducted quarterly. The latest survey included 42 banks, representing all of the euro area countries, thereby taking into account the characteristics of their respective national banking systems. The main purpose of the BLS is to enhance the understanding of bank lending behaviour in the euro area.

The questions distinguish between three loan categories: loans or credit lines to enterprises; loans to households for house purchase; and consumer credit and other lending to households. For all three categories, questions are asked on credit standards for approving loans (bank’s rules for determining the possible borrower’s creditworthiness for loan), credit terms and conditions on new loans, credit demand, the factors affecting loan supply and demand conditions and the share of loan rejections. The responses to questions related to credit standards are analysed in this report by focusing on the difference (“net percentage”) between the share of banks reporting that credit standards applied to the loan approval have been tightened and the share of banks reporting that they have been eased. A positive net percentage indicates that a larger proportion of banks has tightened credit standards, whereas a negative net percentage indicates that a larger proportion of banks has eased credit standards.

In order to describe the developments in survey replies over time, the report refers to changes data from one survey round to another. The report monitors changes in the “net tightening” or “net easing” of credit standards. For example, a lower “net percentage” of banks tightening their credit standards between two survey waves would be referred to as a “decline in net tightening”.

110 According to April Report, credit standards on loans to enterprises were eased further, thereby supporting the recovery of loan growth. According to the report, banks continued to ease credit standards for companies in Q1 2015, which is reflected by the higher negative net percentage of -9% (this percentage amounted to -5% in the previous quarter). Opposite to enterprises, housing loans to households slightly tightened. This is supported by positive net percentage amounting to 2% after easing of -4% in the previous quarter. Lending standards for consumer loans and other loans to households eased again in this quarter, which is confirmed by negative net percentage of -5%, after -3% in the previous quarter. For the second quarter of 2015, banks expect further net easing of credit standards on loans to enterprises and for consumer credits, but a further net tightening of credit standards on housing loans.

Although there are improvements regarding credit standards easing, they were rather strict compared to some earlier periods, bearing in mind that the Report is done since 2003.

For the first time in this survey round, banks also indicated how they have changed their rejection rate for loan applications. The net share of rejected applications is the difference between the sum of the percentages of banks reporting an increase and that of banks reporting a decline in the share of loan rejections. Net share of rejected applications for housing loans to enterprises households and decreased (-5% and -4%, respectively) while this percentage slightly increased for consumer loans (2%).37

On its meeting held on 15 April 2015, the ECB Governing Board decided not to change key ECB interest rates, governed by its economic and monetary analyses. The decisions of the Governing Board in the upcoming period will be guided on the final implementation of the foreseen monetary policy measures. The measures taken should contribute to sustainable attaining of targeted inflation in the middle term period and to improving the economic outlook and credit growth.38

Monetary policy measures, particularly macro-prudential policy measures should be used to control potential risks for financial stability. Such environment is the result of poor economic conditions and low inflation, and the behaviour of market players according to the current situation, as well as the reaction of monetary regulators on current circumstances. The last decade has been characterised by trends in decreasing real interest rates in relation with the stagnation stemming from long-term de- International Economy cline in total output growth and growth in planned savings. These circumstances resulted in monetary policy interest rates being relatively low. Monetary policy has to remain adjusted and flexible to nor- malise the level of inflation to the level of targeted one, which will have additional impact on interest rates growth.

The adjustable monetary policy of the ECB will not only contribute to price stability, but also to maintaining financial stability. As the result of lower interest rates and higher confidence into market, the current monetary policy fosters the demand in the Euro area. Higher expected inflation, near the target, may contribute to mitigating the real debt burden on population, companies and the public sector.

37 The euro area Bank Lending Survey, First quarter of 2015, Retrieved from: https://www.ecb.europa.eu/stats/pdf/blssur- vey_201504.pdf?c836ae8d17a08741a7e0b10bc34374e8 38 ECB, Report 3/2015

111 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Graph 8.8 8.1.3. Japan

Quarterly GDP, in% In Q1 2015, Japanese economy recorded q-o-q growth of 0.6%, yet a y-o-y decline of 1.4%. The economy has been growing since the largest decline in Q2 2014 i.e. since the fiscal measures strongly influencing the spending. Thus, spending grew in this quarter also, as well as investments, public spending and net export, favour- ably affected by depreciated currency. The IMF April Outlook shows that the Japan’s economy will grow at the rate of 1.0% in 2015, and 1.2% in 2016.

Industrial output and corporate profits increased. After the decline in Q4 2014, unemployment increased by 0.3 percentage points in Q1 2015, totalling to 3.5% in end-March. The unemployment rate has been declining since 2009. Wages trend- Source: Government of Japan ed up mildly in this quarter.

The inflation rate was not pointing to stable growth in prices since, as in Q4 2014, inflation measured negative monthly rate during the two months in Q1. On the other hand, inflation rate trended up. However, prices of fuels significantly affected the inflation rate, thus the core inflation showed slightly better results.

The Nikkei 225 index recorded dynamic growth in Q1 amounting to 10.1%. Such trend continued in Q2 2015.

8.2. Emerging countries

According to the IMF April report projections, emerging countries will grow at lower rates than in 2014. The IMF projected growth rate of 4.3% in 2015, and the rate of 4.7% in 2016. The highest chal- lenge in this group of countries is establishing long-term and stable growth, requiring structural changes in many countries. Growing domestic demand and the external demand recovery focusing on advance economies might be an additional stimulus to these economies. Still, slowing down of economy was reflected through lower market indices performances, which have been far below the index trend of advanced markets. The capital flows of many countries were affected by Fed’s monetary policy and cyclical growth in EU and Japan markets. Investors also placed doubted the sustainability of growth rates present before the crisis and in 2010-11, particularly in BRIC countries. On the other hand, the situation was slightly different in some parts of the Asia-Pacific region (Indonesia, Malay- sia), some Latin America countries (Mexico, Chile, Colombia, and Peru), and the sub-Saharan parts of Africa. Geo-political situation in east Ukraine might pose adverse effects even to countries outside this category.

