Central Bank of Montenegro Macroeconomic Report 2017

CENTRAL BANK OF MONTENEGRO MACROECONOMIC REPORT 2017

Podgorica, 2018 PUBLISHED BY: Central Bank of Montenegro Bulevar Svetog Petra Cetinjskog 6 81000 Podgorica Telephone: +382 20 664 997, 664 269 Fax: +382 20 664 576

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

CENTRAL BANK COUNCIL: Radoje Žugić, PhD, Governor Nikola Fabris, PhD, Vice-Governor Irena Radović, PhD, Vice-Governor Miodrag Radonjić, Vice-Governor Asim Telaćević Milivoje Radović, PhD Milorad Jovović, PhD Srđa Božović, PhD

TRANSLATED BY: Translation Services Division

PRINTED BY: DOO „PRO FILE“ Podgorica

PRINTED IN: 70 copies

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

AMM Association of Montenegrin Managers LAMP Land Administration and Management ARIMA Autoregressive Integrated Moving Average Project GDP Gross domestic product LIBOR London interbank offered rate BEA U.S. Bureau of Economic Analysis MBA Montenegro Business Alliance BELEX 15 Belgrade SE Index MBI10 Macedonian SE Index CBCG Central Bank of Montenegro MFI Microcredit financial institution CEB Council of Europe Development Bank MIDAS Montenegro: Institutional Development CEFTA Central European Free Trade Agreement and Agriculture Strengthening CROBEX Zagreb SE Index MONSTAT Statistical Office of Montenegro EBRD European Bank for Reconstruction and MONEX, Development MNSE10 Montenegro Stock Exchange Indices ECB European Central Bank MSCI Morgan Stanley Capital Index EFTA European Free Trade Association NATO North Atlantic Treaty Organisation EIB European Investment Bank NPL non-performing loans EONIA European OverNight Index Average NGO non-governmental organisation EPCG Montenegro`s electricity company OECD Organisation for Economic Co-operation ESA European System of Accounts and Development ETC European Travel Commission OPEC Organization of the Petroleum Exporting EU Eropean Union Countries Eurostat Statistical Office of the European Union OTP Országos Takarék Pénztár bank EURIBOR Euro Interbank Offered Rate VAT value added tax EUROBOND International bond issued ROA Return on Assets EUROFIMA European Company for the Financing of ROE Return on Equity Railroad Rolling Stock SAIDI System Average Interruption Duration Index FAO Food and Agriculture Organisation of the SAIFI System Average Interruption Frequency United Nations Index FATCA Foreign Account Tax Compliance Act SASX-10 Sarajevo SE index FED Federal Reserves SBItop Ljubljana SE index FRED Federal Reserve Economic data SCADA Supervisory control and data acquisition (Federal reserves of St. Louis) FDI Foreign direct investments FSAP Financial Sector Assesment Programme SITC Standard International Trade Classification JIF Joint investment fund TPP Thermal power plant HPP hydro power plant TED Treasury-EuroDollar rate HICP Harmonised Index of Consumer Prices TourMIS Touristischen Marketing- IBRD International bank for Recontruction and Informations systems Development UMPCG Union of Young Entrepreneurs of IDA International Development Association Montenegro IFAD International Fund for Agricultural UN United Nations Development UN/DESA United Nations Department of Economic IMF International Monetary Fund and Social Affairs IPA Instrument for Pre-Accession Assistance UNWTO UN World tourism organization IPARD-like Instrument for Pre-Accession Assistance VIX Volatility Index for Rural Development WEF World Economic Forum CPI Consumer Price Index WESP World Economics Situation and Prospects KFW Kreditanstalt für Wiederaufbau WiiW Vienna Institute for International Economic Studies

CONTENTS

MACROECONOMIC ENVIRONMENT IN MONTENEGRO IN 2017 9 1. REAL SECTOR DEVELOPMENTS 13 1.1. Gross Domestic Product 15 1.2. Industries 24 1.3. Prices 33 1.4. Labour Market 41 2. MONETARY DEVELOPMENTS 45 2.1. Banks 47 2.2. Banks’ interest rates 61 2.3. Microcredit financial institutions 64 3. MONEY MARKET 69 4. CAPITAL MARKET 73 5. FISCAL DEVELOPMENTS 81 5.1. Montenegro’s public finances 84 5.2 Budget of Montenegro 86 5.3. Local Self-Government 89 5.4. State funds 91 6. PUBLIC DEBT 93 6.1. Government debt 96 6.2. Local self-government debt 99 6.3. Issued guarantees 100 6.4. Debt repayment 101 7. EXTERNAL SECTOR 103 7.1. Current and capital account 107 7.2. Financial account 113 8. INTERNATIONAL ECONOMY 115 8.1. Global economic trends 117 8.2. Advanced countries 119 8.3. Emerging countries 125 8.4. Neighbouring Countries 128 8.5. Interest rates of central banks and exchange rate trends 130 9. MOST IMPORTANT EVENTS 133 10. ANNEXES 139

Review of macroeconomic developments

2016 2017 % REAL SECTOR DEVELOPMENTS GDP (in current prices in EUR million)1 3,954.2 4,236.5 Industrial output (compared to the same period the year before) -4.4 -4.2 Forestry (compared to the same period the year before) -22.4 15.8 Construction (compared to the same period the year before-measured by effective working hours) 16.7 24.5 Employment Number of employed people (December) 177,473 177,627 Number of unemployed people (December) 49,487 51,262 Inflation rate Consumer prices (annual rate) 1.0 1.9 Average salary without taxes and contributions (average salary for period)2 499 510 2.2 MONETARY DEVELOPMENTS (EUR million) Total deposits 2,871.7 3,267.2 13.8 Deposits by economy 967.7 1,133.4 17.1 Government deposits 131.4 159.0 21.0 Central government 81.2 77.7 -4.4 Institutions and agencies of the Central Government 7.4 11.6 55.5 Funds and municipalities 29.4 38.6 31.3 State funds 13.4 31.2 132.8 Deposits by financial institutions 33.2 41.5 24.9 Deposits by households 1,534.1 1,704.0 11.1 Deposits - other 205.2 229.2 11.7 Total loans 2,415.8 2,700.5 11.8 Loans to economy 937.2 979.4 4.5 Loans to government 113.5 181.6 60.0 Central government 55.8 131.6 136.0 Institutions and agencies of the Central Government 3.7 3.1 -14.1 Funds and municipalities 52.7 45.8 -13.1 State funds 1.4 1.1 -19.0 Loans to banks and financial institutions 256.5 345.0 34.5 Loans to private citizens 1,018.0 1,123.1 10.3 Other loans 90.6 71.3 -21.2 MONEY MARKET Average interest rates on 91-day T-bills, last recorded 2.35% Average interest rates on 182-day T-bills, last recorded 2.18% 0.20% CAPITAL MARKET Turnover in stock exchanges (EUR million)2 Montenegro stock exchange 115.2 47.5 Stock exchange indices MNSE103 928.27 776.69 -16.3 MONEX 11,510.59 10,175.43 -11.6 MONEX PIF4 2,673.36 FISCAL DEVELOPMENTS (EUR million)2 Current incomes5 1,684.3 1,785.0 6.0 Expenditures5 1,826.5 2.012.9 10.2 Surplus/deficit -142.2 -227.8 60.2 Foreign government debt (in EUR million) 2,002.8 2,214.0 10.5 Domestic government debt (in EUR million)6 400.2 413.9 3.4 Debt of the local governments (in EUR million)6 143.1 131.0 -8.5 EXTERNAL DEVELOPMENTS2 Current account balance (EUR million) -715.0 -799.3 Trade balance -1,657.3 -1,859.6 Balance of services 769.1 836.4 % of trade deficit/other balances coverage 56.9 57.0 Current account balance in % of GDP -18.1 -18.9

1 Data for 2017 is estimate of the Monstat based on quarterly estimates of GDP. 2 Data for period I-XII 2016 and I-XII 2017. 3 Since April 1, 2015 on the Montenegrin capital market within the observing of the price movement of companies, the 2 indices will be in use - MONEX and MNSE10. Index MONEX represents the successor of the index MONEX20 which with the newly composed Methodology has more companies in its index basket. The newly formed index MNSE10 represents blue chip index and the “best“ 10 companies from Montenegrin market enter into its composition. 4 MONEXPIF index inherited the NEXPIF index, which monitored the trends in prices of six privatisation funds’ shares. The termination of the funds transformation process ended, the need to calculate this index stopped. 5 Current revenues and expenditures of the Budget of Montenegro and state funds and local governments. 6 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 in 2017 CBCG Macroeconomic Report 2017

MACROECONOMIC ENVIRONMENT IN MONTENEGRO IN 2017

According to indicators recorded in 2017, Montenegro’s macroeconomic results significantly improved compared to 2016. The GDP rate increased on the back of large infrastructure projects in the construction and energy sectors and robust growth in the number of tourists. Preliminary MONSTAT data, based on quarterly estimates, show that Montenegro’s economy recorded a positive economic growth rate of 4.4% in 2017. Substantial growth was recorded in construction, tourism, forestry, trade, as well as most types of transport. Industrial output continued its downtrend witnessed in 2016, while both employment and unemployment increased.

The annual CPI inflation rate stood at 1.9% in December 2017, while the average annual inflation rate stood at 2.4%.

Industrial output dropped by 4.2% at the annual level. Production decreased by 3% in manufacturing industry, in electricity, gas and steam supply production dropped by 24.6%, whereas the mining and quarrying sector recorded production soar of 113.9%.

Tourist arrivals and overnights continued trending upward, resulting in 2 million tourists who visited Montenegro in 2017, which was by 10.3% y-o-y. In total, 12 million tourist overnights were made, which is by 6.3% more than in 2016.

In 2017, construction saw a significant year-on-year increase in the value of executed construction works of 51.5%, as well as in effective working hours of 24.5%. Growth was also recorded in most types of transport, as well as in forestry, which recorded output growth of 15.8%.

The banking sector had the main share in the structure of financial sector assets. In 2017, the banking sector was stable, solvent and liquid. All prescribed safety indicators of the sector were above the legally defined minimum. Virtually uninterrupted downturn in non-performing loans and receivables recorded in the previous period continued. A high level of liquid funds, growth of total deposits and loans, as well as recapitalization of a number of banks additionally contributed to the banking system`s stability. At the end of 2017, all banks reported solvency ratio above the regulatory minimum of 10%, with the aggregate ratio being 16.37%. The banking sector achieved a positive financial result in the reporting year, in the amount of 35.1 million euros. Twelve banks reported profit, while three banks reported loss at end-2017. Five largest banks showed year-on- year increases in profit.

The downtrend of both, lending and deposit interest rates, recorded in the previous period continued in 2017. Thus, the weighted average effective lending interest rate on total loans amounted to 6.81% at end-2017, recording a year-on-year decline of 0.64 percentage points. However, although

9 CBCG Macroeconomic Report 2017 Macroeconomic environment in Montenegro in 2017

declining, the lending interest rates remain high, limiting the development of the corporate sector. In the same period, the weighted average deposit effective interest rate declined from 0.93% to 0.69%.

The longstanding downtrend in the banking sector’s concentration continued in 2017. Measured by the Hirschman-Herfindahl Index, from the once highly concentrated market and the dominant role of three largest banks, the situation today is notably different and the banking market is closer to the so-called competitive market threshold.

At end-2017, the fiscal deficit was estimated at 237.6 million euros or 5.6% of GDP as a result of higher realization of the capital budget i.e. infrastructure projects.

The budgetary deficit consequently increases the net public debt, which amounted to 2.7 billion euros at end-2017, of which 2.2 billion euros related to external debt. In addition, the amount of issued guarantees (foreign and domestic) stood at 312.8 million euros. Public debt is on an uptrend, and the implemented fiscal consolidation measures may be assessed as having a favourable impact.

Preliminary data show that the current account deficit amounted to 799.3 million euros, which is an annual increase of 11.8%. This increase was a result of a higher foreign trade deficit. Prelimi- nary data reveal that the foreign trade deficit stood at 1.9 billion euros or 12.2% more than in 2016. External trade is still showing high import dependence. Total visible exports amounted to 376.6 million euros, accounting for a 9.1% increase, while the 2.2 billion euros worth of goods were imported at the same, which was 11.7% more than in 2016. The services account recorded a surplus of 836.4 million euros, being 8.8% higher year-on-year. Total revenues from services reached 1.4 billion euros, recording the annual increase of 8.6%, while expenditure stood at 525.7 million euros (increasing by 8.3%). Estimated travel-tourism revenues for 2017 amounted to 901.3 million euros or 7.8% more than in the previous year. Primary income account ran a surplus of 87.9 million euros or 66.3% more than a year ago, whereas the surplus in the secondary income account amounted to 136 million euros or 13% more than in 2016.

As per preliminary data, net foreign direct investments (FDI) inflow amounted to 474.3 million euros in 2017, recording a 27.6% increase y-o-y. Total FDI inflow stood at 649.2 million euros, with equity investments accounting for 366.9 million euros, and the inflow in the form of intercompany debt 247.1 million euros. Withdrawal of residents’ funds invested abroad amounted to 35.2 million euros. In reference to the structure of total FDI inflow, intercompany debt took the share of 38.1%, investments in companies and banks accounted for 33.8% and investments in real estate for 22.7%. Total FDI outflow amounted to 174.9 million euros or 44.6% less than in the previous year.

The number of employees averaged at 182,368 during the reporting year, being 2.5% higher year- on-year, while the total number of employees in December 2017 was 177,627, being 0.1% higher in relation to December 2016. Employment rose in thirteen out of nineteen sectors with the highest increase recorded in the administrative and ancillary services sector (17.7%) and the lowest in the sector of information and communications (0.1%). The drop in the number of employees was recorded in six sectors, with the most significant decline of 5.8% observed in agriculture, forestry and fishing sector, and the least decline of 0.4% in the mining and quarrying sector.

The Employment Agency of Montenegro registered 51,262 of unemployed persons at 2017 year- end, which represents the year-on-year increase of 3.6%. The number of registered unemployed persons in 2017 amounted to 50,510 on average, rising 17.9% compared to the previous year.

10 Macroeconomic environment in Montenegro in 2017 CBCG Macroeconomic Report 2017

The unemployment rate published by the Employment Agency of Montenegro stood at 22.09% in December 2017, which was 0.76 percentage points above the rate recorded in the same month of 2016.

Monstat data reveals that Montenegro’s average gross salary in 2017 amounted to 765 euros, increasing 1.9% in relation to the previous year. An average salary without taxes and contributions amounted to 510 euros, also increasing relative to the previous year, namely by 2.2%. In 2017, real wages and salaries without taxes and contributions declined by 0.2%.

The CBCG model projection for 2018 shows that GDP growth will range from 2.7% to 3.2%, with the central projection at around 3%.

Vigorous investment activity resulting from the planned capital investments for the construction of Smokovac-Mateševo highway section is expected to be the main driver of economic growth along with the investments in tourism, energy, telecommunications, etc. The prospective expansion of visible and invisible exports is based on the expected growth of tourist spending boosted by the construction of new tourist facilities, as well as on stabilisation and investments announced in the area of industrial and agricultural production that are expected to substitute a part of imports with domestic products. Nevertheless, imports increase will still be determined by the investors’ need for the import of lacking equipment and construction materials required for the construction of capital infrastructure and tourist facilities. In addition, continued implementation of fiscal consolidation measures in 2018 may affect the reduction of private and public spending. Thus, maintaining the balance between the developmental component and budget sustainability in the upcoming medium term represents the key challenge of the fiscal policy.

REAL SECTOR DEVELOPMENTS 01

Real sector developmentsReal sector

1.1. Gross Domestic Product

The economic picture of Montenegro, according to the indicators recorded in 2017, is significantly better compared to the previous year1. The intensification of activities on the construction of large -in frastructure projects in construction and energy, as well as significant increases in tourism indicators, resulted in significant GDP growth rates in all four quarters of the year.

Table 1.1

Comparison of trends in basic indicators in 2017 and 2016 - selected sectors

Index Index Sectors/Indicators 2016 2017 Agriculture, forestry and fishing - Sale and repurchase of agricultural, forestry and fishery products 100.6 109.2 - Forestry 77.6 115.8 Mining and quarrying 81.9 213.9 Manufacturing industry 92.2 97.0 Electricity supply 103.5 75.4 Construction - Value of executed construction works 131.5 151.5 - Effective work hours completed 116.7 124.5 Trade - Turnover in retail trade at current prices 104.1 105.2 - Turnover in retail trade at constant prices 102.4 103.3 Transport and warehousing - Road passenger 108.0 100.4 - Road freight 110.9 98.5 - Railway passenger 103.9 72.2 - Railway freight 141.2 114.9 - Air – Passenger transport at airports 112.9 117.7 - Air freight 102.4 96.3 Accommodation and food service activities - Tourist arrivals 105.9 110.3 - Tourist overnights 101.8 106.3

Source: Monstat

1 According to MONSTAT data, Montenegro's GDP in 2016 amounted to EUR 3,954.2 million (real growth of 2.9% in relation to 2015.).

15 Central Bank of Montenegro CBCG Macroeconomic Report 2017

According to preliminary MONSTAT data, real GDP growth in the first quarter was 3.1%, 5.2% in the second, 4.7% in the third quarter, and 4% in the fourth quarter, while the annual growth based on quarterly estimates was 4.4%.2 Available statistical indicators in most sectors mostly show uptrend, with significant growth being recorded in the construction, tourism, trade, forestry sectors and in certain types of transport. A decline in total industrial output was recorded as a result of output drop in the electricity, gas and steam supply sector due to adverse weather conditions and production decline in manufacturing industry, while growth in the mining and quarrying sector was recorded.