112 8.2.1. Russia

According to the World Bank and IMF projections, the Russian economy in Q1 2015 will decline at respective rates of 2.9% and 3.8%. According to the Ministry of sustainable development, GDP decline rates for 2015 range between 3.5% and 3.7%, with the possibility of decline growth. In Q1 2015, the y-o-y decline amounted to some 1.9%. According to the abovementioned international institutions, economic activity in Russia should record better results than the forecasts for this year, i.e. 0.1% and -1.1% according to the World Bank and the IMF, respectively.

According to the Central Bank of Russia (CBR) data, the activity construction will range between 3.5% and 4% i.e. between 1.0% and 1.6% in 2016. Depreciated currency will affect lower imports, while the oil price increase will have positive effect on net export. Due to increased prices of imported goods, lower corporative wages, deteriorated access to international capital markets and stricter lending conditions, the CBR is expecting continued trend of lower investments level, weaker economy financing, which will result in consumption decline. In March 2015, the y-o-y industrial output decline was 14.6%. Real salaries are lower, and the average wage recorded nominal decline relative to Q4 2014.

Inflation trended up resulting from the Russian ruble depreciation39. During Q1 2015, annual inflation rate continued to grow (it amounted to 11.4% in December 2014) and amounted to 16.9% as at end- March. Data point to the decreased domestic demand, and the CBR expects that the inflation will peak in Q2 2015. The CBR has been increasing reference interest rates several times, amounting to 17% as at 2014 year-end, to decrease it three times in 2015, of which two times in Q140. The current rate is 12.5%. The targeted inflation rate for 2017 amounts to 4%.

During the Q1, the Ruble decided to depreciate compared to USD, and started to appreciate in Febru- ary and ended the quarter increasing by 3.9%. Such trend continued in the beginning of Q2 resulting from the oil price increase.

Oil and oil products export increased, while gas export decreased. Export and import decreased, as well as net export. Current account recorded surplus, and the World Bank estimated that it would International Economy amount to 7.5% of GDP in 2015. Budget ran a deficit in the first two months of 2015. Public and private external debt declined.

The RTS index grew in Q1 2015, as the result of positive trends after the lowest recorded value in end- 2014, but it is still below the pre-crisis level.

Economic sanctions have already shown their on Russian economy, in terms of change in economy structure and its foreign interactions. Since the economy mostly bases on export of energy products, price fluctuations will continue to be the aggravating factor. The lack of investments and financial -sec tor trends will pose the highest risk in the upcoming period.

39 The CBR decided to increase currency rate flexibility by not intervening and or increasing the market operations value if the currency exceeds the “operational fluctuation” borders compared to two-currency basket (euro and dollar). The Decision came into force on 5 November 2014, 40 2 February 2015 and 16 March 2015.

113 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

8.2.2. China Graph 8.9 Economic activity in China has had the decreas- Quarterly GDP, % ing growth rates since 2010, and the official data for Q1 2015 show 7% growth compared y-o-y, and a 1.3% y-o-y growth. The April IMF Report points to increase in China’s economy at the moderate rate, projecting 6.8% and 6.3% increase in 2015 and 2016, respectively. The World Bank projections also point to slowdown, with slightly higher rates. The slowdown in the economy is mostly affected by weaker domestic demand and imbalances in the real estate market, as well as the international markets, affecting the China’s exports and industry.

China’s Government started to incentivise economy with comprehensive fiscal and monetary measures in terms of increasing consumption through public projects, stimulating lending, Source: National Statistical Bureau of China fostering “proper” real estates’ development, decreasing reserve requirement and introducing tax incentives41. If the effect would be observed Graph 8.10 through Shanghai SSE composite index and its waste growth, it may be concluded that measures Selected indicators, annual rate, month-end, were extremely effective. However, increased li- in % quidity at the capital market poses the issue of growth foundation and viability. Bearing in mind the lending trend in the state (amounting to over 125% of GDP in 2013), trends in immova- ble properties, problems at the real estate market and lower consumption, it may be said that the measures are yet to give effect.

The Central Bank decreased the reserve require- ment42 in February by 0.5 percentage points to support structural adjusting of financial institutions, assist SMEs and undeveloped parts of the corporate sector, etc. Moreover, this bank’s move should have compensated the capital outflow affecting the labour market. However, this measure did not affect lending interest rates. Inflation decline resulted in real rates increase. In March Source: National Statistical Bureau of China 2015, the Central Bank decreased reference interest rates on loans and deposits – rates for 1-year

41 Report of the Politburo of the Communist Party of China of 30 April 2015 42 Currently 18.5%

114 loans decreased by 0.25 percentage points to 5.35%, and for 1-year deposits also by 0.25 percentage points to 2.5%.

Graph 8.11 8.2.3. Turkey Quarterly GDP, Q/Q-4, constant prices, in % The IMF projected economic activity growth in Turkey for 2015 to amount to 3.1%. Turkey’s economy grew at the rate of 2.9% in 2014, i.e. of 2.6% in Q4 compared y-o-y. It grew by 0.7% compared q-o-q. Household spending, large state’s spending and export of goods and services contributed mostly to the real GDP growth. Judg- ing according to the decline in consumer confidence index, the slowdown may be expected in Q1 despite positive and affirmative projections of rates by domestic and international institutions. The volatility of capital flows and slowed lending growth will have adverse effect on economic activity. Source: Turkish Statistical Institute

Industrial output recorded sound and two-digit growth. Moreover, growth in goods and services export was sound. After large investments in 2011, a significant decline occurred in subsequent years, but data indicate a mild growth that should be viable in the coming period. State spending was used as a support during volatile periods, mostly in infrastructural projects. In end 2015, unemployment amounted to 11.2%, growing since the middle of 2014.

Inflation in Turkey is rather high, with the y-o-y rate of 7.6% in March 2015. The volatility of a currency exposed to effects of international capital flows poses a high risk. In early 2014, the Central Bank radi- cally raised the reference interest rate, to be decreased in the coming period, with the latest change in February 2015 by 0.25 percentage points to 7.5%. Despite the economic growth, Turkey is rather ex-

posed to risks stemming from external financing of different economic sectors, which opens the issue International Economy of maturity compliance of sources and placements.

8.3. Neighbouring countries

In general, the economies of the region continued some negative trends from the previous period. This was shown best through the prism of public finance, where, in addition to radical decrease of expenditures, budget “fillings” pose actual problem of the fiscal policy. It is clear that the decline in public spending reflects on the GDP, however, the key issue are the structural imbalances of these economies, recording high unemployment rates, illiquidity, high NPL rates, lack of competitiveness, low produc- tivity levels, insufficient or slow realisation of FDIs, and the like.

115 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Graph 8.12 Graph 8.13

Gross domestic product, Q/Q-4, in %43 Consumer prices index, annual rate, in %

Source: National Statistical offices Source: National Statistical offices

8.3.1. Serbia

Economic activity in Serbia continued to drop in Q1 2015, for the fifth consecutive quarter recording negative GDP trend. Compared y-o-y, the GDP decline amounted to 1.8%. Household spending also continued the previous year trend declining by 0.6%. According to the Labour Force Survey, unemployment amounted to 19.2% in Q1 2015, recording significant q-o-q growth of 2.4 percentage points. Average salary in March 2015 was decreased in both nominal and real terms by respective 1.1% and 2.9% compared to the average wage paid in March 2014. 43

The state spending also recorded decline of 3.5%. Growth was recorded in goods export and import by respective 9.7% and 11%, as well as in gross investments into primary funds.

Annual inflation rate increased from 0.8% to 1.9% in March 2015, which was still below the lower limit of the allowed discrepancies from the target, and according to the National Bank of Serbia (NBS) projections, the same discrepancies from the target will reappear in H2 2015.

Current account deficit amounted to 6.2% in Q2 2015. Deficit of the Republic budget amounted to 2.4% of GDP in Q1 2015, while public debt of the Republic of Serbia amounted to 75.0% of GDP, pointing to 4.0 percentage points y-o-y increase, and general historical growth, taking as an example debt amounting to 28.3% in 2008. The depreciation of Dinar to US dollar and euro should also be added to this.44

43 At the moment of compiling the Report, quarterly GDP data for Montenegro and Macedonia were not available 44 Estimate of the NBS

116 Serbia’s credit rating was confirmed in January 2015 by both Standard and Poors and by Fitch to BB-/ negative outlook and B+/stable outlook, respectively.

8.3.2. Croatia

Croatia’s economy grew 0.5% in Q1 2015 compared y-o-y. Although this has been the second consecutive positive quarter, GDP in 2014 was really lower by 0.4% relative to 2013.

As at Q1 2015, final consumption recorded positive contribution to the real GDP growth in all categories – households 0.3%, state 0.6%. Thus, the household spending had the strongest positive effect on economic activity trends. Increase in export of goods and services had high contribution to GDP growth. Gross investments into fixed capital had negative contribution similarly to the whole next year.

According to IMF April 2015 projections, Croatia’s economy should grow by 0.5% and 1% in 2015 and 2016, respectively. Thereby, the projected current account surplus for 2015 would amount to 2.2% of the GDP, and the unemployment rate to 17.3%.

Average net salary in March 2015 in nominal terms increased 4.0%, and in real terms by real by 3.9% compared to March 2014. The unemployment rate, which in Croatia has expressed seasonal fluctuations, stood at 19.7% at the end of March.

Annual inflation rate45 was negative in the first two months of 2015, but it amounted to 0.1% as at end- March affected by the increase in price of energy products.

In Q1 2015, total industrial output had positive trends compared y-o-y, but still far below the pre-crisis level. Similar situation is with construction, which has been facing constant decline since the crisis emerging. On the other hand, tourist arrivals and overnights are increasing.

Fiscal deficit je amounted to 5.7% in 201446, which is constantly more than previously forecasted. Re- sulting from deficit and methodological changes in end-2014, public debt amounted to 85% of GDP International Economy and it is on the growing path.

The banking sector remains high level of non-performing loans and loans denominated into Swiss Francs, bearing in mind additional appreciation of Swiss Franc in January 2015.

8.3.3. Macedonia

According to the IMF April 2015 projections, the Macedonia’s economy should grow at a rate of 3.8% in 2015 and 3.9% in 2016, while inflation should remain low also in the future. Annual inflation rate during the whole three months was negative despite higher prices of energy products.

Industrial output recorded 0.8% growth in January-April 2015 compared y-o-y, which is a mild slowdown compared to end-2014. According to the currently available data, construction, which recorded

45 Consumer prices index 46 IMF - May 2015 Mission report

117 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

vast increase last year and early this year, slowed down in this quarter and ultimately the decline, which may indicate the short-term “wave of investments”.

According to the IMF, current account deficit amounted to 1.3% in 2014, whereas higher deficit was projected for the upcoming period. Wages and salaries recorded nominal and real growth compared y-o-y. Still, significant problem is the high unemployment rate that amounted to 27.6% as at Q4 2014.

8.4. Central banks’ interest rates

Under the conditions of still modest economic growth, and particularly bearing in mind expectations, central banks of leading economies continued the policy of record low interest rates in Q1 2015.

As the result of deflation pressures and intensifying risk from economic activity decline, the ECB Governing Council lowered reference interest rate, twice in 2014, which has been on the lowest historical level of since September 2014 of 0.05%. Simultaneously, interest rate on overnight deposits was decreased to -0.2%. FED has been keeping its targeted rate since December 2008 at the level of Graph 8.14 0-0.25%, while the latest meetings of the Federal Reference interest rates of Central Bank Committee for Open Market Operations in Q1 banks’,%, 2013-Q1 2015 2015 announced that rates would remain at the same level until labour market progresses, and the inflation grows to targeted 2% in the middle term. The central banks of England and Japan continued keeping their reference interest rates at extremely low levels of 0.5% and 0-0.1%, since March 2009 and December 2008, respectively. In Q1 2015, the Swiss National Bank additionally reduced its interest rate by 0.5 percentage points. SNB also decided to depreciate the Swiss currency in the situation where euro is depreciating relative to US Dollar, so there is no longer need to justify and maintain the minimum rate of 1.2 Swiss Franks for a euro. Reference interbank rate EONIA and Euribor were also at record low levels; in 2015 EONIA ranged between -0.01% and -0.1%; 3M EURIBOR was also negative and currently amounts to about -0.013%, while 6M LI-

Source: Bloomberg BOR on USD amounted to 0.4%.