Economic trends in Montenegro are partly due to the openness of the economy under the influence of global growth strengthening, i.e. a continued uptrend in economic indicators in the international environment. The UN`s report World Economic Situation and Prospects 2018 estimates the global economic growth rate of 3% in 2017, (2.4% in 2016), which is also the highest growth rate since 2011. The improvement of the indicators of the global economy was highlighted in the latest IMF report World Economic Outlook - Update (January 2018), where the growth rate of 3.7% for the global GDP was estimated for the reporting year. Growth improvements were stimulated by significant results recorded in Europe and Asia, with developed and developing countries achieving better results than projected in the autumn IMF report.

Significant growth rates of Montenegro`s GDP were also forecasted by international institutions (Ta- ble 1.2). According to the latest IMF projections,3 real GDP growth for Montenegro in 2017 should be 4.2% and around 3.0% in 2018. The growth rate of 3.9% for 2017 was released in the latest report of the European Commission, while a growth of 3% was predicted for 2018. According to the World Bank projections, GDP growth for 2017 is 4.2%, while the forecast for 2018 is 2.8%.

Table 1.2

Projected GDP growth rates in Montenegro in 2017 and 2018 (%)

European The World Year/Institution EBRD IMF WiiW UN/DESA Commission Bank 2017 3.9 3.7 4.2 4.2 3.9 4.0 2018 3.0 3.3 3.0 2.8 2.9 3.8

Source: Webpages of certain institutions

Growth of the economy is expected in the upcoming period (on average 2.8% from 2018 to 20214) due to the intensification of investment activities in the areas of tourism, energy and transport, as well as of increasing productivity, expanding arable land, i.e. the strengthening of the agricultural sector due to increased investments in this sector, and implementing the IPARD Programme. A continued implementation of the following projects is expected: construction of the Bar-Boljare highway, construction of small HPPs and wind farms, submarine cable for connecting electricity systems of Montenegro and Italy, as well as the construction of new tourist resorts. This will influence the implementation of the projected growth rates in the upcoming period.

2 Data are preliminary until September 2018, when the final annual GDP data for 2017 will be published. Quarterly rates refer to the same period (quarter) of the previous year. 3 IMF Montenegro: Staff Concluding Statement of the 2018 Article IV Mission, March 2018 4 Source: “Development directions of Montenegro 2018-2021”, December 2017

16 Real sector developmentsReal sector Box 1.1 - Global economy and GDP movements

According to the UN/DESA estimates, the Graph 1 global economy grew 3.0% in 2017, repre- Global GDP increase in % senting the highest growth rate recorded since 2011. Almost two thirds of countries in the world recorded higher growth rates compared to the previous year. Countries in South and East Asia are still experiencing the highest growth, and together with the improvement of economic indicators in some developed countries, they influenced the growth acceleration in 2017. Positive developments are the result of improved investment conditions, due to the stabilization of the financial market, the improvement of the banking sector and the increased credit growth, the recovery of certain sectors in the commodity market and the improvement of the global macroeconomic Source: UN/DESA, World Economic Situation and Prospects (WESP) 2018 environment. The stable growth of the global economy is expected both in 2018 and 2019 at a rate of 3%. However, changes in trade policy, Graph 2 rapid deterioration of global financial condi- Economic growth by regions, 2016-2019 tions and an increase in geopolitical tensions (in percentages) still represent the main risks for reaching the forecasted rates.

Observing developed countries, GDP in the U.S. is expected to grow 2.1% in 2018, which is the projected growth rate for the EU countries as well. Household spending will continue to be the main driver of growth in the EU, stimulated by rising household incomes, lower unemployment and interest rates. At the same time, after a slowdown in growth in 2015 and 2016 in developing countries, it will reach 4.6% in 2018 due to the expansion of domestic demand, while the growth will amount to 4.7% in 2019. According to forecasts, after a significant decline in 2015 and a slight recovery in 2016, economies in transition will continue Source: UN/DESA, World Economic Situation and Prospects 2018 their growing trend from 2017 (2.3% in 2018 a-partial assessment, b- UN forecast and 2.4% in 2019).

The IMF’s forecasts5 of the global economy growth are more optimistic than estimates in the UN report. Increased global trade in the last months of 2017, significant growth of investments, especially in developed countries, and the growth of manufacturing industry in Asia additionally contributed to better results than projected for 2017 (GDP growth rate estimate is 3.7%). According to the same source, the growth trend is expected to continue in 2018 and 2019, when a 3.9% growth is projected. It is assumed that the favourable conditions in the financial market will keep up the demand growth,

5 IMF „World Economic Outlook-Update“, January 2018

17 Central Bank of Montenegro CBCG Macroeconomic Report 2017

which occurred in the previous period, especially the increase in investments, which significantly contributed to the GDP growth of countries with large exports. It is additionally expected that tax reforms and fiscal stimulus adopted in the United States will affect the growth of the U.S. GDP and that of its largest trading partners, which will contribute to global growth. Growth in transition economies and developing economies, according to the IMF forecasts, will amount to 4.9% in 2018, while the growth rate of developed economies for 2018 is predicted to be 2.3%.

Graph 1.1

World Bank and UN/DESA projections of According to forecasts of the World Bank6 from GDP trends for certain Southeast European January 2018, Montenegro’s GDP in 2018 should countries in 2018 - growth rates in% grow at the rate of 2.8%, which is 0.2 percentage points less than forecasted in June 2017. Accord- ing to the same source, the GDP rates for Alba- nia, Bulgaria and Romania increased in January 2018, while the GDP growth rate for Bosnia and Herzegovina, Macedonia, and Serbia decreased. The UN/DESA given in the World Economic Situ- ation and Prospects 2018, GDP growth for Mon- tenegro in 2018 should be 3.8%, which is 0.6 percentage points more than the forecast given in the previous edition of this publication.

Source: World Bank and UN/DESA

Box 1.2 – Business environment in Montenegro

Reforms are constantly being implemented to improve the business environment in Montenegro. The results achieved in this area are recorded through the World Bank Doing Business Report. In the latest (Doing Business 2018) Report, there was a slight improvement in the ease of doing business list. Montenegro`s position improved by nine places, and it is currently 42nd out of 190 countries included in the Report. Of countries in the region, Macedonia (11th on the list), Slovenia (37) and Kosovo (40) rank better than Montenegro while Serbia (43), Croatia (51), Albania (65) and Bosnia and Herzegovina (86) rank worse than Montenegro.

The report highlighted the successful implementation of reforms in the field of getting electricity. In this area, Montenegro progressed forty positions due to improvement of reliability of electricity supply through the implementation of the system for supervisory control and data acquisition (SCADA), as well as starting data collecting to generate the annual system average interruption duration index (SAIDI) and the system average interruption frequency index (SAIFI). Improvement of the position was also observed in the area of issuing building permits (up by 15 positions), liquidity resolving (up by 3 positions) and property registration (up by 2 positions).

6 Source: World Bank - Global Economic Prospects "Broad-Based Upturn, but for How Long?", January 2018

18 Real sector developmentsReal sector

Table 1

Ranking of Montenegro as per basic doing business indicators

DB 2018 DB 2017 Position change Starting a Business 60 58 -2 Issuing Construction Permits 78 93 +15 Getting Electricity 127 167 +40 Registering Property 76 78 +2 Obtaining Loans 12 7 -5 Protecting Investors 51 42 -9 Paying Taxes 70 57 -13 Cross-border Trading 44 43 -1 Enforcing Contracts 42 41 -1 Resolving Insolvency 37 40 +3

Source: Doing Business 2018 – The World Bank Group

The fall in the position was recorded in the following indicators: tax payment (down by 13 positions), investor protection (-9), obtaining a loan (-5), starting business (-2), cross-border trade and execution of contract ( -1 each). It is important to point out that the fall in positions in certain indicators is not the result of deterioration in the quality and efficiency of the provision of services, but rather the impact of the reforms implemented in other countries that are included in the report.

The findings of the Doing Business Report 2018 highlight progress in business reform, but there is still room for improvement in the business environment.

According to the CBCG model projection in 2018, Graph 1.2 GDP growth will range from 2.7 to 3.2%, with the Real GDP development in 2018 (in million) – central projection of around 3%. model projection

The model projection is based on a seasonally customized model of Autoregressive Integrated Moving Average Processes, known as ARIMA processes. The model uses historical quarterly data from 2001 to 2017 for the forecast of quarterly GDP for 20187. The fan chart gives a model overview of trends in the growth rate of real GDP per quarter. Through probability distribution, the chart takes into account potential risks and

7 The value of quarterly GDP was obtained using three important time series for estimating GDP trends, which are: data on industrial output, tourism, and construction. Namely, the GDP interpolation was carried out by monitoring the development in these activities and their share in total GDP. Source: CBCG, 2018

19 Central Bank of Montenegro CBCG Macroeconomic Report 2017

uncertainties, which in the upcoming period could influence the development of the central GDP projection. The values of the central projection are shown in the dark blue line, while the levels of uncertainty (obtained by analytical estimation and the calculation of the relative impact of potential internal and external shocks) are shown in bright blue lines.

Graph 1.3

Fan chart of real GDP in 2018−model projection

Source: CBCG, 2018

Risk deviations from the central projection refer to:

• Possible deviations in the enforcement of measures established by the fiscal strategy; • Delays in the implementation of investment projects; • Adverse weather conditions that would reduce the contribution of tourism, agriculture and electricity production to the projected economic growth; • Instability in external environment, economic and geopolitical risks that could, to a certain extent, have a negative impact on economic growth.

For the purpose of testing the model GDP projections, a GDP estimate was made according to the consumption method. The starting assumptions in the consumption method include the following:

• A slight increase in household spending of 2%. Namely, in 2018, household spending may be exposed to negative effects of fiscal consolidation measures (increase in VAT rate, increase in excise on fuel, tobacco and tobacco products, ethyl alcohol, carbonated drinks with sugar and excise on coal) which could reduce the disposable household income. On the other hand, the growth in available household income will be positively affected by a slight increase in employment, the expected growth in tourism revenues, a steady inflow of remittances, and the expected strengthening of banks’ lending activities.

20 • Reduction of government spending by 1.2%, as a result of implemented fiscal consolidation developmentsReal sector measures. • Growth of investments in fixed assets of 7.5%, as a result of capital investments for the construction of the Smokovac - Mateševo highway, then tourism related investments (Portonovi, Luštica Bay and Porto Montenegro) and energy (undersea power cable, construction of small hydropower plants and wind farms); • Export of goods and services will grow at the rate of some 3.8%, as a result of stabilization and announced investments in the field of industrial and agricultural production, as well as higher tourist spending stimulated by the construction of new tourist facilities; • Imports will have a growth of 3% due to the need of investors to import equipment, construction materials and labour force, especially for the highway construction and tourist resorts. On the other hand, growth of agricultural production can contribute to the reduction of imports.

Table 1.3

GDP estimation per consumption method for 2018

Categories Growth Rates (%) GDP Contributions Household spending 2 1.6 Government spending -1.2 -0.2 Gross investments in fixed assets 7.5 2.0 Export of goods and services 3.8 1.7 Import of goods and services 3 -2.1 Gross Domestic Product (in %) 3.0

Source: CBCG

According to the expenditure approach, GDP will achieve a growth rate of 3% in 2018, which confirms the validity of the central GDP growth projection.

Box 1.3 - Transition Process of the Western Balkan Countries - Transition Results

Since the mid-1990s, the EBRD endeavoured, in the Transition Report, to monitor the progress of the transition countries towards market-oriented economies through a set of so-called transitional indicators. This year, the methodology was updated and is based on the revised concept of transition, which implies tracking six qualities of a sustainable market economy rather than structural or sectoral indicators. The components used to measure the quality of a sustainable market economy are: competitiveness, good governance, green economy, inclusion, resilience and integrity. The countries of the Western Balkans lag behind the regional average of the EBRD in terms of progress towards a sustainable market economy (Table 1).

Monitoring of competitiveness implies a wide range of reforms in order to facilitate business operations of companies and their growth, as well as to improve attractiveness of the economy for investment, skills and innovation. One of the biggest obstacles to doing business and improving competitiveness in the Western Balkans is unfair competition in the informal sector. Apart from this, significant obstacles include corruption, electricity generation, access to finances, as well as the still large state involvement in some key economies. In some cases, governments introduced comprehensive and far-reaching

21 Central Bank of Montenegro CBCG Macroeconomic Report 2017

reform packages after a long period of rest. The two-year political crisis in Macedonia, which led to stagnation and weakening of growth, was resolved in mid-2017, so the new government presented a comprehensive reform agenda with an emphasis on support to local businesses and the promotion of regional integration. Generally in the Western Balkans, in countries such as Montenegro, Serbia and Bosnia and Herzegovina, the process of joining the EU remains a key asset to market-oriented reforms.

Table 1

Transition results for six qualities of a sustainable market economy for the countries of the Western Balkans, 2017 Good Green Competitiveness Inclusion Resilience Integrity Average management economy Albania 4.4 4.3 4.9 5.1 4.9 5.8 4.9 Bosnia and Herzegovina 4.7 3.7 4.8 4.8 5.3 5.5 4.8 Macedonia 5.4 5.2 4.9 4.7 5.3 6.0 5.3 Kosovo 3.4 3.7 3.8 4.7 5.1 4.9 4.3 Montenegro 4.9 5.1 5.2 5.6 5.9 5.6 5.4 Serbia 4.9 4.4 5.8 5.2 5.6 6.4 5.4 Average- Western Balkan 4.6 4.4 4.9 5.0 5.3 5.7 5.0 Countries

The results range from 1 to 10, with a score of 10 indicating the best one and the limit in terms of a sustainable market economy. Source: EBRD Transition Report 2017-2018

Improving the management is a difficult task that requires commitment to reforms over a certain period of time. Governance issues in the Western Balkans are reflected in theimplementation of the rule of law, corruption control, government efficiency and regulatory quality. The greatest improvement in indicators over the past 15 years was noted in the context of political stability, with significant improvements in the rule of law and government efficiency, while the smallest progress was made in the area of corruption control. This led to the fact that all countries of the region are ranked relatively low in measuring the corruption perception index, with Montenegro being the best ranked in the region (64), while the worst ranked was Macedonia (107).

Countries of the Western Balkans are facing a number of problems and challenges in environmental protection, including air pollution, water and wastewater treatment, as well as sustainable waste management. However, all countries in the region are advancing in the implementation of EU standards in terms of energy efficiency and renewable energy sources. In Montenegro, the third phase of mod- ernization and installation of smart meters began, which is expected to become the first country in the EBRD region to meet the EU’s goal of covering at least 80% of the population with smart meters by 2020.

The issue of inclusion, which occurs through a high level of inactivity and non-inclusion of young people, is a major challenge in most parts of the EBRD region. All the countries of the Western Balkans are confronted with high unemployment rates, especially among young people, as well as with regular emigration flows. However, even if progress is often very slow, in many Western Balkan countries, reforms are under way to improve technical and vocational education, as well as greater inclusion of young people in the labour market. In 2016, Kosovo and Montenegro launched strategic plans to align their policies on vocational education and training with labour market requirements. Albania adopted new regulations aimed at improving the dual learning system, while in Montenegro the parliament adopted a new social strategy aimed at improving the skills and employment opportunities of the

22 Real sector developmentsReal sector

Roma and the Egyptians as minorities. At the same time, Bosnia and Herzegovina, Macedonia and Serbia have not yet adopted new national qualifications frameworks.

Over the past decade, the countries of the Western Balkans took important steps to strengthen the resilience of their financial sectors. Although it falls, the level of non-performing loans (NPL) is in three (Serbia, Albania and Bosnia and Herzegovina) of the six observed countries at the two-digit level, but in most cases there are action plans to address this issue. In addition to the financial sector, some countries also took measures to bring their energy sectors to a financially viable basis. Energy market reforms were recorded in Albania, Kosovo, Montenegro and Serbia through the implementation of the third energy package of the EU, being postponed in Bosnia and Herzegovina and Macedonia. So far, only Albania successfully separated electricity and gas transmission system operators, although it did not yet split electricity distribution and retail. The dependence on electricity imports varies across the region, so Albania, Macedonia and Kosovo are major importers, there is a relatively equitable balance of electricity in Montenegro and Serbia, while Bosnia and Herzegovina is the only exporter. All countries in the region, except Albania, have a negative oil balance higher than 5% of GDP.

Observing the integration, the Western Balkan is neither sufficiently integrated into European supply chains nor into cross-border electricity trade. In recent years, regional integration has been an important goal of these countries, but poor quality of infrastructure is often an obstacle to cross-border trade and investment. Albania, Macedonia, Kosovo and Montenegro have made great progress in the construction of roads last year, while important projects in Bosnia and Herzegovina were postponed due to the authorities’ failure to amend the Law on Excise Taxes on Fuel. In the transport and energy sector in Bosnia and Herzegovina, Macedonia, Montenegro and Serbia, large projects were carried out or are under way, being implemented with the help of Chinese partners.

According to the CBCG survey on businessmen`s expectations regarding the volume of activities (production and provision of services), the largest number (60% of them) expect the same scope of activities in 2018. An increase in activity levels in comparison to the previous year is expected to be 37%, while only 3% expect their reduction.

Businessmen see the main business barriers in the upcoming period in general business risks, weak demand, excessive taxes and other forms of taxes, as well as high lending interest rates.

Graph 1.4 Graph 1.5

Expected volume of activities in 2018, in % Expected business barriers in 2018, in %

23 Central Bank of Montenegro CBCG Macroeconomic Report 2017

The growth in investment activity, as well as the higher level of engagement of domestic potentials in the implementation of the planned projects, primarily in the construction and transport sector, should have a significant impact on the level and trends in overall economic activities in the upcoming three- year period. In the Economic Reform Programme for Montenegro 2018-2020, the main macroeconomic scenario envisages growth of the Montenegrin economy of 3% in 2018, 2.7% in 2019, and 2.6% in 2020. Having in mind the importance of investments for the economy of Montenegro, and taking into account the uncertainty in the dynamics of their implementation, the scenario of lower growth starts from the assumption that in the upcoming period, the trend of growth in investment activity will slow down, especially after the high level of investments carried out in 2016 and 2017. Changing the investment dynamics with a potential decrease in tourism revenues, due to possible risk of deterioration in the geopolitics or adverse weather conditions, may have a moderate negative impact on the overall macroeconomic trends in the future period. According to this scenario, the growth would amount to 1.8% in 2018, 1.9% in 2019, and 2.5% in 2020.