118 Box 8.1 – ECB monetary policy measures - Expanded Asset Purchase Program

The key facto of Euro area recovery in Q1 2015 was the implementation of the expanded asset purchase program (EAPP), which was presented by the Governing Board’s decision in January 2015. The decision was brought to stop deflation trends. According to recovery forecasts, it was hard to believe that the inflation will reach 2% in middle-term period, moreover because the implementation of previously proposed comprehensive monetary policy measures would be uncertain, since it depended whether banks would borrow funds from Eurosystem and place them to their clients.

The purchase of bonds under the Programme started on 9 March 2015. Planned monthly amount of buying was 60 billion euros. The intention was to continue buying until September 2016, precisely until getting more general picture on whether the inflation in middle term will reach targeted level of or close to 2%. The value of shares and other forms of capital increased significantly. Equity prices have gone up by 13% January to May 2015. Corporate bond yields came down by 49 basis points since June last year and the most recent (March) data on bank lending rates shows that rates decreased by 70 basis points, with respect to last year.47

From 5 March until 14 April 2015, all states other than Greece, registered decrease in yields on government bonds, with the highest decline registered in states with the highest credit rating. In average, yields on 10-year government bonds of the Euro area decreased by 14 basis points to reach 0.8% at the end of the reporting period. High decline in bonds with longer maturity led to the further aligning of government bonds yield curve in the whole Euro area. During a short interval, significant number of Euro area member states recorded negative yields. The continued uncertain financial situation in Greece encouraged significant turmoil in the value of Greece’s Treasury bills, but this did not affect financial flows in other countries negatively.48

The implementation of measures resulted in the decline of yields on borrowing at the Euro market, which is the indirect benefit primarily of the state that borrowed from the Euro market, and/or any company that borrowed or plans to borrow at that market.

ECB monetary policy measures encourage fostering of monetary policy transmission mechanism and have effect on Banks to improve lending conditions. This is testified by mild increase of loans according

to the private sector during the last three months. International Economy

Surely, there are no interventions or measures in either any area or monetary policy that does not produce any non-desired effects. Very flexible monetary policy is directed on accomplishing planned inflation with currently rather overestimated values of equity, it may pose potential risk for financial system stability. Notwithstanding it, monetary policy has to focus on establishing desired inflation and economic growth, whereby identified potential risks have to be regulated by monetary policy instruments for strengthening and maintaining system’s resilience, primary referring to supervision and macro-prudential policy.

47 https://www.ecb.europa.eu/press/key/date/2015/html/sp150508.en.html 48 ECB, Report 3/2015

119 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

8.5. Exchange rates

In Q1 2015, Euro significantly depreciated compared to main global currencies, including the Japanese Yen. Compared to dollar, yen, UK pound and Frank, euro depreciated by 11.3% (from 1.2098 to 1.0732 USD for 1 euro), 11.9%, 9.5% and 11.5%, respectively. We should mention the further decline of Euro compared to Frank in early 2015, and after the announcement of the Swiss National Bank that it will no longer defend the strengthening of Frank compared to euro starting from January 2015. Graph 8.16 shows appreciation of dollar compared to other currencies, with the visible effect of Fed’s monetary policy since the middle of 2014, i.e. the effect of ECB and BoJ monetary policies.

Graph 8.15 Graph 8.16

Euro and other currencies, 2013-Q1 2015, 1 Euro and other currencies, 2013-Q1 2015, 1 January 2013=100 (growth/decline shows January 2013=100 (growth/decline shows strengthening/weakening of Euro) strengthening/weakening of Euro)

Source: Bloomberg, CBCG calculations Source: Bloomberg, CBCG calculations

120 IMPORTANT EVENTS 09

Important events in Q1 2015

January

The CBCG Council issued licence to “Zapad banka”, supported by the Ukraine Capital, and to MFI “Kredit plus”.

The Government adopted the Decision on Borrowing and Issuing of Guarantees for 2015. The Decision stipulates that the Government may borrow the maximum of 671 million euros, of which 399 million euros for repayment of debt and outstanding obligations, up to 206 million for financing the construction of priority route of highway, up to 30 million for financing the remaining fiscal deficit, and 36 -mil lion for settling obligations of the Fund for Health Insurance of Montenegro and public health institutions. Moreover, it foresees that the Government assumes the debt of Montenegro Airlines amounting to 3.7 million euros.

Slovenian Nova Ljubljanska banka passed the decision on assuming NLB Montenegrobanke from Podgorica.

The tax on lottery gains became applicable as of 1 January 2015.

The Government adopted the Bill of Decree on fostering direct investments with a view to improving business environment attracting new investors and increasing employment, with the possible direct subsidy per job of three to ten thousand euros.

Moreover, the Government adopted the Programme of Economic Reforms (PER) for 2015-2017, which

base scenario foresees the growth rate of 3.5% in 2015. Events Important

The US “Heritage Foundation” published the list of economic freedoms, on which Montenegro took 66th place of 178 ranked countries, with 64.7 points.

From 1 January 2015, Lithuania became the 19th member state of the Euro area and will be using euro instead of euro.

February

The Agenda of Montenegro and the European Bank for the reconstruction and development started negotiations on crediting new terminal building at the Tivat airport.

123 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

The Customs Administration announced the enhanced control of the excise products duties, which means that no single excise duty product may not be legally present without appropriate excise duty stamp. The control includes increased number of officials and mobile teams of the Customs administration and the application of contemporary equipment recently placed into function.

Representatives of the Investment and Development Fund, Ministry for Human and Minority Rights and the UN Development Programme (UNDP) in Montenegro signed the Memorandum of Under- standing, which foresees new credit line for lady entrepreneurs, which means lending facilities to women who want to be entrepreneurs.

Within the implementation of the EU-financed project “Strengthening competitiveness of SMEs in Montenegro through cluster development”, the Ministry of Economy organised the training on cluster development.

The land property on hill Možura was sold to Brittish company “Vestigo Capital”, thus obliging the company to implement the project of constructing wind-energy power plants on the location.

Representatives of the Government and the Swiss Company Orascom Development signed the con- tract on long-term lease of locality Lastavica with fort Mamula.