1.2. Industries Graph 1.6 1.2.1. Industrial output Industrial output

Total industrial output fell by 4.2% in 2017. Pro- duction decline was recorded in manufacturing industry by 3% as well as in electricity, gas and steam supply by 24.6%, while production in the mining and quarrying sector rose by 113.9%.

The increase in production was recorded in the mining and quarrying sector by 113.9%. Pro- duction growth was recorded in coal mining by 8.1%, due to the increased coal exploitation during 2017, and in the field of metal ores mining by 200%8 due to the renewal of the extraction of bauxite ore which did not occur in the previous year. In the field of other mining, production Source: Monstat dropped by 6.5%.

Manufacturing industry, which accounted for 57.6% of total industrial output, registered a growth of 3% y-o-y.

Production decline in 2017 was recorded in six manufacturing industries, which account for 24.7% of total industrial output (Table 1.4). Observed by the fields, the largest decline was recorded inprinting and reproduction of audio and video recordings (-44.6%), and the smallest decrease in production of machinery and equipment otherwise not mentioned (-3.2%). In the same period, production growth was recorded in nine manufacturing industries, with the largest growth being recorded in the production of paper and paper products (82.1%), and the smallest in the field of wood, cork products, etc. (0.7%). Activities in the field of repair and assembly of machinery and equipment as well as in production of tobacco products were not recorded in 2017, due to works on the construction of the factory „Novi Duvanski kombinat“, which did not start production by the end of the year.

8 Calculated index is above 300.

24 Table 1.4 Real sector developmentsReal sector

Manufacturing industry, indices change

Jan-Dec 2017 Industry Field/ Period Jan-Dec 2016 MANUFACTURING INDUSTRY − Total 97.0 Production of food products 94.4 Production of beverages 105.1 Production of tobacco products - Production of apparel 101.5 Production of leather and leather products 75.0 Production of wood products, cork and the like 100.7 Production of paper and paper products 182.1 Printing and reproduction of audio and video records 55.4 Production of chemicals and chemical products 140.4 Production of basic pharmaceutical products 66.6 Production of rubber and plastic products 101.6 Production of other non-metal minerals products 148.1 Production of basic metals 101.6 Production of metal products, other than machinery and appliances 90.8 Production of machinery and equipment otherwise not mentioned 96.8 Production of furniture 148.7 Repair and assembly of machinery and equipment -

Source: Monstat

Graph 1.7 In the electricity, gas and steam supply sector, Share of power plants in total electricity which accounted for 29.4% of the total industri- production, in % al output, a 24.6% drop was recorded in relation to 2016. Weather conditions, that is, the drought during 2017, influenced a decline in the production in hydro power plants not only in Monte- negro, but also in the entire Balkan region. In Montenegrin hydro power plants, production declined by 46%, while thermal power plant TPP „Pljevlja“ had a production increase of 4% compared to 2016. The share of power plants in total electricity production is presented in Graph 1.7. Source: EPCG

Given that Montenegro has great energy potential, there is a growing number of investments in this area. After the construction of the wind farm at Krnovo in early December 2017, work began on setting concrete feet for the installation of twenty-three wind farms in the Možura wind park. The total value of investments in Možura amounts to 87 million euros, with state-owned land leased for a period of 20 years for the construction of a wind farm with an installed capacity of up to 46 MW.

25 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 1.8

Industrial output by sectors Ø 2010 = 100

Monstat and CBCG calculations

Graph 1.9 After a slight downward trend in industrial out- Industrial output – trends (2010=100) put trends in 2011 and 2012, there was stagnation or a slowdown in the downward trend and a significant growth in the last two months in 2013. Industrial output fluctuated in 2014, especially in the middle of the year, and recorded a moderate annual growth in January, February, September and October that year. In 2015, total industrial output was trending up, while a decrease in production was recorded both in 2016 and 2017.

Source: Monstat

26 9 1.2.2. Tourism developmentsReal sector

The tourism sector recorded significant growth rates in 2017, which continued the positive trend from the past eight years, contributing to the participation of the accommodation and food service activities in the total GDP to increase from 5.1% in 2009 to 7.1% in 2016. Monstat data showed that the number of tourist arrivals to Montenegro amounted to 2 million in 2017, which is 10.3% more than in 2016, whereby the respective increase in foreign tourist and a decline in domestic tourist arrivals amounted to 12.9% and 19.1%.

According to the structure of arrivals, the most Graph 1.10 visited are seaside resorts with 85.8% of total arrivals. The number of tourists on the coast was 7.1% Tourist arrivals in 2017 higher than in the previous year, while the number of visits to other places increased by 69.8%, those to the capital by 50.1%, in other tourist resorts by 24% and in mountain resorts by 17.6%.

Observing the tourist arrivals to collective and individual accommodations by months (Graph 1.12), it is evident that excluding the summer tourist season, there are more tourist arrivals in collective accommodation, while in July and August tourists are more determined to choose individual accommodation capacities. Accord- ing to the structure of total arrivals by type of accommodation in 2017, 48% of tourists stayed in collective, while 52% of tourists stayed in individual accommodations. Source: Monstat

Graph 1.11 Graph 1.12

Structure of tourist arrivals by resorts in 2017, Arrivals of tourists by type of accommodation in % in 2017, by months

Source: Monstat Source: Monstat

9 Preliminary data

27 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 1.13 In the structure of arrivals of foreign tourists in total arrivals, the most frequent were the tour- Structure of tourist arrivals by countries in 2017, in % ists from the region and Russia. Namely, the participation of tourists from Serbia was 20.3%, Russia (17.5%), Bosnia and Herzegovina (9.2%), while the share of tourists from France was 3%, Ukraine and Germany 2.9% each, and Albania and Poland (2.8% each).

The number of overnights in 2017 was 12 million or 6.3% more than in 2016. Of total overnights, domestic tourists recorded 483.2 thousand overnights or 33% less than in 2016, while foreign tourists recorded 11.5 million overnights or 8.9% more than in the previous year. Of the total overnights, 94.9% referred to the coastal towns, while Source: Monstat the capital is represented by 2.2%, mountain towns with 1.6%, other tourist resorts with 1.1% and other places with 0.1%. Graph 1.14

Structure of tourist overnights in 2017 According to the structure of total overnights by by type of accommodation, in % type of accommodation, the highest number of overnights in 2017 was recorded in individual accommodations (67.5%), while collective accommodation made 32.5% of total overnights, with the largest number of tourists staying in collective accommodations in hotels (20.9%), tourist resorts (3.3%), small hotels (2.7%), health resorts (1.8%), and other collective accommodation (3.8%).10 Observing the overnights structure, 50.2% of the total number of overnights was recorded by tourists from Russia (25.6%) and Ser- bia (24.6%), while the highest growth was re- Source: Monstat corded by tourists from Kosovo (26.4%), France (17,7%) and Germany (11.1%).

Improving Montenegro’s air accessibility, with the establishment of cooperation with new low-cost companies and the expansion of the number of airlines, influenced the increase in the number of visitors from certain countries in 2017. However, most countries that recorded increased number of tourist arrivals and tourist overnights still have relatively low shares in the total structure of tourist arrivals and overnights in Montenegro. Graph 1.15 shows tourist overnights from countries with the largest share in the structure of total overnights.

Total number of overnights by EU tourists amounted to 2.4 million, and they made up 20.5% of total overnights.

10 Other collective accommodation establishments include: Garni hotel, Boutique hotel, Apart hotel, Motel, Inn, Pension, Camping, Ethno village, Eco lodge, Resort, Hostel.

28 Graph 1.15 Graph 1.16 Real sector developmentsReal sector

Tourist overnights from countries with Structure of EU member states tourists’ the largest share in the structure of total overnights in 2017 overnights, change 2017/2016, in %

Source: Monstat Source: Monstat

With the adoption of the new Law on Tourism and Hospitality11 in December 2017, the aim is to en- able better regulation of the area of provision of services in tourism and hospitality. Innovations to the Law, inter alia, aim to introduce a ban on the implementation of certain activities that undermine the reputation of each tourist place, as well as the introduction of licenses for electronic operations for tourist agencies that perform their activities online, in order to raise the level of the entire tourist offer.

Box 1.4 – Continued growth trend of tourism indicators in the world, stimulated by the significant growth in Europe

International tourism indicators have record- Graph 1 ed positive rates for the eighth year in a row. International tourist arrivals per months According to preliminary UNWTO data, over (in millions) 1.3 billion international tourist arrivals were recorded in 2017, which represents a growth of 6.7% compared to 2016. This is also the highest growth rate recorded since 2010. The growth of global indicators is largely the result of the increase in the number of arrivals in Eu- rope (8.4%) and Africa (7.8%), followed by Asia and the Pacific (5.8%), and the Middle East (4.8%) while the smallest increase in arrivals was recorded in America (2.9%).

Europe remained the world’s leading tourist destination in 2017, with 671 million international tourist arrivals and an increase of 8.4%, which is also the highest growth achieved in Source: World Tourism Organisation (UNWTO)

11 Parliament of Montenegro, Tenth session of the second regular (autumn) assembly in 2017, Agenda Item 6

29 Central Bank of Montenegro CBCG Macroeconomic Report 2017

2017 compared to other regions. According to the European Travel Commission (ETC - European Travel Commission, Quarterly Report Q4/2017), the highest increase in arrivals was recorded in Turkey (27.7% in the first eleven months of 2017), following a downward trend since 2014, the stabilization of political situation and improvement of the security situation in the country. International tourist arrivals in Iceland continued to grow significantly this year, thus the growth of arrivals increased by 24.2% in 2017. The average growth in this country over the past six years amounted to over 25% annually, with the aim to slow it down in the medium term, as the current demand for accommodation exceeds the available tourist infrastructure of Iceland. The increase in international arrivals was also recorded in countries of south Mediterranean Europe (18.6% in Montenegro in the first eleven months, 17.6% in Serbia), Malta (15.7%), Slovenia (15.3%), Graph 2 Cyprus (14.6%)), and it is evident that the de- Foreign tourist arrivals and overnights in the pendence on the summer tourist season in European countries, change in % these countries decreased during 2017. Signifi- cant increase in tourist arrivals from China and India influenced Finland`s two-digit growth rates of arrivals and overnights of international tourists in the first eleven months of 2017 (13.5% and 14.5%, respectively). Spain also recorded an increase of 9.1% of international tourist arrivals, but further developments of this tourist market in the future will largely depend on the political tensions in Catalonia, which contributes with almost one-fifth of all international visits to Spain.

The growth in the number of tourist arrivals in Source: European Travel Commission, TourMIS North Africa (13.4%) and Sub-Saharan Africa * figures vary (Jan-Sep/Dec) per country (5.1%) contributed to the growth of arrivals in the African continent of 7.8% in relation to Graph 3 the previous year. Significant increase in international tourist arrivals was registered in Asia International tourist arrivals per years and forecast and the Pacific (5.8%), with the highest growth for 2018, in % in the countries of South Asia (10.4%), South- east Asia (8.3%) and Oceania (6.5% %), while in the countries of Northeast Asia growth of tourist arrivals increased by 3.2%. An increase in the number of international tourist arrivals by 4,8% was recorded in the Middle East, while in the US, which grew by 2.9%, the highest growth was recorded in the South America (6.7%), followed by the Caribbean (4.1%), Cen- tral America (3.7%), and North America (1.6%).

The UNWTO forecasts growth ranging from 4% to 5%12 for 2018, with stronger growth in Africa (5% to 7%), and Asia and the Pacific (from 5% to 6%), followed by the Middle East (4% to 6%) and America and Europe (3.5% to Source: World Tourism Organisation (UNWTO) 4.5% each). *Preliminary data

12 UNWTO, World Tourism Barometer, January 2017

30 Real sector developmentsReal sector The growth trend in total arrivals and overnights in Montenegro, which was evident since the crisis in 2009, continued in 2017 as well. The number of total arrivals and the number of overnights in 2017 are 10.3% and 6.3% higher y-o-y, respectively. (Graph 1 shows the data for the period January-November for collective accommodation establishments in Montenegro).

1.2.3. Forestry Graph 1.17

In 2017, 336,879 m³ of forest assortments were Production of forests assortments, in m³ produced in forestry, which is 15.8%13 more than in the previous year. Having in mind a number of shortcomings of the concessionary use of forests in Montenegro, which was established in 2007, a proposal for the reorganization of the concept of concession use of forests14 was adopted in Octo- ber with the aim of creating a better system of forest management and administration, better development of the wood industry by achieving as higher degree of finalization of wood products as possible, and a reduction in the excessive export of wood raw materials from the country.

1.2.4. Construction Source: Monstat

Significant results were recorded in construction during the reporting year. Work on the construction of the first section of the Bar-Boljare highway was intensified, and four tunnels were successfully pen- etrated during the year (Klopot, Jabučki krš, Vilac and Mrke), while the works were successfully performed on the construction of other tunnels, bridges as well as on the open route of the first sections of the highway where about 30% of the total works were carried out. Works on the highway, as well as infrastructure projects in energy and tourism, influenced the value of executed construction works in 2017 to amount to 579.8 million euros, which is 51.5% more than in the previous year. Construction activity, as measured by the effective working hours, increased 24.5% in the same period.

The value of new construction contracts for buildings amounted to 59.3 million euros, which was 14.8% less than in 2016, and the value of other new construction contracts was 123 million euros or 16.2% more than in the previous year.

Bearing in mind the success of the realization of the first two phases of the project for solving the housing needs of citizens under favourable conditions named „Project 1000+“, cooperation with the Coun- cil of Europe Development Bank (CEB) continued, and a loan was granted in November 2017, creating conditions for the signing of the Loan Agreement with the CEB in the amount of 10 million euros.

In the previous two phases of the project, 809 family households or 2,149 citizens of Montenegro, resolved their housing issue in this way.

13 This is presented in the weighted index, while if presented in the non-weighted index, the output was 14.7% higher for the same period. 14 43rd Government session, Agenda Item 8

31 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 1.18

Construction

Source: Monstat

1.2.5. Transport

In 2017, growth was recorded in most aspects of transport in relation to the previous year. According to Monstat data, 0.4% more passengers15 were transported in 2017 in road transport than in the previous year, while the cargo transport decreased by 1.5%.16

Within the framework of the eighteenth call for Graph 1.19 the submission of projects of the Western Bal- kan Investment Framework in December, the Road passenger transport – in thousands European Union allocated to Montenegro additional 3.8 million euros for the preparation of infrastructure projects in the field of transport. Namely, Montenegro was granted 2.5 million euros for the preparation of project documenta- tion for the construction of a priority sub-branch of the bypass around Budva on the Adriatic-Io- nian highway section and 1.3 million euros for auditing the feasibility study and the accompa- nying analysis of the costs and benefits for the Bar-Boljare highway. These projects represent a continued EU financial support under the Berlin Process as a political platform within which the Union provides support to the Western Balkans for transport and energy connecting and the im- Source: Monstat plementation of related reforms in these areas.

15 Presented in number of passengers, by passenger km, growth of passenger transport was 0.3%. 16 In terms of cargo transport expressed in thousands of tonnes and in tonnes km, cargo transport decreased by 14.2%.

32 17

Passenger rail transport in 2017 was reduced by 27.8% mostly as a result of cancelling of the night developmentsReal sector train line on the Bar-Belgrade-Bar route between December 2016 and June 2017, while cargo transport increased by 14.9% 18 in relation to the previous year, partly due to the increased transport of bauxite ore in the Port of Bar for the purpose of export.

In 2017, 2.2 million passengers were transported in air transport, which is 17.7% more than in the same period 2016, while cargo transport decreased by 3.7%. This was at the same time a year of historical maximum as both airports welcomed their millionth passenger (Tivat in September and Podgorica in December). The increase in passenger traffic at airports in Montenegro in the past seven years is largely the result of improved airline availability by the introduction of new flights, as well as the ar- rival of a number of low cost airline carriers that significantly enhanced the connection with numer- ous European metropolises.

Graph 1.20

Passenger traffic at the airports Podgorica and Tivat in the period of 2010-2017

Source: Airports of Montenegro

Total turnover in ports amounted to 2.1 million tonnes, which is 27.4% more than a year ago. In the structure of total turnover, exports accounted for 57.7% and it increased by 49.5% compared to 2016, while imports accounted for 42.1%19, and it increased by 9.4% compared to 2016.

1.3. Prices

After the negative average rate in 2016, annual growth rates of consumer prices were recorded in Mon- tenegro in all months of 2017. Positive annual inflation rates were registered in countries of the region, as well as in most EU countries, primarily as a result of the rise in oil prices in the global market, following a 12-year minimum recorded in the previous year and higher prices for certain food products. The Annual CPI inflation rate stood at 1.9% in December 2017, while the annual HCPI inflation rate

17 Presented in transported passengers in thousands, by passenger km, the decrease amounted to 28.6%. 18 Presented in thousand tonnes, in tonne-kilometres, the increase amounted to 50.2%. 19 The sum of exports and imports does not give figure 100 due to the difference referring to the goods transit.

33 Central Bank of Montenegro CBCG Macroeconomic Report 2017

was 2.9%. Observed by months, the highest growth in consumer prices was recorded in September (0.9%), while the biggest drop in prices was recorded in December (-0.2%).

During 2017, the monthly20 rate of core inflation Graph 1.21 for seven months (January, February, March, April, August, October and November) was be- Rate of consumer prices and core inflation low the level of total monthly inflation, while it was higher than the total inflation in the remaining five months. The highest range between the total monthly and core inflation was recorded in January (due to a change in the prices of some products that are otherwise excluded from the core inflation calculation, such as electricity prices, agricultural products, etc.). Graph 1.19 shows the trends in total and core inflation rates.

The highest contribution to the growth of the annual inflation rate (0.7 percentage points) was of the prices from the category transport with a growth of 6.4% (Table 1.5). The increase in prices in this category is mostly the result of the increase in the prices of fuels and lubricants Source: Monstat and CBCG calculations for personal transport equipment of 14%, due to the increase in excise duties on mineral oils after the adoption of the Law amending the Law Graph 1.22 on Excise Duties and the global rise in oil prices. Prices from the category alcoholic beverages and Consumer prices tobacco with a growth of 14.8% gave a significant contribution to the annual inflation (0.6 percentage points). Tobacco prices rose by 21.3% as a result of an increase in excise duties on tobacco products21 in order to reach the level of excise duties on tobacco products up to the prescribed minimum in accordance with EU directives. The increase in prices was also recorded in the category hotels and restaurants (5.4%), due to the growth in the prices of accommodation services of 14.4%, as well as the category of clothing and footwear (3.8%) due to a rise in footwear prices by 4.4% and clothing by 3.3%. The annual price growth in December was also recorded in other goods and services (1.9%), housing, electricity, gas Source: Monstat and other fuels (0.7%), health care (0.6%), and communication (0.2%). Annual price decline was

20 In 2017, as in the previous five years, data on annual change in prices were not available for all products included in the core inflation basket, i.e. for the products excluded from the basket for the calculation of core inflation. 21 According to the excise calendar, new excise duties on cigarettes entered into force as of 1 April, while the Law Amending the Law on Excise Duties (OGM 50/2017 of July 2017) led to new increases.

34 recorded only in the categories of recreation and culture (-0.8%), furnishing, household equipment and developmentsReal sector routine household maintenance (-0.7%) and food and non-alcoholic beverages (-0.1%), while prices in the category education remained unchanged compared to December 2016.22

Table 1.5 23

Contribution of specific categories in total inflation23

Weights XII 17/XII 16 Growth rate Contribution TOTAL 1000.0 101.9 1.9 1.9 Food and non-alcoholic beverages 351.7 99.9 -0.1 0.0 Alcoholic beverages and tobacco 38.6 114.8 14.8 0.6 Clothing and footwear 85.1 103.8 3.8 0.3 Housing, water, electricity, gas and other fuels 155.3 100.7 0.7 0.1 Furnishing, household equipment and routine 41.2 99.3 -0.7 0.0 household maintenance Health care 40.9 100.6 0.6 0.0 Transport 107 106.4 6.4 0.7 Communication 49.9 100.2 0.2 0.0 Recreation and culture 33.2 99.2 -0.8 0.0 Education 19.3 100.0 0.0 0.0 Hotels and restaurants 31.3 105.4 5.4 0.2 Other goods and services 46.5 101.9 1.9 0.1

Source: Monstat and CBCG calculations

The annual inflation rate in the euro area in December 2017 amounted to 1.4% and it was 0.3 percentage points higher than the annual rate from December 2016. The annual price growth of transport fuel (3.9%) and cigarettes (4%), i.e. the annual decline in the prices of telecommunications (-1.9%), had the largest impact on inflation.

Box 1.5 - Prices development of selected groups in Montenegro and a review of food prices on a global level

The level of inflation over the three-year period was mainly generated by the prices in the categories of food and non-alcoholic beverages, alcoholic beverages and tobacco, housing and transport, accounting for 65.3% of the weighting structure of total inflation. Significant increase in prices in this period was recorded by the prices of category alcoholic beverages and tobacco as a result of correction of excise duties on tobacco and tobacco products in order to gradually align excise legislation with EU directives (i.e. reach the level of excise duties on tobacco products up to the prescribed minimum). The fuels and lubricants for personal transport equipment was largely influenced by oil prices in the international market, where the minimum prices were recorded in 2015 and 2016, while in 2017 significant growth was achieved after the twelve-year minimum recorded in 2016. After the increase in 2015, prices in the category food and non-alcoholic beverages stabilized, with the majority of product groups

22 OGM 1/2017 as of January 2017 23 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.

35 Central Bank of Montenegro CBCG Macroeconomic Report 2017

reaching the annual price decline in the reporting year. In the housing, water, electricity gas and other fuels category, prices changed mostly as a result of changes in electricity prices, with the exception of 2015 when the rise in the price of water supply services affected the price increase in this category.

Table 1

Development of the total inflation rate and prices of certain product categories

XII 17/XII 16 XII 16/XII 15 XII 15/XII 14 TOTAL 1.9 1.0 1.4 Food and non-alcoholic beverages -0.1 0.5 2.4 Food 0.0 0.5 2.4 Non-alcoholic beverages -0.5 1.2 3.0 Alcoholic beverages and tobacco 14.8 3.0 3.3 Tobacco 21.3 3.2 3.6 Housing, water, electricity, gas and other fuels 0.7 1.1 1.6 Electricity, gas and other fuels 0.5 1.4 0.2 Transport 6.4 2.0 -4.6 Fuels and lubricants for personal transport 14.0 3.3 -11.1 equipment

Source: Monstat

In contrast to lower prices in the category of Graph 1 food and non-alcoholic beverages in Monte- Annual rates of categories with the largest share in negro, countries of the former Yugoslavia re- total inflation in Montenegro and countries of the corded annual growth rates from 1.5% in Bos- former Yugoslavia nia to 4.2% in Serbia. Significant increase of prices in the category of alcoholic beverages and tobacco was also recorded, while prices in the category of transport increased by 1.6% in Slovenia (with the prices in the group fuel and lubricants increased by 7.9%) to 8.4% in Mac- edonia as a result of the increase in oil prices in the international market.

In addition to a significant rise in oil prices, global food prices also rose in the international market. Namely, according to the UN Food and Agriculture Organization (FAO), global food prices recorded growth rates in 2017 due to the growth in prices of dairy products, meat, cereals and vegetable oils. The FAO price index, which measures monthly changes in prices for the basket of products, averaged annually 174.6 points or 8.2% more Source: Statistical offices of countries than in 2016, which is the highest annual average in the past three years. The FAO points out that food prices in 2018 will be variable and the forecasts are still unreliable as the prices

36 Real sector developmentsReal sector

Graph 2 FAO Food Price Index will largely depend on the impact of weather conditions on harvest and oil prices development that significantly reflect on food prices.

As far as long-term developments are con- cerned, the UN Food and Agriculture Or- ganization and the OECD, in the OECD-FAO Agricultural Outlook 2017-2026 Report expect real prices of most agricultural products in the ten-year period to have a declining trend due to slower demand growth, as well as their level to be lower than the maximum ones reached from 2006 to 2016.

Source: UN Food and Agriculture Organization (FAO)

The prices of liquid fuels and lubricants in Montenegro, which mostly resulted from the changes in the global oil prices, recorded the annual growth of 14%. There was a rise in the price of this energy generating products in the world market in 2017 after a twelve-year minimum reached in 2016. The rise in oil prices is the result of better compliance in the implementation of oil production agreements between the OPEC members and non-member Graph 1.23 countries. The price of the OPEC reference basket averaged 52.5 USD/barrel in 2017, being 29.1% Oil prices, monthly growth rate higher than in 2016. The average price of Brent was 54.2 USD/barrel, or 24.2% higher relative to the average price in 2016. In the reporting year, the highest level of the average price of Brent was recorded in December (64.14 USD/barrel), which is the highest level since May 2015 (when it stood at 64.32 USD/barrel). According to the UN World Economic Situation and Prospect 2018 Report, the average price of Brent will increase in 2018, amounting to 55.4 USD/barrel. The increase in prices is largely based on the expected decrease in output of the signatories of the agreement on the reduction of oil production24 by the OPEC members and non-member countries. In Novem- ber 2017, the agreement was extended until the Monstat and “Monthly Oil Market Reports”, OPEC end-2018 with the aim of raising the price of that

24 At the meeting of OPEC countries held in November 2016, the agreement on the reduction of oil production was signed and extended in May 2017 once again until March 2018 (which was extended by the end-2018 just before the expiration at end-November).

37 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 1.24 energy generating product, having in mind that Producers` prices of manufactured products the International Energy Agency predicted that the demand for oil would fall next year.

Producers` prices of manufactured products recorded the y-o-y increase of 0.1% in December 2017. The prices in the electricity, gas and steam supply sector increased by 5.3%. The mining and quarrying prices fell by 3.1%, while those in manufacturing industry dropped 3%. An average increase in producers` prices of manufactured products was 0.4% in 2017.

Source: Monstat

2018 inflation forecast

Model Assessment

Montenegro’s inflation fan chart represents a graph of probability distribution of inflation rate presented by the consumer price index (CPICG). In that respect, instead of determining specific points, the fan chart also takes into account potential risks and uncertainties through probability distribution that might influence the inflation development in the following period. The fan chart is aimed at pointing to and taking into account uncertainties in the real economy flows, which are consequently reflected in inflation rate trend (increase in energy generating product prices, increase/decrease in foreign trade deficit etc.).

Montenegro’s fan chart for 2018 was based on the following three estimated components:

1. Central projection values– the values of the fan chart central projection are derived from the ARIMA model; 2. Degree of uncertainty – determines the fan chart width. The degree of uncertainty ratios are obtained through analytical assessment and calculation of a relative impact of potential internal and external shocks that are possible in Montenegrin economy during one-year period and which are reflected through the “thickness” of the band around the central projection. 3. Fan chart skewedness – based on the level of skewedness of the distribution of inflation projection, the fan chart is adjusted to the forecast to show whether the values of the central projections are “overestimated” or “underestimated” inflation rates. This will also influence the position of the mean value of inflation distribution.

38 Central projection of Fan Chart - ARIMA model for 2018 developmentsReal sector

With a view to developing the fan chart, an ARIMA (Auto-Regressive Integrated Moving Average) model was developed for Montenegro time series of inflation presented through the Consumer Price Index25.

The ARIMA model was used for short term forecasts (12 months), whereby iteration of several ARIMA models was made, which were ranked based on their efficiency and quality of diagnostics. The selected ARIMA model, ARIMA (1, 1, 21)26, has sufficient confidence level for forecasts.

The projection values on monthly basis were used for the values of Fan Chart central projections of CPI for 2018. The obtained values represent the distribution mode, i.e. values with the highest frequency in the distribution of this time series.

Graph 1.25

Montenegro’s CPI forecast for 2018

Source: CBCG, 2018

The mean value of the given model is 2.7. The value of central projection’ asymmetry ratio ranged between 0.5 and 1, while standard deviation was 0.25. The model-based inflation projection is located in the central part of the distribution. This indicates that the corresponding range of uncertainty of future inflation is placed symmetrically. The Fan Chart presents a 90% probability of inflation distribution. The central projection is usually in the deepest shade of the fan chart, i.e. in the central 10%

25 More detailed explanation of ARIMA model of Montenegro was presented in the Central Bank Working Paper 11 “Infla- tion forecasting: Empirical research of retail price index of Montenegro for 2007 – implementation of ARIMA model“ 26 ARIMA model is generally referred to as an ARIMA (p,d,q) where p represents the number of autoregressive variables, d refers to the level of dependent variable and q is the number of variables, moving averages, in the certain model.

39 Central Bank of Montenegro CBCG Macroeconomic Report 2017

of probability.27 The fan chart has an equal number of bands (eight) on either side of the central band whereby every band is of the same colour, both above and below the central band, cumulatively, ex- plains the next 10% of inflation projection probability. As the degree of uncertainty grows over time, the fan chart spreads.

The fan chart of inflation in Montenegro, based on the ARIMA model assessment for 2018, indicates that there is a 90% probability that the CPI inflation will range between 1.4% and 4%, depending on the month, with the central projection of 2.7%. At the same time, inflation at end-2018 is forecasted to range between 1.5% and 3.1%, with the central projection of 2.2%. The fan chart central projection (the darkest part) represents a 10% probability span (Graph 1.23).

The risks related to the projected inflation rate shown on the fan chart are symmetrically set. Higher rates of inflation than projected ones could be affected by a stronger rise in oil prices in the international market, unfavourable weather conditions that could affect the rise in food and electricity prices. On the other hand, the risks that would contribute to a lower rate of inflation relate to a decline in oil prices, as well as a weaker growth in inflation in the euro area than the projected one.

Internal factors:

• Increasing excise duties on tobacco and tobacco products, ethyl alcohol, and carbonated drinks with sugar and excise duties on coal will reflect on the rise in price levels. • Increase in the VAT rate by 2 percentage points, or from 19 to 21 percent. • Increase in electricity prices of 3% in January, with possible further increase of 5% by the end of the year. • Stagnation of wages and salaries and real estate prices.

External factors:

• The European Central Bank expects a gradual rise in inflation and its approach to the target, which is encouraged by monetary policy measures and stronger economic growth. • Following the rise in oil prices in the last quarter of 2017, forecasts indicate that oil prices will remain at that H1-2018 level, while the downward trend in oil price development in the international market is expected in the H2-2018. • After rise in metal prices and food prices in the international market in 2017, it is expected these prices to remain steady in 2018.

Deviation of any of abovementioned parameters would require the correction of the forecast.

Expert assessment

A survey conducted among businessmen suggests that growth in economic activity can be expected in 2018. The CBCG’s projection suggests that GDP growth of around 3% can be expected in 2018. Projec- tions of all relevant international financial institutions also indicate that solid economic growth can be expected in 2018. Output growth will certainly have anti-inflation effect.

27 The mode value (central projection) is, by construction, always in the deepest band shade, but in case of a heavily unbal- anced risk, the central projection may not cover either of these values. (Britton, E, Fisher, P.G. and Whitley, J.D. (1998), ‘The Inflation Report projections: Understanding the Fan Chart’, Bank of England, Quarterly Bulletin, 38, p. 30–37.)

40 On the other hand, there are factors that will influence inflation growth in 2018. These primarily relate developmentsReal sector to an increase in VAT, an increase in excise duties as a part of fiscal consolidation measures, and the expected increase in electricity prices. Also, a gradual recovery of oil and food prices on the global level can be expected.

Our expert assessment is similar to a model estimate and we expect that inflation will range from 1.9% to 3.9% in 2018.

Table 1.6

Estimation of inflation rate in 2018

Optimistic assessment Realistic assessment Pessimistic assessment 1.9 2.9 3.9

This assessment is based on the same assumptions as the econometric one, thus the deviation of any parameters used for this forecast would require the adjustment of the assessment.

1.4. Labour Market

The average number of employed persons in 2017 Graph 1.26 amounted to 182,368, being 2.5% higher than the average number of employees in the previ- Number of employed persons ous year. The total number of employed persons amounted to 177,627 at end-2017, representing the y-o-y increase of 0.1%. Growth in the number of employed persons in 2017 was recorded in thirteen out of nineteen sectors, with the highest growth recorded in the administrative and ancillary service activities (17.7%) and the lowest in information and communications (0.1%). Decline in the number of employed persons was recorded in six sectors, with the largest decline in the number of employees of 5.8% being registered in the sector of agriculture, forestry and fishing, and the smallest of 0.4% in the sector of mining and quarrying.

The Employment Agency of Montenegro regis- Source: Monstat tered 51,262 unemployed persons at end-2017, which represents the y-o-y increase of 3.6%. The average number of registered unemployed persons in 2017 was 50,510 or 17.9% more than in the previous year, which is partly the result of the Law adoption28 by which the beneficiary women compensated for giving birth to three or more children, who initially exercised that right on the basis of years spent as unemployed and registered with the Employment Agency, were re-registered in the

28 Law on Execution of the Decision of the Constitutional Court of Montenegro U-I 6/16 of 19 April 2017 (OGM 042/17 of 30 June 2017).

41 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 1.27 Agency. The highest number of unemployed persons in 2017 was recorded in March (52,905). Unemployment The unemployment rate published by the Em- ployment Agency of Montenegro amounted to 22.09% in December 2017 and it increased by 0.79 percentage points y-o-y. According to the La- bour Force Survey published on quarterly basis by Monstat, the highest unemployment rate was recorded in Q1 2017 and it amounted to 17.4%. The available data show a decline recorded in Q2 and Q3 (15.1% and 14.8% respectively), while it reached 17% in Q4.

The Employment Agency continued with the implementation of programmes for employing local labour force on seasonal jobs in 2017 as well, thus 9,51229 unemployed people were hired during the summer season. In 2017, 20,969 work permits Source: Monstat and Employment Agency to foreign workers were issued, which is 43.74% more than in 2016. In the 2017 annual foreign worker quota, four groups of occupations: con- Graph 1.28 struction, accommodation and food service activities, trade and other service activities made 30 Number of unemployed persons up the main share of 76.3%. At its session held in November, the Government passed a Decision on determining the annual number of permits for temporary stay and work of foreigners for 2018, laying down the annual quota of a total of 18,185 licenses.

The negotiation Chapter 2: Freedom of movement for workers was opened at the Intergovernmental conference held in Brussels in December 2017. The opening of this chapter is of great importance as, on the day of the EU accession, citizens of Montenegro will have the right to professional development and work in another EU member state, also having the same treatment as domes-

Source: Employment Agency tic workers both in terms of working conditions, social and tax privileges.

29 Source: “Employment Agency of Montenegro 2017 Annual Report”, January 2018 30 The same

42 Wages and Salaries developmentsReal sector

Monstat data showed that an average gross salary in Montenegro was 765 euros in 2017 and it increased by 1.9% in relation to the average salary in 2016. An average salary without taxes and contributions totalled to 510 euros, showing the y-o-y increase of 2.2%. Real wages and salaries without taxes and contributions recorded a 0.2% decrease in 2017.

Compared y-o-y, the highest average salaries without taxes and contributions in 2017 were recorded in financial and insurance activities (917 euros), electricity supply (858 euros), information and communications (697 euros), and real estate activities (674 euros), while the employees in the administrative and ancillary service activities sector recorded the lowest salaries (336 euros). The highest increase in wages and salaries without taxes and contributions in 2017 was recorded in the sector of arts, entertainment and recreation, 10.4%, while the lowest growth was recorded in the sector of financial and insurance activities 0.7%. Fall in wages and salaries without taxes and contributions was recorded in six sectors, with the largest decline of 7.2% recorded in the real estate business sector and the smallest of 0.2% in the mining and quarrying sector.