The Government adopted the Agro budget for 2015, amounting to 22.98 million euros, which is by 12.43% higher than in 2014.

March

The Adriatic summit on gas and oil, held in Budva, showed the possibilities in the area of gas and oil available in the region, with special focus on Montenegro, Croatia and Albania.

The Government paid the first instalment of advance amounting to 81 million euros to Chinese company China Road and Bridge Corporation (CRBC).

At the International Real Estate Fair (MIPIM) in Cannes, under the presentation of Montenegro as a destination of unique investment potentials, the new town at the Adriatic - Luštica Bay was presented.

The EIB granted loan to the Investment and Development Fund of Montenegro amounting to 70 million euros, which will inter alia, be aimed at supporting SMEs.

124 ANNEXES 10

Annex A: Real Sector

Table 1: Overview of macroeconomic developments

2014 2015 (chain indeks) Description XII/XI I II III IV V VI VII VIII IX X XI XII Industrial production (index) 126.2 80.9 110.1 105.3 Consumer prices (index) 99.6 99.8 100.3 101.1 Industrial producer prices (index) 99.9 100.1 100.0 100.1

Source: Monstat

Table 2: Industrial output

Share Mar-15 Mar-15 Mar-15 Jan-Mar 2015 Description 2014 (%) Ø 2014 Feb-15 Mar-14 Jan-Mar 2014 INDUSTRY TOTAL 100.0 119.2 105.3 119.3 107.0 MINING AND QUARRYING 6.0 125.6 104.1 138.9 116.2 MANUFACTURING 53.9 114.6 115.6 109.2 103.5 ELECTRICITY, GAS, STEAM AND AIR COND. SUPPLY 40.1 124.5 95.0 131.7 109.7 MINING AND QUARRYING 6.0 125.6 104.1 138.9 116.2 Mining of coal and lignite 3.8 121.3 112.1 105.7 100.7 Mining of metal ores 1.1 136.2 63.0 - 209.7 Other mining and quarrying 1.1 129.5 206.9 129.4 120.1 MANUFACTURING 53.9 114.6 115.6 109.2 103.5 Manufacture of food products 8.2 65.7 81.6 66.2 71.7 Manufacture of beverages 3.2 66.7 157.7 85.5 75.2 Manufacture of tobacco products 2.6 154.1 107.4 169.2 188.3 Manufacture of wearing apparel 0.1 107.7 116.7 116.7 118.8 Manufacture of leather and related products 0.1 171.4 100.0 100.0 100.0 Manufacture of wood and of products of wood and cork 2.2 86.3 283.9 158.1 111.3 Manufacture of paper and paper products 0.7 86.4 102.7 87.6 80.2 Printing and reproduction of recorded media 0.5 68.6 100.0 85.4 84.7 Manufacture of chemical and chemical products 0.2 131.5 95.5 139.2 190.9 Manufacture of basic pharmaceutical products 8.8 119.4 178.2 111.5 79.6 Manufacture of rubber and plastic products 0.1 200.0* 100.6 200.0* 200.0* Manufacture of other non-metallic mineral products 8.8 120.6 148.7 107.3 104.8 Manufacture of basic metals 11.4 130.4 105.8 102.3 106.0 Annexes Manufacture of fabricated metal products 0.2 200.0* 57.3 200.0* 200.0* Production of machinery and equipment, not mentioned 6.3 125.6 99.1 125.0 117.9 elsewhere Manufacture of furniture 0.1 87.5 98.3 89.8 89.1 Repair and installation of machinery and equipment 0.4 95.4 85.7 120.0 175.0 ELECTRICITY, GAS, STEAM AND AIR COND. SUPPLY 40.1 124.5 95 131.7 109.7 Electricity, gas, steam and air conditioning supply 40.1 124.5 95 131.7 109.7

* Calculated index is higher than 200.0. Source: Monstat

127 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Table 3: Industrial production