Table 1.7

Average salary without taxes and contributions, by sectors

Wages and Index of nominal wages Index of real wages and salaries without and salaries without taxes salaries without taxes taxes and and contributions and contributions contributions Ø 2016 Ø 2017 Ø 2017/Ø 2016 Ø 2017/Ø 2016 TOTAL 499 510 102.2 99.8 Agriculture, forestry and fishing 539 527 97.8 95.5 Mining and quarrying 600 599 99.8 97.5 Manufacturing industry 431 426 98.8 96.5 Electricity supply 874 858 98.2 95.9 Water supply, waste management 461 470 102.0 99.6 Construction 445 435 97.8 95.5 Wholesale and retail trade 345 350 101.4 99.1 Transport and warehousing 522 541 103.6 101.2 Accommodation and food service activities 388 388 100.0 97.7 Information and communications 682 697 102.2 99.8 Financial and insurance activities 911 917 100.7 98.3 Real estate activities 726 674 92.8 90.7 Professional, scientific and technical activities 401 410 102.2 99.8 Administrative and ancillary service activities 314 336 107.0 104.5 State administration and defence, compulsory 569 590 103.7 101.3 social insurance Education 482 489 101.5 99.1 Human health and social work activities 526 552 104.9 102.5 Arts, entertainment and recreation 393 434 110.4 107.8 Other service activities 431 467 108.4 105.8

Source: Monstat

43 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Box 1.6 – Average wages and salaries in the former Yugoslav countries, December 2017

Data on average salaries in December 2017 showed the difference in salaries by individual countries of former Yugoslavia. Wages and salaries without taxes and contributions showed the year-on-year increase in all observed countries. The highest nominal growth in net annual salaries was recorded in Slovenia with growth of 5.2%, followed by Croatia (2.3%), Serbia and Macedonia (each 1.7%), Bosnia and Herzegovina (1.1%), and Montenegro which recorded the lowest nominal increase of 0.6%. Slo- venia 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 Serbia, Bosnia and Herzegovina and Macedonia.

Table 1

Wages and salaries in former Yugoslav countries, in euro (ranked as per net amount)

Country Net wages and salaries Gross wages and salaries Slovenia 1.130 1.723 Croatia 792 1.067 Montenegro 512 768 Bosnia and Herzegovina 441 685 Serbia 456 629 Macedonia 388 569

Source: Statistical offices and central banks of the selected countries

44 MONETARY DEVELOPMENTS 02

Monetary developments Monetary

In 2017, operations of banks in Montenegro were safe and sound, with high liquidity and solvency ratios and improved profitability. During the reporting period, total assets and liabilities of banks increased 10.3%, mostly reflecting a significant increase in banks’ lending activity on the assets side, and deposited funds on the liabilities and capital side.

Total granted loans of banks recorded 11.8% growth compared to 2016. This was mostly owing to growth in deposits as the main source of banks’ financing, and from the improved assets quality during the reporting period. Although remaining high, non-performing loans of banks decreased during the reporting period, particularly during H2 2017 after the adoption of amendments to the Law on Voluntary Financial Restructuring of Debts towards Financial Institutions.

Deposits increased 395.5 million euros, or 13.8% compared to 2016. Retail and corporate sectors were at the same time the largest debtors and deponents in the Montenegrin banking system, and both sectors were net depositors at end-2017.

Total banks’ capital increased 5.9% y-o-y due to the recapitalisation of two banks in the amount of 8.5 million euros, profit of 35.1 million euros recorded during the reporting period, and a decreased loss accumulated from the previous period. To cover loss from the previous period in 2017, two banks reduced their equity capital by 52.6 million euros.

High liquidity of banks and the financing conditions at the international market resulted in decreasing of interest rates by banks, which recorded historical nadir during the reporting period. Although both rates declined, the significant decline in lending interest rates during the reporting period resulted in a positive trend reflected through decreased difference between lending and deposit interest rates.

2.1. Banks

2.1.1. Banks’ liquidity

In 2017, the banking sector of Montenegro was highly liquid. According to the key liquidity indicators, all the banks maintained their daily and ten-day liquidity ratios above the statutory minimum31 (Graphs 2.1 and 2.2).

Even though they were above the statutory minimum, liquidity ratios fluctuated during the reporting period with a declining trend. Both ratios were at levels lower than at end-2016.

31 Decision on Minimum Standards for Liquidity Risk Management in Banks (OGM 60/08), which prescribes the obligation of banks to maintain minimum daily (0.9) and ten-day (1.0) liquidity ratios is in effect.

47 Central Bank of Montenegro CBCG Macroeconomic Report 2017

At the end of the reporting period, the daily liquidity ratio amounted to 1.70 and it was lower compared to the same period of the previous year (1.85). The ten-day liquidity ratio amounted to 1.68 at the end of 2017 and it was lower compared to end of 2016 (1.87).

Graph 2.1 The average liquidity indicator amounted to 1.70 in December 2017, recording a decrease in rela- Aggregate daily liquidity indicator tion to the same period of 2016 when it amounted to 1.84. In 2017, the average liquidity indicator amounted to 1.69, recording a decrease in relation to the same period of 2016 when it amounted to 1.90.

Liquid assets of banks amounted to 1,059 million euros at end-December 2017. This was 129.4 million euros or 13.9% more than at end-2016. Liquid assets made up 25.32% of total assets at end-2017 or 24.53% more than at end-2016 when it was 24.53% (Graph 2.3).

The loans to deposits ratio amounted to 0.83 as at end-December 2017, and it was slightly lower compared to end-2016 (0.84).

Source: Banks’ daily reports

Graph 2.2 Graph 2.3

Banks’ liquid assets (left-hand side) and share Aggregate ten-day liquidity indicators of liquid assets in total assets (right-hand side)

Banks’ ten-day reports Source: CBCG

48 2.1.2. Aggregate balance sheet of banks

In 2017, total assets and liabilities of banks were Graph 2.4 on an uptrend (graph 2.4). Total assets and liabilities of banks amounted to 4,182.1 million eu- Total assets and liabilities, loans and deposits Monetary developments Monetary ros as at end-2017, which is 391.9 million euros or of banks, in million euros 10.3% more than at the 2016 year-end.

Banks’ assets structure reveals that total banking loans accounted for the main share of 64.6%, while deposits recorded the main share in liabilities and capital side of 78.1%.

Growth in banks’ total assets primarily resulted from a significant increase in loans of 284.7 million euros or 11.8%, and cash and deposit accounts with central banks of 83.9 million euros or 10.5%. Placements in securities declined 2.6 million euros or 0.6%.

On the liabilities and capital side, deposits record- Source: Banks’ daily reports ed growth and the y-o-y increase of 395.5 million euros or 13.8%. Banks’ capital grew annually by Graph 2.5 28.5 million euros or 5.9%, while banks’ borrowings decreased by 29.9 million euros or 9.7%. Non-performing assets, in million euros (left), the share of non-performing in total banks’ assets, in % (right) Positive trend was also present in the banks’ non- performing assets. At end-2017, total non-performing assets of banks amounted to 255.6 million euros, which was 53.7 million euros or 17.4% lower than at the previous year-end. The share of non-performing assets in total banks’ total assets was 6.1%, being lower by 2 percentage points relative to 2016 year-end (Graph 2.5).

During the twelve months in 2017, banks ran a profit of 35.1 million euros. The aggregate ROA was 0.89% and it increased compared to 2016 year-end.

2.1.3. Banks’ lending activity

At end-December 2017, total granted loans of banks amounted to 2,700.5 million euros, which is 284.7 million euros or 11.8% more in relation to end-2016. Growth in total banking loans in 2017 was more significant relative to 2016, recording monthly average growth of 0.9% (compared to growth of 0.1% recorded in 2016). Growth of loans mostly resulted from growth in deposits as the main source of banks’ financing, and from the improved assets quality during the reporting period. During the observed period, twelve banks reported growth in loans while three banks recorded decline.

49 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Of total banking loans at end-2017, the main share of 41.6% was extended to the retail sector, followed by the nonfinancial institutions (38.8%), financial institutions (12.8%), general government (6.7%), while the share of 0.1% referred to the category “non-governmental and other non-profit organisations” (Graph 2.6).

Graph 2.6 In annual terms, the highest growth of total loans was recorded by the retail sector (105.1 million Banking loans structure per sector, euros or 10.3%), followed by financial institutions in million euros with the growth of 88.5 million euros or 34.5%. Loans to the general government sector increased 68.1 million euros or 60%, while loans granted to nonfinancial institutions increased 24.7 million euros or 2.4%. Loans to non-government and other non-profit organisations recorded 1.8 million euros or 33.8% decline.

The highest fluctuations were recorded by loans to financial sector, general government, and non-profit and non-governmental organisations, while nonfinancial institutions and the retail sector recorded the lowest fluctuations (Graph 2.7).

At end-2017, resident legal persons’ debt arising from loans totalled to 1,182.7 million euros, which is 106.9 million euros or 9.9% more than at

Graph 2.7 Graph 2.8

Loans to resident legal persons by industries, Growth of loans per sector, monthly rate, in % in million euros

50 end-2016. The structure of loans by industries indicates that the largest portion of loans from resident legal persons referred to wholesale and retail trade and the repair of motor vehicles and motorcycles (30%), followed by public administration and defence; compulsory social security (15%), construction (14.8%), while 40.2% referred to all other sectors (Graph 2.8). Monetary developments Monetary Observed by purpose, the main share of bank- Graph 2.9 ing loans referred to cash loans (22.2%), liquidity (17.7%), housing loans (12.3%), loans for re- Structure of banks’ loans by purpose, % financing of obligations to other banks (6.2%), and loans for the purchase of fixed assets (5.6%). Banks’ funds were considerably less used through consumer loans, overdrafts, credit cards, loans for construction and remodelling of construction objects, loans for the preparation of tourist season, purchase of cars, purchase of securities and other purposes (Graph 2.9).

Although remaining high, non-performing loans of banks decreased during the reporting period, particularly during the H2 2017 after the enact- ment of amendments to the Law on Voluntary Financial Restructuring of Debts towards Fi- nancial Institutions, which aim is to improve the process of voluntary financial restructuring, and Graph 2.10 ultimately decrease non-performing loans. Non-performing loans and loan value adjustment, in million euros (left-hand side), share of non- Non-performing loans (NPLs) amounted to 197 performing loans in total loans, % (right-hand side) million euros at end-2017 and showed the annual decline of 51.6 million euros or 20.7%. At the end of the observed period, NPLs accounted for 7.3% of total banking loans, and their share in total loans declined by 3 percentage points compared to end-2016 (Graph 2.10).

Total value adjustments of banking loans amounted to 118.5 million euros. Total value adjustment of banking loans amounted to 118.5 million euros and it made up 60.2% of non-performing loans as at end- December 2017, being 57.1% higher compared to end-2016.

At the end of the reporting period, past due loans amounted to 188.41 million euros or 7% of total approved loans. Past due loans declined by 82.6 million euros or 30.5% in relation to end-2016.

51 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 2.11 New loans

New loans, maturity structure, in million euros In 2017, banks granted new loans to this sector in total amount of 1,094.7 million euros, which was 50 million euros or 4.4% less than in 2016. Dur- ing the reporting period, banks granted 852.6 million euros or 77.9% of new loans for a period over one year. The share of long-term loans in the structure of new loans increased relative to the same period of 2016 when it amounted to 72.6% (Graph 2.11).

The structure of new loans by sectors in 2017 shows that the main part of loans was granted to the nonfinancial sector and retail sector. During the reporting period, loans granted to the nonfinancial sector accounted for 47.7%, retail sector 43.5%, general government 8.4%, while the item “other” accounted for 0.4 of total new loans Graph 2.12 (Graph 2.12).

New loans, structure by sectors, in million euros Observed by purpose, the majority of new loans (373.6 million euros or 34.1%) were granted for liquidity (working capital), followed by cash loans (304.4 million euros or 27.8%), housing loans (63.9 million euros or 5.8%), loans for refinancing of obligations towards other banks accounted (58.1 million euros or 5.3%), and loans for other purpose (294.6 million euros or 27%).

2.1.4. Deposits

Deposits with banks amounted to 3,267.2 million euros at end-2017, i.e. 395.5 million euros or 13.8% more compared to the end-2016. During 2017, monthly growth of deposits in banks averaged 1.1%, which is higher than in 2016 when deposits in banks grew at the rate of 0.8%.

In reference to the structure of deposits of banks, the highest share referred to the retail and nonfinancial sector deposits with respective 52.2% and 40%. Deposits to the retail sector grew by 169.9 million euros or 11.1%, while deposits to nonfinancial sector grew 180.7 million euros or 16%. General Gov- ernment is the third most important depositor in Montenegro’s banking system accounting for 4.9% of total deposits in banks, recording thereby the annual increase of deposited funds of 27.6 million or 21% (Graph 2.13).

52 Graph 2.13 Graph 2.14

Deposits with banks per sector, in million euros Maturity structure of deposits, %33 Monetary developments Monetary

As at 2017 year-end, demand deposits accounted for the main share in total deposits (61.2%), time deposits made up 38%, while funds at escrow accounts32 made up the remaining 0.8% of total deposits. Demand deposits increased 402.9 million euros or 25.2% compared to December 2016, while time deposits decreased 16.3 million euros or 1.3%. As at 2017 year-end, demand deposits with maturity over one year accounted for the share of 17.1% in total deposits (annual decrease of 5.4 percentage points), while deposits with maturity up to one year made up 20.9% (y-o-y decrease of 0.4 percentage points), as indicated in Graph 2.14.33 Graph 2.15 The share of deposits and borrowings in loans by maturity indicates that 38.8% of loans were Share of deposits and borrowings in total loans granted for a period longer than one year and by maturity, 31 December 2017, in % they were covered by sources of financing (in the form of deposits and borrowings) with the same maturity. On the other hand, total demand deposits with banks were 6.7 times higher than total banks’ receivables arising from demand deposits placed with other banks, while banks’ short-term deposits and borrowings were 2.1 times higher than banking loans granted for a period up to one year (Graph 2.15).

32 Escrow account is an account at which the funds are kept until the moment of the completion of the respective agreement. 33 Funds at escrow account accounted for a minor share.

53 Central Bank of Montenegro CBCG Macroeconomic Report 2017

2.1.5. Retail and corporate sector

2.1.5.1. Retail sector

Households (retail sector) reported net savings34 of 580.9 million euros at end-2017, thus being the most important net depositors in the Montenegrin banking system. Net savings of this sector increased 64.8 million euros or 12.6% y-o-y (Graph 2.16). The loans to deposits ratio amounted to 0.66 at end-2017, remaining unchanged compared to end-2016.

Graph 2.16 Total loans to this sector amounted to 1,123.1 million euros, being 10.3% higher compared Loans, deposits and net household savings, to end-2016. They accounted for 41.6% of total in thousand euros granted bank loans.

Cash loans dominated in the structure of loans (51.8% of total loans granted to this sector). In addition to cash loans, earmarked loans recorded the significant share of 40.3%, whereby 71.5% of earmarked loans referred to housing loans, a minor portion to the renovation of housing or office space (7.7%), while the remaining 20.8% were loans for other purposes. Mortgage loans amounted to 6.2%, while household borrowings for credit cards amounted to 1.6% of total borrowings of this sector in banks. Lease operations accounted for an insignificant share of loans (0.1%).

Graph 2.17 At the end of 2017, past due loans to the household sector amounted to 68.9 million euros or New retail loans, maturity structure, 6.1% of total granted loans to this sector, i.e. in thousand euros 36.6% of past due loans of the entire banking system. Compared to end-2016, past due retail loans declined 21 million euros or 23.3%.

If we observe the amount of new loans, it can be concluded that banks’ lending activity to the household sector was intensive. To wit, some 476.5 million euros of new loans were granted to this sector in 2017, being 6.7 million euros or 1.4% higher than at end-2016. Loans with maturity over one year accounted for 460.2 million euros (96.6%), while the remaining amount referred to new loans with maturity up to one year (Graph 2.17).

34 The difference between total deposits and household loans

54 As for the purpose of new loans, households largely borrowed cash loans (63.7%), loans for housing and remodelling (13.4%), and loans for liquidity (4.9%), while the remaining 18% of new loans referred to all other purposes.

Debt per capita measured by the total loans granted to households to number of citizens ratio35 amounted to 1,805 euro as at end-2017 and it was 10.3% higher than at end-2016. developments Monetary

Growing trend in deposits to this sector continued in 2017, with recorded more intensive average monthly growth of 0.9% compared to 2016 (0.5%). At end-2017, total household deposits amounted to 1,704 million euros and they increased by 169.9 million euros or 11.1% y-o-y.

At end-2017, household demand deposits ac- Graph 2.18 counted for 54.3% of total deposits, short-term deposits accounted for 23.6% while long-term ac- Household deposits, maturity structure, % counted for 22.1% and are dominated by deposits with maturity from three months up to one year (Graph 2.18). The maturity structure of retail deposits shows the growing tendency in demand deposits, while short-term and long-term deposits decreased in total deposits (Graph 2.18).

Long-term deposits of this sector declined 50 million euros or 11.7% compared to end-2016, while at the same time short-term deposits grew 8.5 million euros or 2.2%. On the other hand, demand deposits recorded the year-on-year increase of 211.3 million euros or 29.6%.

2.1.5.2. Corporate sector

At end-2017, net savings of the corporate sector Graph 2.19 in banks amounted to 154.1 million euros, i.e. five times higher than at end-2016. Growth in Net corporate debt/saving, in million euros net savings of the corporate sector was a result of higher depositing of funds with banks in relation to lending to this sector (Graph 2.19).

Loans granted to the corporate sector amounted to 979.4 million euros at the end-2017, accounting for 36.3% of total loans granted by banks. They recorded an increase of 42.2 million euros or 4.5% y-o-y and grew at the average monthly rate of 0.4% (Graph 2.20).

A significant portion of corporate loans defaulted at the end of the observed period. Past due loans

35 Source: MONSTAT, population estimate amounted to 622.387 as at 1 January 2017.

55 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 2.20 of this sector amounted to 112.8 million euros and they made up 11.5% of total loans granted to Corporate loans, in million euros (left-hand this sector, or 59.9% of past due loans of the entire side), monthly change, in % (right-hand side) banking system. Compared to end-2016, past due retail loans declined 51.7 million euros or 31.4%.

Banks granted new loans to this sector in total amount of 510.3 million euros, which was 15.8 million euros or 3% more than in 2016. Maturity structure of new loans indicated that the corporate sector borrowed more for a period longer than one year (57.6%).

Deposits of this sector amounted to 1,133.4 million euros and they made up 34.7% of total deposits in banks at end-2017. Corporate deposits increased 165.7 million euros or 17.1% in relation to end-2016. Deposits of this sector recorded average monthly growth of 1.4%, at slightly slower pace compared to the previous year, when they grew by 1.8%.

The maturity structure of corporate sector deposits shows the dominant share of demand deposits (64.4%). Time deposits accounted for 33.4%, while 2.2% referred to funds at escrow accounts.

2.1.6. Banks’ foreign assets and liabilities

At end-December 2017, total foreign assets of banks amounted to 615.4 million euros, which is 88.2 million euros or 16.7% more in relation to end-2016.

The recorded increase in foreign assets mostly Graph 2.21 resulted from the increase in deposits of banks Structure of banks’ foreign assets, with non-resident banks by 89.5 million euros or in million euros 36.1%, and cash in the total amount of 28.5 million euros or 20%. At the same time, the structure of foreign assets showed a decrease in loans to non-residents (by 18.2 million euros or 20.8%), securities except shares declined by 11.2 million euros or 27.2%, while the position “other” declined by 364 thousand euros or 4.6% (Graph 2.21).

Bank’ deposits with foreign banks represent the most significant category in the structure of foreign assets. At end-December 2017, they amounted to 337.4 million euros, accounting for 54.8% of foreign assets. Demand deposits accounted for the main share of 87.4% in the maturity structure of these deposits. In addition to deposits, cash

56 and loans had significant shares with respective 27.8% and 11.2%, while other foreign assets items accounted for the remaining 6.2%.

At the end of 2017, foreign liabilities amounted to 861.3 million euros, increasing by 43.6 million euros or 5.3% in relation to end-2016. This growth was mainly due to the non-residents’ deposits increase in the amount of 71.9 million euros or 12.4%. The banks’ foreign liabilities structure shows the an- developments Monetary nual decline in borrowings to non-residents and in other liabilities with respective 27.2 million euros (11.7%) and 1 million euros (27.4%).

The foreign liabilities structure at end-2017 Graph 2.22 shows that non-residents’ deposits accounted for Structure of banks’ foreign liabilities, the main share of 75.8%, while 23.9% referred to in million euro banks’ borrowings, and mere 0.3% to other foreign liabilities items (Graph 2.22).

At end-2017, the most important foreign source of financing of banks were non-residents’ deposits, which were on an uptrend in the observed period, with certain fluctuations. Foreign deposits structure shows that the main share of 74.4% referred to private non-resident deposits, which increased by 11.5% y-o-y. Foreign companies (24.4%) were the second most important foreign depositor, recording an increase of 15.4%. Only 0.7% of foreign deposits referred to foreign financial institutions` deposits, while 0.5% referred to all other foreign sources (Graph 2.23).

Graph 2.23 Graph 2.24

Non-residents deposits by sectors, Banks’ net foreign assets, in million euros in million euro

57 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 2.25

Share of banks’ foreign assets, foreign liabilities Net foreign assets were negative at end-2017, and and net foreign assets in total assets and amounted to -245.9 million euros. The difference liabilities of banks, in % between foreign assets and liabilities decreased compared to end-2016 when it amounted to -290.4 million euros (Graph 2.24).

Foreign liabilities to total assets and liabilities of banks ratio shows that non-residents financed 20.6% of banks’ total assets, while 14.7% of banks` total assets and liabilities referred to banks` receivables from non-residents. The gap between foreign assets and foreign liabilities of banks amounted to -5.9% at end-2017, and it decreased compared to end-2016, when it amounted to -7.7% (Graph 2.25).

2.1.7. Banks’ capital

Total capital of banks amounted to 514.2 million euros at end-2017 or 28.5 million euros (5.9%) more than at the 2016 year-end (Graph 2.26). As regards the ownership structure of banks’ capital at end- 2017, the state accounted for a mere 2.3%, domestic private capital made up 18%, while foreign capital made up 79.7%.

The increase in capital in 2017 resulted from the recapitalisation of two banks in the total amount of 8.5 million euros (in August and December), the profit gained during the reporting period amounting

Graph 2.26 Graph 2.27

Recapitalisation of banks in million euros (left- Total capital of banks, in million euros hand side) and solvency ratio (right-hand side)

58 to 65.3 million euros. To cover loss from the previous period, two banks reduced the equity capital in 2017 in the amount of 52.6 million euros.

In 2017, the solvency ratio of the banking system was above the statutory minimum of 10% and it stood at 16.37% (Graph 2.27). Monetary developments Monetary

Countries in the region also recorded the solvency ratio above the prescribed minimums (Table 2.1).36

Table 2.1 37

Solvency ratio, end-2017

Country37 Prescribed solvency ratio Solvency ratio Montenegro 10% 16.37% Serbia 8% 22.5% Croatia 8% 22.63% Macedonia 8% 15.7%

In 2017, banks finished the year with a positive financial result in the total amount of 35.1 million euros (graph 2.28). Thereby, twelve banks ended the year with profit, and three recorded loss.

During 2017, the return on average equity of the banking system (ROE) was positive, and it stood at 6.98% at end of the year (Graph 2.29). Value of the ROE ratio improved in relation to 2016 when it was 1.21%. This indicator was positive in twelve and negative in three banks.

Graph 2.28 Graph 2.29

Aggregate financial result, in million euros Developments of aggregate ROE, %

36 Note that the methodologies for calculating the solvency ratio are not the same in all countries. 37 Data for Serbia and Croatia refer to Q3 2017.

59 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 2.30 2.1.8. Banks’ reserve requirements Reserve requirement (right-hand side) and total deposits (left-hand side), in million euros Reserve requirement amounted to 233.6 million euros at end-2017, which represents a decrease of 32.1 million euros or 12.1% in relation to end- 2016 (Graph 2.30). The reserve requirement decline was the result of decreased reserve requirement rate pursuant to the Decision38 of March 2017 aimed at freeing a portion of reserve requirement funds for crediting the economy.

The effective reserve requirement rate, measured as the allocated reserve requirement to total deposits ratio, amounted to 7.15% at end-2017, and it declined in relation to end-2016 (9.25%). At the same time, the reserve requirement to deposits plus borrowings ratio amounted to 6.59% and it declined in relation to 2016 when it amounted to 8.35% (Graph 2.31). Graph 2.31

Reserve requirements to total deposits and Of the total amount of the allocated reserve re- borrowings of banks ratio, in % quirement at end-2017, 51.5% was allocated to the CBCG account abroad, while 48.5% was allocated to the reserve requirement accounts in the country.

In 2017, none of the banks resorted to their reserve requirement for liquidity purposes, while all banks allocated the statutory amount of reserve requirement.

38 Decision Amending the Decision on Bank Reserve Requirement to Be Held with the Central Bank of Montenegro (OGM 15/17)

60 2.2. Banks’ interest rates

2.2.1. Lending interest rates

On total loans granted developments Monetary

The weighted average nominal and effective interest rates on total loans granted had a constant declining trend during 2017. At end-2017, both rates reached their nadirs.

The weighted average nominal interest rate Graph 2.32 (WANIR) on total banking loans amounted to 6.16% in December 2017 and recorded a decline Lending interest rates on total loans at the of 0.58 percentage points in relation to end- system level, annual level, % 2016. The weighted average effective interest rate (WAEIR) on total loans granted amounted to 6.81% and was 0.64 percentage points lower in relation to December 2016 (Graph 2.32).

In reference to maturity, the downward trend was also present in interest rates on short-term and long-term loans, with a more significant decline recorded in interest rates on long-term loans. In December 2017, the WAEIR on short- term loans reached 5.53% and it was 0.24 percentage points below the level at end-2016. In December 2017, the WAEIR on long-term loans amounted to 6.90%, which represents a decline of 0.72 percentage points compared to December 2016 (Graph 2.33).

Graph 2.34 Graph 2.33 The WAEIR on loans by sectors, annual level, % The WAEIR on loans by maturity, annual level, %

61 Central Bank of Montenegro CBCG Macroeconomic Report 2017

In 2017, the WAEIR was the lowest for loans to the General Government sector, while the highest rates referred to the retail sector. In addition, the WAEIR recorded a decline in all sectors. The highest annual decline of 1.10 percentage points was recorded in the WAEIR on loans to non-financial institutions (Graph 2.34).

On new loans

The weighted average nominal and effective interest rates on new loans recorded fluctuations during the reporting period, while both rates recorded their lows compared to end-2016.

The weighted average nominal interest rate Graph 2.35 (WANIR) on new banking loans amounted to Interest rates on new loans at system level, 5.27% in December 2017 and recorded a decrease annually, % of 0.29 percentage points in relation to end-2016. At the same time, the weighted average effective interest rate on new loans amounted to 6.23% and it recorded the annual decline of 0.04 percentage points (Graph 2.35).

Observed by maturity, significant oscillations were recorded by the WAEIR both on short- term and long-term loans. In December 2017, the WAEIR on short-term loans amounted to 7.41% and it recorded the annual growth of 1.70 percentage points compared to December 2016. At the same time, the interest rate on long-term loans amounted to 5.84%, recording a decline of 0.77 percentage points in relation to end-2016 (Graph 2.36).

Graph 2.36 Graph 2.37

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

62 In December 2017, the WAEIR on loans granted to natural persons amounted to 8.09%, increasing by 0.23 percentage points in relation to December 2016. At the same time, the WAEIR on loans to the corporate sector was lower than the bank’s rates on loans to natural persons. This rate amounted to 5.90%, and it declined by 0.31 percentage points compared to December 2016 (Graph 2.37).

In terms of purpose of granted loans during 2016, the highest WAEIR was recorded with loans granted developments Monetary for the purchase of vehicles (12.05% in January), followed by foreign payments (11.11% in November), the purchase of shares (10.09% in September), preparation of tourist season (10.00% in July), and cash loans (9.32% in May).

2.2.2. Deposit interest rates

High banks’ liquidity and the financing conditions at the international market resulted in decreasing of interest rates by banks, which recorded their historical nadir during the reporting period. The weighted average effective interest rate (WAEIR) on total deposits amounted to 0.69% in December 2017, and was 0.23 percentage points lower in relation to December 2016.

At end-2017, the WAEIR on demand deposits amounted to 0.03%, deposits with maturity up to three months 1.28%, deposits with maturity from three months up to one year 1.55%, deposits with maturity from one to three years 1.97%, deposits with maturity from three to five years 2.02%, and on deposits with maturity over five years 3.30%. In terms of maturity, compared to December 2016, increase was recorded only in the interest rate on deposits with maturity up to 3 months (of 0.28 percentage points). The highest decline of 1.22 percentage points was recorded by the interest rate on deposits with maturity from three to five years (Graph 2.38).

Graph 2.38 Graph 2.39

The WAEIR on deposits of natural persons and The WADEIR by maturity, annual level, % legal persons, %

63 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 2.40 In December 2017, the WADEIR on natural persons’ deposits amounted to 0.90%, recording a The WAEIR on loans and deposits, and interest spread, % decline of 0.34 percentage points in relation to the end of the previous year. The highest interest rates in 2017 were recorded on deposits of natural persons with maturity over five years. On the other hand, the WAEIR on deposits of legal persons amounted to 0.47% and it recorded a decline of 0.11 percentage points y-o-y. Observed by maturity, the highest interest rates were recorded on deposits of legal persons with maturity over five years (Graph 2.39).

The difference between lending and deposit -in terest rates (interest rate spread) showed a downward trend during 2017. At end-2017, the difference between lending and deposit interest rate on total loans and deposits of banks amounted to 6.12 percentage points and it recorded a decline in relation to end-2016 when it amounted to 6.52 percentage points (Graph 2.40).

Graph 2.41 2.3. Microcredit financial institutions MFIs’ loans by sectors, in thousand euros At end-2017, total assets and liabilities of microcredit financial institutions (MFIs) amounted to 61.1 million euros at end-2017, and it showed the year-on-year increase of 5.8 million euros or 10.6%.

At end-December 2017, total MFIs’ loans amounted to 60.1 million euros, which represents an increase of 6.1 million euros or 11.4% y-o-y. Alloca- tion per sector shows that the main share (95.8%) of MFIs’ loans referred to retail sector, and 2.7% referred to nonfinancial institutions, while the remaining 1.5% referred to financial institu- tions39 (Graph 2.41).

During 2017, MFIs approved a total of 53.9 million euros of new loans. Therefore, the lending activity of MFIs intensified during the observed period, recording the year-on-year increase of 5.4 million euros or 11% in new loans. The largest part of new placements of MFIs (97.6%) was granted to the retail sector.

39 MFIs' deposits in domestic banks

64 With regard to the structure of total liabilities of MFIs, borrowings accounted for the main share of 56.1%, while total capital accounted for 40%, and other liabilities made up 3.9% of total assets and liabilities. Total capital of MFIs amounted to 24.4 million euros as at end-2017, which is 2.9 million euros or 13.4% more than at the 2016 year-end. Capital from donations accounted for 63.2% of total capital, while retained earnings made up 21.8% and current year profit made up 15%. Monetary developments Monetary

At end-2017, MFI borrowings amounted to 34.2 million euros and they recorded the year-on-year increase of 3.2 million euros or 10.2%. The main share of MFIs borrowings (88.8%) was taken from foreign financial institutions, while 10.9% referred to borrowings taken from domestic banks, and the remaining 0.3% referred to other borrowings.

At the aggregate level, in 2017, MFIs reported a net profit of 3.7 million euros, which represents an increase of 33.3% y-o-y. In 2017, six MFIs recorded positive financial results, while one recorded a negative result.

2.3.1. MFIs’ interest rates

On total loans granted Graph 2.42 Although the interest rates on total MFIs’ loans The WANIR and the WAEIR on total MFIs loans, declined in the observed period, this decline was annual level, % not as prominent as that recorded in the interest rates of banks. In December 2017, the weighted average nominal interest rate (WANIR) on total loans granted amounted to 20.42% and it was 0.14 percentage points lower in relation to end-2016. On the other hand, the weighted average effective interest rate (WAEIR) amounted to 24.24% and it recorded the annual decline of 0.19 percentage points (Graph 2.42).

At end-2017, the WAEIR on total short-term loans was 25.71%, while on long-term loans it amounted to 24.30%, recording declines relative to De- cember 2016 of 0.45 and 0.15 percentage points, respectively.

The WANIR on MFI loans to the corporate sector amounted to 17.04%, while the WAEIR on these loans amounted to 20.90%, recording declines in relation to end-2016, by 1.22 and 1.57 percentage points, respectively.

The WANIR on loans to natural persons amounted to 20.51% and the WAEIR amounted to 24.34%, with the WANIR being 0.10 percentage points lower oat the annual level, while the WAEIR recorded a decline of 0.14 percentage points.

65 Central Bank of Montenegro CBCG Macroeconomic Report 2017

On new loans Graph 2.43 In 2017, the WANIR on new MFI loans record- Interest rates on new loans at system level, ed oscillations, with a downward trend (Graph annually, % 2.43). In December 2017, the WANIR on new MFI loans amounted to 20.18%, recording a decrease of 0.58 percentage points y-o-y. At the same time, the WAEIR amounted to 24.35%, recording a decrease of 0.44 percentage points in relation to De- cember 2016.

Observed by maturity, the WAEIR on new short- term loans amounted to 24.64% and in relation to December 2016 it decreased by 1.33 percentage points. On the other hand, the WAEIR on loans with maturity over one year amounted to 24.31%, recording the annual decrease of 0.29 percentage points.

In regards of the purpose for which the loans were granted in 2017, the highest WAEIR was on loans for land purchase (31.49% in September) and the housing purchase and renovation loans (31.34% in December).

Box 2.1 – Comparison of banks’ and MFIs lending interest rates

Interest rates at which the banks and MFIs granted loans differed significantly. Specifically, banks’ WANIR on total loans amounted to 6.16%; the WAEIR amounted to 6.81%, while the same rates with MFIs amounted to 20.42% and 24.24%, respectively.

Banks granted short-term loans at the WAEIR of 5.53%, while MFIs WAEIR was 25.71%; as regards long- term loans, banks’ WAEIR was 6.90%, and the same rate of MFIs was 24.15% (Table 1, Graph 1).

Table 1

Banks and MFIs interest rates on total loans, December 2017, %

Short-term Long-term Total Banks MFIs Banks MFIs Banks MFIs Natural WANIR 6.65 20.69 7.31 20.50 7.31 20.51 persons WAEIR 8.99 25.79 8.19 24.24 8.19 24.34 WANIR 4.69 16.44 5.31 17.08 5.22 17.04 Corporate WAEIR 5.36 22.89 5.76 20.77 5.70 20.90 WANIR 4.79 20.57 6.25 20.41 6.16 20.42 Total loans WAEIR 5.53 25.71 6.90 24.15 6.81 24.24

66 Graph 1 Banks’ and MFIs interest rates on total loans, % Monetary developments Monetary

There are large discrepancies with regard to interest rates on new loans granted by banks and those granted by MFIs. Namely, the WANIR on banks’ new loans amounted to 5.27% and the WAEIR amounted to 6.23%, while the same rates with MFIs amounted to 20.18% and 24.35%, respectively.