Electricity, gas, steam and Total Mining and quarrying Manufacturing airconditioning supply Index Monthly Index Monthly Index Monthly Index Monthly period on 2010=100 growth period on 2010=100 growth period on 2010=100 growth period on 2010=100 growth period rate period rate period rate period rate 2001 99.3 88.5 101.6 93.9 2002 100.6 107.5 102.3 93.4 2003 102.4 101.4 97.9 117.5 2004 113.8 94.9 113.1 121.0 2005 98.1 100.2 102.5 86.6 2006 101.0 102.9 100.1 103.1 2007 100.1 101.5 109.3 72.6 2008 98.0 117.7 88.7 131.9 2009 67.8 34.5 61.4 97.6 2010 117.5 158.7 97.0 151.1 2011 89.7 106.3 106.8 67.3 2012 92.9 79.0 89.9 101.4 2013 110.6 98.6 95.0 138.7 2014 88.6 114.4 93.3 80.4 Jan 79.7 -4.6 89.5 12.6 86.3 -17.3 70.6 19.7 Feb 85.2 6.9 86.9 -2.9 91.6 5.9 77.4 9.6 Mar 93.3 9.5 83.6 -3.8 115.2 25.6 68.1 -11.9 Apr 99.7 6.8 44.0 -47.4 125.9 9.3 75.0 10.1 May 73.9 -25.9 14.7 -66.6 108.2 -14.1 39.8 -46.9 Jun 66.3 -10.3 38.8 163.9 95.3 -12.0 34.9 -12.3 2012 Jul 85.6 29.1 88.1 127.2 97.7 2.6 70.8 102.7 Aug 83.2 -2.8 91.1 3.4 104.6 7.0 56.6 -20.2 Sep 78.7 -5.4 189.0 107.5 92.4 -11.7 49.0 -13.3 Oct 73.0 -7.8 117.1 -38.0 68.0 -26.9 73.6 50.1 Nov 84.8 16.3 95.6 -18.4 83.9 23.2 125.6 14.9 Dec 97.7 15.3 71.0 -25.7 83.2 -0.9 118.3 40.0 Jan 81.0 -17.0 84.8 19.5 54.8 -34.1 112.0 -5.3 Feb 82.6 2.0 75.9 -10.6 61.5 12.1 108.9 -2.8 Mar 103.0 24.6 81.7 7.8 75.5 22.8 138.5 27.1 Apr 113.9 10.6 48.6 -40.5 90.3 19.5 150.1 8.4 May 90.4 -20.7 13.8 -71.6 95.8 6.0 93.0 -38.0 Jun 79.0 -12.7 87.3 532.3 84.6 -11.6 71.1 -23.5 2013 Jul 89.9 14.0 87.5 0.3 109.2 28.9 67.2 -5.7 Aug 90.7 0.8 98.0 12.0 109.4 0.3 67.4 0.4 Sep 81.5 -10.2 155.8 59.0 99.2 -9.3 51.2 -24.0 Oct 80.6 -1.0 90.5 -42.0 83.5 -15.9 76.0 48.3 Nov 102.9 27.6 73.1 -19.2 107.5 28.8 100.8 32.7 Dec 111.9 8.7 98.0 34.1 123.8 15.2 99.2 -1.6 Jan 87.0 -22.2 96.6 -1.5 76.7 -38.2 98.3 -0.9 Feb 87.4 0.4 99.3 2.8 74.2 -3.2 101.8 3.6 Mar 81.7 -6.5 85.7 -13.6 89.4 20.6 71.9 -29.4 Apr 82.1 0.6 104.3 21.6 79.4 -11.1 82.7 15.0 May 69.2 -15.7 49.5 -52.5 85.4 7.5 52.2 -36.8 Jun 58.2 -16.1 61.3 23.8 80.6 -5.8 31.0 -40.8 2014 Jul 75.2 29.2 90.4 47.5 82.4 2.3 64.7 109.2 Aug 79.2 5.4 109.8 21.6 87.9 6.8 64.9 0.3 Sep 87.6 10.6 84.7 77.1 96.2 109.3 77.7 119.8 Oct 87.3 -0.3 113.5 34.0 83.8 -12.8 88.4 13.6 Nov 82.5 -5.6 115.0 1.3 88.1 5.0 71.8 -18.7 Dec 104.0 26.1 127.8 11.1 98.5 11.9 107.8 50.1 Jan 84.1 -19.1 93.7 -26.7 66.5 -32.5 104.0 -3.5 2015 Feb 92.6 10.1 114.3 22.1 84.5 26.9 99.8 -4.0 Mar 97.5 5.3 119.1 4.2 97.6 15.5 94.8 -5.0

128 Table 4: Industrial output

2015 I II III IV V VI VII VIII IX X XI XII

Chain index 80.9 110.1 105.3

ø 2014 = 100 102.8 113.2 119.2

Month-on-month 96.6 105.9 119.3

Year-on-year 101.3 107.0

Table 5: Consumer prices

2015 I II III IV V VI VII VIII IX X XI XII

Chain index 99.8 100.3 101.1

ø 2013 = 100 99.8 100.2 101.3

Month-on-month 100.2 100.6 101.6

Year-on-year 100.4 99.2

Decembar 2013 = 100 99.8

Table 6: Producers’ prices of manufactured products

2015 I II III IV V VI VII VIII IX X XI XII

Chain index 100.1 100.0 100.1

ø 2013 = 100 100.3 100.3 100.4

Month-on-month 100.8 100.6 100.5

Year-on-year 100.7 100.6

Decembar 2013 = 100 100.1

Source: Monstat Annexes

129 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Table 7: Prices

Producer’s prices of Export Producer prices of Import industrial product Consumer prices industrial products industrial products prices Total Total Total Total Annual Monthly Annual Monthly Annual Monthly Annual Monthly growth rate growth rate growth rate growth rate growth rate growth rate growth rate growth rate Jan 4.1 0.7 -0.6 1.0 -8.6 -1.1 3.1 0.8 Feb 4.2 1.0 -0.8 0.4 -6.0 3.3 2.5 -0.1 Mar 2.7 0.4 -1.5 -0.3 -5.8 0.2 1.8 -0.1 Apr 3.1 0.5 -0.2 0.1 -5.6 0.1 1.4 0.3 May 3.5 0.4 -0.3 -0.2 -7.8 -1.5 1.0 -0.8 Jun 3.9 0.2 1.8 1.8 -7.4 0.3 0.5 -0.8 2012 Jul 4.4 0.2 0.9 0.0 -7.2 -0.8 0.8 0.1 Aug 4.0 0.4 5.1 4.2 -7.1 -0.2 2.3 2.6 Sep 4.4 0.4 3.5 -1.5 -8.7 -2.4 3.3 0.4 Oct 5.2 1.1 4.3 0.4 -2.3 5.4 2.5 -0.8 Nov 5.2 -0.1 4.5 0.1 -1.4 -0.3 1.7 -0.5 Dec 5.1 -0.3 5.7 -0.4 -0.5 -2.1 0.5 -0.7 Jan 4.2 -0.1 4.6 -0.1 3.7 3.1 -0.3 0.3 Feb 3.3 0.1 3.9 0.2 -0.5 -1.0 0.0 0.2 Mar 3.3 0.4 4.2 -0.1 1.9 2.8 0.0 -0.3 Apr 3.2 0.3 4.0 -0.1 -1.9 -3.6 -1.0 -0.7 May 3.0 0.2 4.1 -0.1 -2.0 -1.7 -0.6 -0.3 Jun 2.2 -0.6 2.3 0.0 -3.3 -1.0 -0.1 -0.2 2013 Jul 2.7 0.7 2.2 -0.1 -3.5 -1.1 -0.5 -0.3 Aug 2.2 -0.1 -2.0 -0.4 -4.6 -1.4 -2.9 -0.1 Sep 1.8 0.1 -0.4 0.2 -1.9 0.3 -3.5 -0.2 Oct 0.5 -0.2 -0.9 -0.1 -8.8 -1.8 -3.3 -0.5 Nov 0.0 -0.6 -1.1 0.0 -5.7 2.0 -2.7 0.2 Dec 0.3 0.0 -0.6 0.1 -5.7 -2.3 -2.0 0 Jan -0.4 -0.8 -1.3 0.1 -7.4 2.1 -2.7 -0.1 Feb -0.6 0.0 -1.2 0.3 -6.4 -0.2 -2.7 0.1 Mar -0.9 0.1 -0.3 0.2 -9.1 0.0 -2.8 -0.4 Apr -1.4 -0.2 -0.2 0.1 -3.7 1.9 -2.3 -0.2 May -1.3 0.3 -0.1 -0.1 -1.7 0.2 -1.7 0.2 Jun -0.1 0.5 0.0 0.1 2.1 2.8 -1.3 0.1 2014 Jul -1.2 -0.4 0.1 0.0 5.4 2.1 -0.9 0.1 Aug -1.1 0.1 1.0 0.4 12.4 5.1 -0.7 0.1 Sep -0.7 0.5 0.9 0.0 14.1 1.9 -0.6 -0.1 Oct -0.5 0.1 1.0 0.0 16.3 -0.1 -0.4 -0.4 Nov 0.0 -0.1 1.1 0.0 13.8 -0.1 -1.2 -0.6 Dec -0.3 -0.4 0.9 -0.1 20.3 3.2 -2.0 -0.8 Jan 0.2 -0.2 0.8 0.1 15.9 -1.0 -3.2 -1.1 2015 Feb 0.6 0.3 0.6 0.0 17.3 1.0 -3.1 0.1 Mar 1.6 1.1 0.5 0.1 16.4 -0.8 -1.7 0.9