Banks granted short-term loans at the WAEIR of 7.41%, while the same rate of MFIs amounted to 24.64%. The WAEIR on long-term loans with banks amounted to 5.84%, while with MFIs this rate was 24.31% (Table 2 and Graph 2).

Table 2

Banks and MFIs interest rates on new loans, December 2017, %

Short-term Long-term Total

Banks MFIs Banks MFIs Banks MFIs

Natural WANIR 6.90 19.78 7.25 20.32 7.24 20.25 persons WAEIR 9.63 24.65 8.05 24.37 8.09 24.41 WANIR 5.00 16.40 4.53 16.87 4.73 16.79 Corporate WAEIR 7.33 24.03 4.87 21.07 5.90 21.58 WANIR 5.06 19.70 5.33 20.25 5.27 20.18 Total loans WAEIR 7.41 24.64 5.84 24.31 6.23 24.35

67 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 2

Banks’ and MFIs interest rates on new loans, %

68 MONEY MARKET 03

Eight 182-day T-Bills auctions and one 91-day T-Bills auction were held in 2017. Money market

During the reporting year, there was a lower need of the Ministry of Finance for short-term financing from the domestic market compared to 2016. Thus, in 2017, the total value of issued T-bills amounted to 170.8 million euros, which represents a decline of 5.2 million euros or 3% y-o-y.

At the same time, the demand for T-bills amount- Graph 3.1 ed to 139.1 million euros and it grew by 64.9% in relation to 2016. The total demand amounted T-bills sold and corresponding interest rate, to 353.2 million euros and it was 106.8% higher 2017 than the announced issuing.

T-bills were sold in the total amount of 195.1 million euros40, which is 24.3 million euros or 14.2% more than issued T-bills. Buyers at all T-Bills auctions were Montenegrin banks (84.5%), while the Deposit Protection Fund was a buyer at six auctions (15.5%).

The weighted average interest rate on total T-bills sold amounted to 2.06%, and it increased 0.45 percentage points in relation to 2016. This indicates that the financing conditions of the Minis- try of Finance through T-bills deteriorated during the reporting period (Graph 3.1). However, the weighted average interest rate was on a decline since February 2017.

Total government debt based on T-bills sold amounted to 77.5 million euros as at 31 Decem- ber 2017, and it declined 0.2 million or 0.2%. Source: CBCG Some 80.2 million euros (80.2%) of total government debt based on T-bills sold referred to debt to banks.

40 At auctions held in 2017, the Ministry of Finance issued 91-day and 182-day T-Bills, with the possibility of selling a larger number than initially issued.

CAPITAL MARKET 04

In 2017, total turnover at the Montenegro Stock Exchange (Montenegro SE) amounted to 47.6 million euros, which represents a decrease of 67.7 million euros or 58.8% compared to 2016. The average monthly turnover amounted to 4 million euros, and it was lower compared to the average monthly average in 2016 (9.6 million euros).

When comparing the turnover, it should be taken Graph 4.1 into account that the turnover in 2016 was sig- Total turnover in 000 euros (left-hand scale) nificantly higher due to the sale of government and number of transactions (right-hand scale) bonds in November 2016 in the amount of 80.4 at Montenegro SE million euros, which accounted for 69.8% of total market Capital turnover in 2016. If this sale were excluded, the turnover in 2017 would be 36.7% higher than in 2016.

In 2017, total turnover was performed through 5,706 transactions, which represents a growth of 27.9% y-o-y. Average monthly number of transactions amounted to 476 (Graph 4.1).

In 2017, the Montenegro SE recorded a total of 8 block trades valued of 2.3 million euros, which made up 4.9% of total turnover. There was also an auction for block of shares which value amounted to 5.8 million euros and represented 12.2% of total turnover. Source: Montenegro SE

Total turnover was performed through second- Graph 4.2 ary trade. Structure of turnover at the Montenegro Stock Exchange (in 000 euros), 2015, 2016 and 2017 Turnover structure

The structure of turnover recorded in 2017 significantly changed compared year-on-year. Thus, in the turnover structure in 2017, the largest share was recorded by transactions in company shares with 50.1% (27.4 percentage points more than in 2016), while the share of various types of bonds was 24.1% (y-o-y decrease of 48.6 percentage points. The remaining 25.8% of turnover referred to shares of joint investment funds, which share increased by 21.2 percentage points (Graph 4.2).

Source: Montenegro SE

75 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 4.3 Graph 4.4

Turnover in 000 euros (left-hand side) and the Turnover in 000 euros (left) and the number of number of transactions (right-hand side) of bonds transactions (right), 2015, 2016 and 2017 companies’ shares, in 2015, 2016, and 2017

Source: Montenegro SE Source: Montenegro SE

Graph 4.5 The total turnover of shares of companies in the amount of 23.8 million euros was realized Turnover in 000 euros and number of transactions of joint investment funds, 2015, through 3,703 transactions representing 64.9% 2016 and 2017 of total transactions in the reporting period. The turnover recorded the year-on-year decline of 2.3 million euros or 9%, while the number of performed transactions increased 6.5% (Graph 4.3).41

Bonds’ turnover in 2017 totalled at 11.5 million euros, which is 72.3 million euros or 86.3% less in relation to the previous year. Total bonds turnover was executed through 41 transactions (Graph 4.4).

The main share of bonds turnover referred to government bonds (81.1%), followed by corporate bonds and bonds of the Compensation Fund with respective 18.4% and 0.5%, while an insignificant share related to frozen foreign currency deposits bonds. During the reporting period, the turnover of issued corporate bonds totalled to 1.7 million euros, i.e. 96% more compared y-o-y. Source: Montenegro SE

41 Including block transactions and auctions for blocks of shares.

76 Turnover in joint investment funds’ (JIF) shares in 2017 amounted to 12.2 million euros and it was realized through 1,962 transactions. It increased by 7 million euros or 132.8% compared to 2016 (Graph 4.5). The highest share in the turnover of 11.5 million euros was recorded by shares of the JIF Trend AD, accounting for 93.7% of total turnover in JIF shares in 2017.

Stock exchange indices

For monitoring prices in company shares, the Graph 4.6 Montenegrin capital market uses two indices42 - MONEX and MNSE10. The MONEX represents Montenegro Stock Exchange indices a benchmark index of the Montenegro SE, while the MNSE10 represents a blue-chip index including the ten “best” companies on the Montenegrin

market. market Capital

In 2017, both indices declined in relation to the end of 2016 (Graph 4.6).

The MONEX index value amounted to 10,175.43 at end-2017and it was 1,335.16 index points or 11.6% lower than the value achieved at the end 2016.

The value of the index of the most representative shares of Montenegro SE - MNSE10 at the end- Source: Montenegro SE 2017 amounted to 776.69 and was 151.58 index points or 16.3% lower than the value achieved at the end of 2016. Graph 4.7

Capitalisation Capitalisation, in million euros

Market capitalisation at the Montenegro SE amounted to 2,854.9 million euros at end-De- cember 2017. In relation to the end of the previous year, market capitalisation decreased 22.9 million euros or 0.8% (Graph 4.7).

Liquidity measured by the turnover ratio of funds at Montenegro SE improved during the reporting period. In December 2017, it amounted to 0.00172 and it grew in relation to December 2016, when it amounted to 0.000638.

Source: Montenegro SE

42 Since April 2017, the MONEX PIF index, which followed the development of prices of shares of six privatisation funds, is no longer in use, since the process of transformation of funds has been completed, thus ending the need for its calculation.

77 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 4.8

Turnover ratio

Source: Montenegro SE

Box 4.1 - Regional SEs, selected operating indicators

During 2017, compared to the previous year, three SEs in the region recorded growth, while the remaining three recorded lower turnover. Compared to the previous year, the biggest increase in the total turnover was recorded by the Macedonian Stock Exchange (56.7%), followed by Belgrade Stock Exchange and Ljubljana Stock Exchange with respective turnover of 50.1% and 4.1%. The decline in turnover was recorded at the Montenegro SE (-58.8%), followed by the Sarajevo Stock Exchange and the Zagreb Stock Exchange with respective -29.5% and -6.2%. During the reporting period, the number of transactions in three regional stock exchanges grew, while it declined in other stock exchanges (Table 1).

Table 1

Changes in turnover and transactions at regional stock exchanges

Relative turnover ratio Relative ratio of the number of transactions Stock exchange January-December 2017 January-December 2017 January-December 2016 January-December 2016 Belgrade Stock Exchange 50.1 -23.8 Zagreb Stock Exchange -6.2 31.4 Sarajevo Stock Exchange -29.5 -26.1 Macedonian Stock Exchange 56.7 25.5 Ljubljana Stock Exchange 4.1 -40.8 Montenegro Stock Exchange -58.8 27.9

Reports of regional stock exchanges

Compared to end-2016, three SEs in the region recorded decline in SE indices, while three SEs recorded growth. The most significant decline was recorded by the Sarajevo SE index (-18.5%), while the largest growth was recorded by the Macedonian SE index (18.9%) (Table 2).

78 Table 2

Changes in selected regional stock exchange indices

Index value % of change Stock exchange Index 31 XII 2017 31 XII 2016 XII2017/XII2016 Belgrade Stock Exchange BELEX15 759.8 717.37 5.9 Zagreb Stock Exchange CROBEX 1,842.87 1,994.84 -7.6 Sarajevo Stock Exchange SASX-10 562.49 690.48 -18.5 Macedonian Stock Exchange MBI10 2,538.86 2,134.91 18.9 Ljubljana Stock Exchange SBItop 806.52 717.59 12.4 Montenegro Stock Exchange MONEX 10,175.43 11,510.59 -11.6 Capital market Capital Compared to end-2016, increase of stock exchange capitalisation was recorded by three stock exchanges, while the remaining three recorded a decline, with the the most significant decline being recorded on the Belgrade Stock Exchange (-7.4%), while the highest growth was recorded on the Mac- edonian Stock Exchange (17.8%).

Table 3

Comparison of market capitalization of regional stock exchanges

Market capitalisation (change in %) Stock exchange 31.12.2017/31.12.2016 Belgrade Stock Exchange -7.4 Zagreb Stock Exchange 1.6 Sarajevo Stock Exchange -7.0 Macedonian Stock Exchange 17.8 Ljubljana Stock Exchange 13.6 Montenegro Stock Exchange -0.8

Reports of regional stock exchanges

FISCAL DEVELOPMENTS 05

Maintaining fiscal stability as the main factor in overall macroeconomic stability was the main goal of the fiscal policy in 2017. Public finances were marked by a successful implementation of fiscal adjustment measures established by the Budget Deficit and Public Debt Recovery Plan for the period 2017- 2021 and the Fiscal Strategy for the period 2017-2020.

On the revenue side, the effect of consolidation was most noticeable when charging excise duties, where the largest collection was generated from excise duties on cigarettes and diesel fuel, as a result of the implementation of a new „excise duties calendar“, which stipulates a gradual increase of excise duties on these products. Fiscal developments Positive results were also evident in the better collection of value added tax on imports as well as contributions due to the reprogramming of tax debt, from which more than 20 million euros were received, while the adjustment on the expenditure side was aimed at reducing public sector wages and compensation to mothers with three and more children.

The aforementioned measures are expected to significantly reduce the pressure on public finances and to lead to current budget spending balance, i.e. financing of current expenditure from source revenues, whereas borrowing will only be used for capital budget financing.

On the other hand, due to increased expenditure of the capital budget, the growth of consolidated expenditure, and therefore the budget deficit, was evident. The higher budget deficit, together with the necessity of technical harmonization with the new organization and the mode of work of the state administration, conditioned the adoption of the budget revision for 2017, with taxes increasing by around 8 million euros, and current expenditure reduced by 40 million euros.

Table 5.1

Development of the public sector and budget surplus/deficit

Description/ Period 2013 2014 2015 2016 2017 Public sector deficit/surplus -176,3 -104,7 -265,1 -112,1 -227,8 (million euros) % share in GDP -5,2 -3,0 -7,3 -2,8 -5,4 Deficit/surplus of the Budget of Montenegro with State funds -215,8 -107,1 -276,2 -122,3 -237,6 (million euros) % share in GDP -6,4 -3,1 -7,6 -3,1 -5,6

Source: Ministry of Finance (data for 2017 are preliminary)

83 Central Bank of Montenegro CBCG Macroeconomic Report 2017

5.1. Montenegro’s public finances43

According to preliminary data of the Ministry of Finance44, public revenues amounted to 1.79 billion euros in 2017, which represents 42.1% of estimated GDP45 which is in line with the plan, while they increased by 6% compared to 2016. This increase mostly came as a result of increased VAT revenues by 48 million euros (9.6%), excise duties by 42.4 million euros (23.2%), and contributions by 32.1 million euros (6.9%).

As for the structure of public revenues, taxes accounted for the main share (61.9%) and followed by contributions (27.7%), whereas all other revenues amounted to 10.4% of total revenues.

Consolidated public spending, according to preliminary data, in 2017 amounted to 2.01 billion euros, i.e. 47.5% of GDP. Compared to the previous year, public spending increased by 10.2%, while it increased by 50 million euros or 2.5% compared to the plan.

Current public spending46amounted to 1.71 billion euros or 40.4% of GDP, and was lower in comparison with 2016 for only 0.5%, while the capital budget amounted to 301.6 million euros or 7.1% of GDP.

The highest increase in expenditures compared to the previous year was recorded with the capital budget - 195.8 million euros, as a result of the increased dynamics of works on the Bar-Boljare highway.

Also, compared to the previous year, significant growth was recorded in gross earnings and contributions at the expense of the employer of 24.5 million euros, interests of 16.8 million euros, and pensions of 10.5 million euros.

Economic classification reveals that the main expenditure items were gross wages and salaries and contributions paid by employer (492.1 million euros) and expenditure for pensions (401.3 million euros).

The most significant decrease in expenditures, compared to the previous year, was recorded in transfers for social protection (17.2 million euros or 3.1%) as a result of the decrease in social spending in the area of social protection.

Also, compared to the plan for 2017, social protection transfers have been reduced by 26.8 million euros or 4.7%, within which the expenditure for social protection rights decreased by 16.2 million euros or 14%.

In 2017, a lower level of public revenues from consolidated public spending was realized, so that the public sector deficit amounted to 227.8 million euros or 5.4% of GDP, and it was 85.6 million euros higher than the cash deficit (142.2 million euros), and 115.7 million euros from the corrected deficit recorded in 2016.47

During 2017, debt repayment amounted to 371.8 million euros or 8.8% of GDP which, adding the estimated deficit, indicated a need for borrowing in the amount of 599.6 million euros or 14.2% of GDP. Of

43 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, and Labour Fund) and local government budgets (Old Royal Capital Cetinje, Capital Podgorica and 21 municipalities). 44 The data are preliminary, while the final data will be integral part of the Law on Budget Execution for 2017. 45 Source: Monstat; estimated GDP for 2017 amounts to 4.24 billion euros. 46 Public spending minus total capital expenditure 47 The adjusted deficit for 2017 will be published once the Law on Budget Execution for 2017 is adopted.

84 this number, 264.4 million euros relates to domestic borrowing, while 353.3 million euros is foreign borrowing. The remaining amount represents privatization revenues - 9.3 million euros and transfers - 3.6 million euros. As a consequence of these transactions, deposits were reduced by 23.7 million euros in 2017 (Annex D, Table 12).

Table 5.2

Consolidated public spending

2013 GDP 2014 GDP 2015 GDP 2016 GDP 2017 GDP DESCRIPTION million million million million million % % % % % euros euros euros euros euros Public revenues 1.432,1 42.6 1.549,8 44.8 1.525,8 42.1 1.684,3 42.6 1.785,0 42.1 Consolidated expenditures 1.586,5 47.2 1.648,0 47.7 1.828,5 50.4 1.826,5 46.2 2.012,9 47.5 Capital expenditures 124,4 3.7 124,5 3.6 268,1 7.4 105,9 2.7 301,6 7.1 Current public consumption 1.462,1 43.5 1.523,5 44.1 1.560,4 43.0 1.720,6 43.5 1.711,3 40.4 Surplus/Deficit -176,3 -5.2 -104,7 -3.0 -265,1 -7.3 -112,1 -2.8 -227,8 -5.4

Source: Ministry of Finance (data for 2017 are preliminary) Fiscal developments Box 5.1 - Fiscal policy measures implemented in 201748

Fiscal adjustment measures implemented in 2017, in accordance with the Budget Deficit and Public Debt Recovery Plan, as well as additional measures contained in the Fiscal strategy, related to the following: • Implementation of the Law on tax debt reprogramming, allowing taxpayers to pay tax debt in 60 equal monthly instalments with write-off of interest and expenses related to the receivables, with a one-time payment of 10% of the total amount of tax receivables; • Increase of excise duties on mineral oils to 0.09 euro/l, on cigarettes and fine-cut tobacco, where the specific excise duty is 30 euros and the proportional rate is 32%, and excise duties on ethyl alcohol to 850 euros/hl of pure alcohol; • Strengthening the fiscal discipline of taxpayers through the reduction of shadow economy and more regular collection of tax receivables; • Continuation of implementation of a higher rate of personal income tax of 11% to the amount of income above the average salary; • Applying a standard VAT rate of 19% to computer equipment, as opposed to a lower rate of 7% that was previously applied; • Reduction of wages and salaries of public officials by 8% from 01 January 2017, and from July by an additional 6%, while wages and salaries of all employees in the public sector, other than employees with the lowest incomes, decreased by 1% from March 2017; • Initial reduction of allowances for mothers with three or more children from 336 euros to 264 euros and from 192 euros to 144 euros, and then a decision to return to the state before receiv- ing allowances for beneficiaries who previously exercised the right to retirement and were in the register of unemployed persons, while the beneficiaries who have terminated their employment for the purpose of exercising this right will continue to receive temporary allowance for a period not longer than five years from the entry into force of the Law on Enforcement of the Constitu- tional Court’s decision (30 June 2017); • Increase of child allowance by 20%, as well as the allowance for a newborn until the first year of the child’s life, allowance for unemployed persons in the register of the unemployed persons or students, and the like.