Source: Monstat

130 Table 8: Tourism*

2014 2015 Index I-III 2015 Structure III I-III III I-III I-III 2014 Total 21,674 54,728 24,204 65,275 119.3 100.0 Arrivals Domestic 4,119 12,397 5,343 15,883 128.1 24.3 Foreign 17,555 42,331 18,861 49,392 116.7 75.7 Total 83,765 206,301 88,021 240,511 116.6 100.0 Overnights Domestic 17,863 47,643 19,295 58,239 122.2 24.2 Foreign 65,902 158,658 68,726 182,272 114.9 75.8

* Preliminary data Source: Monstat

Table 9: Number of employed and unemployed people

I II III IV V VI VII VIII IX X XI XII Employed * 2004. god.*** 142,081 142,834 142,361 143,224 143,845 146,696 145,160 142,634 143,447 143,113 143,992 142,438

2005. god.*** 142,145 142,072 141,298 140,959 142,248 145,852 148,528 146,744 145,739 145,923 145,528 145,261

2006. god.*** 144,978 145,753 146,554 147,517 149,321 151,678 154,723 154,289 154,236 154,652 155,156 150,746

2007. god.*** 151,535 152,114 153,140 154,074 156,817 158,190 160,045 158,392 158,164 157,458 157,739 159,223

2008. god. 160,450 161,105 162,737 162,307 165,955 170,146 168,916 168,488 167,722 168,583 169,079 169,160

2009. god. 169,305 169,670 170,607 172,549 174,218 178,839 178,622 179,016 176,936 175,468 174,736 169,859

2010. god. 172,301 171,557 171,263 158,211 158,716 159,221 160,224 158,535 157,570 157,918 157,712 157,679

2011. god.**** 157,849 158,010 158,842 159,669 162,905 168,195 170,618 167,955 164,386 163,396 162,712 162,450

2012. god. 160,880 162,035 162,569 163,744 165,776 162,567 173,124 173,024 169,877 168,701 168,589 167,484

2013. god. 167,370 167,379 167,738 170,302 174,369 179,861 178,815 176,588 171,440 169,044 167,607 167,173

2014. god. 167,616 168,805 170,177 172,202 174,917 179,774 181,408 178,558 173,942 172,306 172,273 171,158

2015. god. 169,719 170,486 171,855 Unemployed** 2004. god. 69,573 71,419 72,378 72,202 68,993 64,572 60,993 60,771 60,447 59,930 59,387 58,950

2005. god. 59,115 58,774 58,075 57,557 56,772 55,199 53,683 52,494 51,843 51,266 49,886 48,825

2006. god. 48,639 48,656 49,388 48,651 45,640 42,560 40,220 39,093 38,919 38,747 38,892 38,876

2007. god. 39,104 39,155 38,714 37,571 35,356 33,393 32,205 31,271 31,156 31,569 31,787 31,469

2008. god. 31,323 31,469 31,684 30,270 30,021 29,088 28,660 27,954 28,276 28,666 28,645 28,366

2009. god. 28,921 29,305 29,170 28,616 27,785 27,113 27,048 26,844 27,313 28,731 29,607 30,169

2010. god. 31,055 32,375 33,117 33,188 32,377 31,324 31,118 30,595 31,016 31,900 32,199 32,106 Annexes 2011. god. 32,829 33,062 32,748 32,203 30,920 29,816 29,128 29,078 29,404 30,108 30,576 30,552

2012. god. 31,339 31,495 31,562 31,320 30,126 29,411 28,686 28,549 28,272 29,540 30,718 31,168

2013. god. 31,890 32,648 32,986 32,624 31,363 30,337 30,102 30,947 30,919 33,271 34,680 34,514

2014. god. 34,804 34,664 34,671 33,906 32,763 31,570 31,115 31,163 31,584 33,744 34,733 34,687

2015. god. 35,152 35,172 34,903

* Source: Monstat ** Source: Employment Agency *** Methodology: Data from the Central Registry of obligors and policy holders based on type of pension insurance **** Since April 2010, data have been obtained from the Central Register of Tax Administration (CRTA).

131 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015 7.9 1.1 7.8 5.4 3.6 0.0 0.0 0.5 13.3 74.6 14.2 10.8 73.7 69.2 100.0 100.0 31.03.2015 Structure in % 0.0 0.0 83.9 98.9 98.9 99.8 98.4 98.4 94.5 140.1 140.1 103.6 100.7 100.7 100.0 100.0 100.3 100.3 100.1 100.1 5:4 index 0 0 14,992 34,787 113,757 4 47,125 248,129 169,901 418,284 340,031 244,262 5 2,170,854 2,314,641 2,340,755 2,340,755 3,138,644 3,138,644 2015 31.03. 0 0 14,989 35,357 242,717 120,429 120,429 172,652 235,735 248,655 498,636 444,035 4 2,367,178 2,194,526 2,308,149 3,136,257 3,136,257 31.12. 0 0 14,987 34,594 419,124 176,767 110,700 441,961 237,990 223,165 276,526 3 2,268,031 2,443,287 2,266,520 3,112,205 3,112,205 3,112,205 3,112,205 30.09. 0 0 2014 14,985 14,985 33,987 111,812 428,102 386,191 223,076 180,505 180,505 303,905 234,255 2 2,195,716 2,146,447 2,376,220 3,005,251 3,005,251 30.06. 0 0 33,147 14,983 331,224 324,731 421,834 223,614 103,849 226,785 183,809 1 2,221,194 2,104,273 2,405,003 2,969,670 2,969,670 2,969,670 2,969,670 31.03. 2. 1. Value adjustment 2. 1. of loans 2.2. Net loans TOTAL LIABILITIES TOTAL 6. Total capital 6. Total 5. Other5. liabilities 4. Financial derivatives Financial 4. 6. Value adjustment of other assets 5. Other assets Other 5. 3. Securities issued TOTAL ASSETS LIABILITIES Deposits1. 2. Borrowings 3. Securities3. assets financial Derivative 4. ASSETS Cash and deposits1. with central banks 2. Loans Annex B Balance 10: sheetTable of banks, EUR thousand

132 Annex C

Table 11: Auctions of 182-day T-bills, EUR thousand

Maturity of Weighted issued treasury Issue date Issued Sold Total demand average bills, number of interest rate days 182 10.01.2015 10,000.0 21,103.9 25,003.9 0.33% Jan 182 14.01.2015 13,700.0 15,200.0 19,800.0 0.32% 2015 Feb 182 24.02.2015 40,000.0 40,000.0 43,900.0 0.31% Mar 182 04.03.2015 8,500.0 21,230.0 21,230.0 1.20% Total Number of auctions Issued Sold Demand january - march 2015 4 72,200.00 97,533.90 109,933.90

Source: CBCG Annexes

133 Central Bank of Montenegro CBCG Macroeconomic Report Q1 2015

Annex D Table 12: Consolidated Public Consumption* in Montenegro 01.01 - 31.03.2015

% I - III 2015 I - III 2015 I-III 2014 % I-III 2015. in DESCRIPTION plan in EUR realization in realization in GDP relation to I-III million EUR million EUR million 2014. CURRENT REVENUES 300.01 309.95 8.7 299.94 103.3 Taxes 192.38 179.18 5.0 182.36 98.3 Personal income tax 27.08 23.29 0.7 24.39 95.5 Tax on profits of legal persons 13.83 11.12 0.3 14.60 76.2 Property taxes 3.97 3.36 0.1 3.67 91.6 Value added tax 96.37 93.37 2.6 98.25 95.0 Excise Tax 29.43 32.08 0.9 27.64 116.1 Tax on international trade and transactions 4.06 4.59 0.1 3.90 117.7 Local Taxes 16.65 10.12 0.3 8.88 114.0 Other revenues of the Republic 0.99 1.25 0.0 1.03 121.4 Contributions 72.93 83.83 2.3 75.02 111.7 Pension and disability insurance contribution 44.26 50.56 1.4 46.63 108.4 Health insurance contributions 24.81 28.78 0.8 24.79 116.1 Unemployment insurance contributions 2.06 2.32 0.1 1.99 116.6 Other contributions 1.80 2.17 0.1 1.61 134.8 Duties 6.67 4.13 0.1 5.64 73.2 Fees 16.42 14.35 0.4 13.56 105.8 Other revenues 9.33 5.80 0.2 7.56 76.7 Receipts from repayment of loans and funds carried over 0.39 21.36 0.6 13.85 154.2 from previous year Donations 1.89 1.30 0.0 1.95 66.7 CONSOLIDATED EXPENDITURES 427.49 331.59 9.3 325.09 102.0 CURENT PUBLIC EXPENDITURES 346.32 308.72 8.6 309.42 99.8 Current expenditures 173.91 146.65 4.1 142.57 102.9 Gross salaries and contributions charged to employer 103.91 97.44 2.7 98.42 99.0 Other personal earnings 3.48 2.92 0.1 2.61 111.9 Expenses for supplies 8.92 6.72 0.2 6.78 99.1 Expenses for services 12.34 9.45 0.3 9.18 102.9 Current maintenance 6.27 4.18 0.1 2.42 172.7 Interests 19.97 11.00 0.3 8.89 123.7 Rent 2.20 2.52 0.1 2.16 116.7 Subsidies 5.46 4.85 0.1 6.17 78.6 Other expenditures 7.90 5.58 0.2 5.13 108.8 Capital expenditures of the current budget with funds 3.46 1.99 0.1 0.81 245.7 Transfers for social protection 126.37 120.75 3.4 122.93 98.2 Transfers to institutions, individ. NGO’s and public sector 40.77 34.13 1.0 21.36 159.8 Total capital expenditures 81.17 22.87 0.6 15.67 145.9 Borrowings and loans 1.12 0.56 0.0 1.23 45.5 Reserves 4.01 1.18 0.0 4.64 25.4 Payment of guarantees 0.00 0.00 0.0 9.68 0.0 Repayments of Arrears 0.00 5.45 0.2 7.01 77.7 Net increase liabilities 0.14 0.00 0.0 0.00 DEFICIT/SURPLUS** -127.48 -21.64 -0.6 -25.15 86.0 Payment of debts to residents 12.80 23.43 0.7 8.91 263.0 Payment of debts to nonresidents 81.69 32.00 0.9 7.63 419.4 Payment of liabilities from the previous period 19.45 11.41 0.3 11.06 103.2 Privatization revenues 2.50 1.90 0.1 0.88 215.9 Borrowings and loans from foreign sources and project loans 159.27 496.92 13.9 0.71 69988.7 Borrowings and loans from domestic sources 1.25 37.08 1.0 78.56 47.2 Deposit increase/decrease 78.40 -447.44 -12.5 -27.40 1633.0

* Consolidated public expenditure includes the Budget of Montenegro and state funds and local administration. ** Surplus/Deficit as the residual of total revenues decreased by borrowings, donations, transfers and property taxes, and expenditures for repayment of principal based on debt of taking loan and issuing securities in the country and abroad. Source: Ministry of Finance

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