48 Source: „Economic Reform Programme for Montenegro 2018−2020“.

85 Central Bank of Montenegro CBCG Macroeconomic Report 2017

5.2. Budget of Montenegro

In 2017, total revenues of the Budget and State Funds, as per preliminary data of the Ministry of Finance,49 amounted to 2.19 billion euros or 51.6% of the estimated GDP.

Source revenues amounted to 1.57 billion euros or 37% of GDP. Compared to the plan50, they were 0.9% lower while compared to 2016, source revenues were 5.3% higher.

In the structure of source revenues, tax revenues accounted for the main share of 62%, followed by contributions with 31.6%, other revenues with 2.3%, donations with 1.6%, fees 1.2%, duties with 0.9%, and receipts from loan repayment and funds transferred from the previous year with 0.4%.

Table 5.3

Revenues of the Budget of Montenegro and state funds in 2017

Recorded Recorded Share Plan for Recorded Share in in relation Recorded in in 2017 in 2017 revenues to the in 2016 relation GDP Type of revenue Plan to 2016 In million In million In million % % Index Index euros euros euros Taxes 979.1 971.1 44.4 22.9 99.2 886.5 109.5 Personal income tax 117.7 112.0 5.1 2.6 95.1 123.1 90.9 Corporate profit tax 48.8 49.2 2.3 1.2 101.0 45.2 108.8 Property turnover tax 1.5 1.5 0.1 0.0 99.3 1.3 114.3 Value added tax 550.5 548.7 25.1 13.0 99.7 500.7 109.6 Excise Duties 225.6 225.1 10.3 5.3 99.8 182.7 123.2 Tax on international trade and transactions 25.8 25.4 1.2 0.6 98.6 24.3 104.7 Other republic taxes 9.2 9.2 0.4 0.2 99.9 9.2 100.0 Contributions 500.5 494.9 22.7 11.7 98.9 462.9 106.9 Contributions for pension and disability insurance 304.7 303.0 13.9 7.2 99.4 273.6 110.8 Contributions for health insurance 171.3 167.4 7.7 4.0 97.7 164.4 101.8 Contributions for unemployment insurance 12.8 12.6 0.6 0.3 98.4 13.0 97.0 Other contributions 11.7 11.9 0.5 0.3 102.2 12.0 99.6 Duties 13.4 13.6 0.6 0.3 101.2 13.0 104.6 Fees 18.1 19.0 0.9 0.4 105.0 73.9 25.7 Other revenues 35.6 35.7 1.6 0.8 100.3 34.5 103.6 Receipts from loan repayment and funds 6.7 6.3 0.3 0.1 93.2 4.7 134.5 transferred from the previous year Grants and transfers 26.6 25.3 1.2 0.6 94.9 11.6 218.1 SOURCE REVENUES 1,580.0 1,565.9 71.7 37.0 99.1 1,487.0 105.3 Revenues from sale of property 0.0 6.2 0.3 0.1 4.2 146.7 Borrowings and loans from foreign sources 292.4 352.8 16.1 8.3 120.6 331.8 106.3 Borrowings and loans from domestic sources 100.0 260.1 11.9 6.1 260.1 317.8 81.8 TOTAL REVENUES OF THE BUDGET OF 1,972.4 2,185.0 100.0 51.6 110.8 2,140.8 102.1 MONTENEGRO AND STATE FUNDS

Source: Ministry of Finance

49 Budget revenues include source revenues (direct and indirect taxes and non-tax revenues), borrowings and loans from domestic and foreign sources, and revenues from the sale of assets. 50 Budget implementation plans according to budget revision, in line with the Law Amending the Budget Law for 2017.

86 Tax revenues amounted to 971.2 million euros, which is 0.8% lower in relation to the plan and 9.5% higher than in 2016. Observed individually, personal income tax of natural persons recorded the largest decrease in relation to the plan, partly due to the decrease in salaries of public officials and public sector employees.

Compared to the previous year, there are positive deviations in the collection of VAT, excise duties and contributions, which is explained by the increased collection of import VAT, the increase in excise taxes on cigarettes and ethyl alcohol, and tax debt rescheduling.

Revenues arising from contributions amounted to 494.9 million euros, being 1.1% lower in relation to the plan for 2017, recording a 6.9% y-o-y increase.

Total budget expenditure51 amounted to 2.16 billion euros or 51% of GDP, recording a minor y-o-y increase of 5.8% and a 9.6% increase in relation to the plan.

Consolidated budget expenditure amounted to 1.80 billion euros and made up 42.6% of the estimated GDP. Expenditure was higher in comparison with the previous year by 11.2% and in relation to the plan by 2.9%. Fiscal developments Current expenditures accounted for 1.55 billion euros or 36.5% of GDP. The biggest deviation from the plan, due to growth, was recorded in the expenditures for services and capital expenditures in the current budget. Decrease was recorded in current maintenance expenditures, transfers for social protection and transfers to institutions, individuals, NGOs, and the public sector.

The capital budget of Montenegro amounted to 255.5 million euros or 6% of GDP, which is 294.2% more than in the previous year.

The repayment of government debt amounted to 358.6 million euros52 and it was reduced by 174.5 million euros in relation to the previous year due to lower repayment of securities and loans to non-residents.

The structure of budget expenditures in 2017 Graph 5.1 remains unfavourable, as shown in Graph 5.1. About 24.7% of the budget expenditure refers to Budget expenditure in 2017, % share gross wages and salaries, 29.8% to social protection transfers, while the repayment of liabilities from previous years accounted for 2.2% of budget spending. Development part of the budget, i.e. capital budget accounted for 14.2% of budget spending.

Montenegro’s deficit53 for 2017 was estimated at 237.6 million euros or 5.6% of GDP, recording an increase of 102.6 million euros in relation to deficit from 2016, and an increase of 115.4 million Source: Ministry of Finance

51 Total budget expenditures comprise consolidated expenditures and the repayment of securities and loans to residents and non-residents. 52 Debt principal to residents and non-residents, without debt repayment from the previous period. 53 Methodology for surplus/deficit calculation, OGM 53/09; Deficit represents the difference between source revenues and consolidated expenditure.

87 Central Bank of Montenegro CBCG Macroeconomic Report 2017

euros in relation to the adjusted 2016 deficit. Primary budget deficit54 in 2017 amounted to 138.9 million euros or 3.3% of GDP.

Table 5.4

Expenditure of the Budget of Montenegro and State funds in 2017

Recorded Recorded Plan for Recorded Share in Share in relation Recorded in relation 2017 in 2017 expenditures in GDP to the in 2016 to 2016 DESCRIPTION Plan In million In million In million % % Index Index euros euros euros Current budget expenditures 738.0 778.6 36.0 18.4 105.5 739.4 105.3 Gross salaries and contributions paid by the 439.1 445.4 20.6 10.5 101.4 422.5 105.4 employer Other personal income 10.1 10.7 0.5 0.3 105.7 10.9 97.6 Expenditures for material 29.2 29.3 1.4 0.7 100.1 31.3 93.5 Expenditures for services 49.9 66.7 3.1 1.6 133.7 59.8 111.5 Expenditures for current maintenance 20.6 20.2 0.9 0.5 98.0 20.5 98.9 Interests 95.4 98.7 4.6 2.3 103.5 81.6 121.0 Rent 9.1 9.1 0.4 0.2 100.2 9.2 98.9 Subsidies 27.3 27.8 1.3 0.7 101.7 27.1 102.5 Other expenditures 32.9 38.3 1.8 0.9 116.6 34.4 111.5 Capital expenditures in current budget 24.4 32.4 1.5 0.8 132.8 42.1 77.0 Transfers for social welfare 562.4 538.1 24.9 12.7 95.7 555.0 96.9 Transfers to individuals. NGOs and public 167.8 166.9 7.7 3.9 99.5 171.8 97.1 sector Capital budget of Montenegro 258.6 255.5 11.8 6.0 98.8 64.8 394.2 Borrowings and loans 2.4 4.9 0.2 0.1 200.0 2.9 169.3 Reserves 22.8 19.7 0.9 0.5 86.4 18.9 104.1 Repayment of guarantees 0.0 0.0 0.0 0.0 0.0 Repayment of obligations from earlier years 0.0 40.0 1.8 0.9 69.3 57.7 Net increase in obligations 0.0 0.0 0.0 0.0 BUDGET EXPENDITURES 1.752.0 1.803.5 83.4 42.6 102.9 1.622.0 111.2 Repayment of securities and loans to 51.9 226.0 10.5 5.3 435.4 225.4 100.2 residents Repayment of securities and loans to 134.8 132.6 6.1 3.1 98.4 307.7 43.1 residents Repayment of obligations from earlier years 33.7 0.0 0.0 0.0 0.0 0.0 TOTAL EXPENDITURES 1.972.4 2.162.1 100.0 51.0 109.6 2.155.1 100.3

Source: Ministry of Finance

Lacking funds in the budget amounted to 596.2 million euros or 14.1% of GDP. The shortfall was provided through borrowings and loans from foreign sources in the amount of 325.8 million euros, borrowings and loans from domestic sources in the amount of 260.1 million euros, and to a lesser extent through revenues from the sale of property and use of deposits.

54 Deficit less the amount of paid interests.

88 Box 5.3 - Overview of medium-term fiscal risks

The main risks in the implementation of fiscal projections, whether political or economic, can reflect positively and negatively on public finances.

Positive political risks:

• Montenegro’s NATO membership will increase the confidence of investors and tourists, which will have a positive impact on all economic parameters of the domestic economy and will lead to better access to financing sources; • Progress to the EU accession will increase investors’ confidence, a more stable business environment and access to the EU funds.

Negative political risks:

• Political instability in South-East Europe may have negative effects on Montenegro’s economy, especially in the tourism sector.

Positive political risks: Fiscal developments

• The intensification of activities to reduce shadow economy and the achievement of results in this field will increase the tax base, thereby enabling the increase of budget revenues. • Higher multiplication effects of highway construction and the realisation of announced investments will affect revenues projections; • Reprogram of tax debt of municipalities and the obligation to pay wages and salaries in gross amount will have a positive effect on budget revenues.

Negative political risks:

• The size of the public debt represents a negative economic pressure on the realization of projections, and the increase of the public debt negatively affects the conditions of borrowing on the international market; • Increase in the cost of the highway construction, potentially up to 10%; • The implementation of ESA 2010 methodology will widen the current institutional scope of fiscal accounting by including the public companies which should be reported in the General Gov- ernment sector in accordance with ESA 2010 qualitative and quantitative criteria.

5.3. Local Self-Government

Preliminary Ministry of Finance data reveal that the local self-government source revenues amounted to 219.1 million euros or 5.2% of GDP, being higher than planned by 11.2%.

The structure of recorded revenues shows the main share of revenues from taxes (60.8%) and fees (27.7%), whereas other revenues accounted for 11.5%. The most significant increase in revenues compared to 2016 was recorded with fees (14.5 million euros), due to the collection of a new fee for utility equipment of construction land for informal facilities in accordance with the Law on Spatial Develop- ment and Construction of Structures.

89 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Preliminary local self-government expenditures amounted to 209.3 million euros or 4.9% of GDP. Compared to 2016, they recorded a growth of 2.4% or 4.9 million euros, but they were 0.7% or 1.5 million euros lower than planned.

With the share of 38.3%, the current expenditure made up the most significant expenditure item in the local self-government spending. They were followed by transfers with the share of 22.3% and capital expenditures with 22%. Repayment of obligations from the previous period accounted for 6.3%, while the remaining 11.1% referred to other local level expenditures.

Table 5.5

Preliminary source revenues and consolidated expenditure of local self-government in 2017

Recorded Plan for Recorded Recorded in 2017 in relation 2017 in 2016 Type of revenue to 2016 million million million % of GDP Index euros euros euros SOURCE REVENUES 219.1 5.2 206.4 197.1 111.2 Taxes 133.2 3.1 125.5 126.2 105.5 Duties 6.5 0.2 6.0 5.9 110.2 Fees 60.8 1.4 55.0 46.3 131.3 Other revenues 13.4 0.3 12.8 13.0 103.1 Receipts from loan repayment and funds transferred from the 0.0 0.0 0.2 0.0 previous year Donations 5.2 0.1 6.9 5.7 91.2 EXPENDITURES 209.3 4.9 210.8 204.4 102.4 CURRENT SPENDING 163.2 3.9 175.8 163.4 99.9 Current expenditures 80.2 1.9 88.5 78.9 101.6 Gross salaries and contributions paid by the employer 46.7 1.1 48.5 45.1 103.5 Other personal income 3.2 0.1 7.4 4.4 72.7 Expenditures for material and services 14.8 0.3 16.9 15.3 96.7 Current maintenance 6.2 0.1 5.1 5.7 108.8 Interests 3.8 0.1 6.0 4.1 92.7 Rent 0.6 0.0 0.6 0.5 120.0 Subsidies 1.2 0.0 1.0 0.7 171.4 Other expenditures 3.7 0.1 3.0 3.1 119.4 Transfers for social welfare 0.8 0.0 3.3 1.1 72.7 Transfers to institutions. individuals. NGO and public sector 45.9 1.1 41.5 41.4 110.9 Capital expenditures 46.1 1.1 35.0 41.0 112.4 Borrowings and loans 2.3 0.1 0.6 0.7 328.6 Reserves 2.0 0.0 1.9 1.9 105.3 Repayment of guarantees 0.0 0.0 40.0 0.0 Repayment of liabilities from the previous years 31.9 0.8 0.0 39.4 81.0 Net increase in obligations 0.0 0.0 0.0 -17.4 Surplus/Deficit 9.8 0.2 -4.4 -7.3 -134.2 Adjusted surplus/deficit 10.1 Primary deficit 13.6 0.3 1.6 6.0 226.7 Transfers from the Budget of Montenegro 3.6 0.1 3.0 1.7 211.8 Debt repayment 13.2 0.3 33.0 17.3 76.3 Borrowings and loans from domestic sources 4.3 0.1 10.0 11.4 37.7 Borrowings and loans from foreign sources 0.6 0.0 9.0 0.2 300.0 Revenues from privatisation and sale of property 3.1 0.1 5.0 6.9 44.9 Increase/decrease in deposits -0.9 0.0 10.4 -13.2 6.8

Source: Ministry of Finance

90 In 2017, local self-governments recorded a surplus in the amount of 9.8 million euros. Debt repayment amounted to 13.2 million euros or 0.3% of GDP primarily due to the high repayment of securities and loans to residents (10.3 million euros). In 2017, transfers from the central budget amounted to 3.6 million euros (Table 5.5).

5.4. State funds

According to preliminary data of the Pension and Disability Insurance Fund of Montenegro, the Fund recorded total revenues of 407 million euros or 2.5% more than in 2016. The Fund’s source revenues amounted to 74.9% of total revenues, recording the annual increase of 11%. The share of contributions (which are the main source of the Pension and Disability Insurance Fund’s financing) in total revenues amounted to 74.5%. This category of revenues recorded the annual increase of 10.8%. At the same time, transfers from the budget, which comprise 25.1% of total revenues, recorded the annual decline of 16.5%, and amounted to 102.1 million euros.

Total expenditures of the Pension and Disability Insurance Fund of Montenegro amounted to 407 million euros or 2.5% more than last year, yet being slightly below the plan. Expenditures for pensions, accounting for 98.6% of total expenditures, represented the most significant expenditure item, Fiscal developments while 1.4% referred to administrative expenses and repayment of loans. Pension-based expenditure increased by 2.7% in relation to 2016.

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

Box 5.3 – Working age population and pensioners

In 2017, the expenditure for gross pensions amounted to 401.3 million euros. Of this amount, Graph 1 retirement pension accounted for the main share Gross pensions expenditure structure, 2017, in % of 58.6%, followed by survivor’s pension with the share of 19.7%, disability pension with 16.4%, other rights with 2.5%, fees 2.3% and allowances 0.5%, which is presented in the following graph.

Comparing the period between 2016 and 2017, there is an increase in the number of pensioners. In December 2016, the number of pensioners was 108.478 and in December 2017 this number was 114.140, recording growth of 5.2% (Graph 2).

However, in December 2017, the number of em- Source: Pension and Disability Insurance Fund ployed persons recorded a minor year-on-year increase.

Nevertheless, the number of employed persons to number of pensioners’ ratio remains highly unfavourable. At end-2017, it amounted to 1.56.

91 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 2 Graph 3 Number of pensioners Number of employed persons to number of pensioners ratio

Source: Pension and Disability Insurance Fund Source: Pension and Disability Insurance Fund and Monstat

There were no available data from the Health Insurance Fund of Montenegro at the time of drafting this report.

In 2017, according to the Employment Agency of Montenegro data, this Agency recorded total revenues in the amount of 23.4 million euros, which is by 30.6% more than in 2016.

Expenditures of the Agency amounted to 23.4 million euros, and they were 30.6% higher compared to the corresponding period of 2016, and 2.4% below the plan. In total expenditures, 21.8% referred to current expenditures, while 44.6% referred to social protection transfers, 31.9% were transfers to individuals, institutions and public sector and 1.7% referred to capital expenditure, borrowings, and loans granted.

Comparison of recorded revenues and expenditure shows that the Agency ran a balanced budget in 2017.

As at 31 December 2017, outstanding liabilities of the Employment Agency amounted to two 150.9 thousand euros.

The Labour Fund, as a typical budget beneficiary financed from general and earmarked revenues, recorded revenues in the amount of 2.5 million euros and the equal amount of total expenditure. This is 3.8% below the plan and 61.1% less than in 2016. Expenditure referring to social protection transfers, i.e. funds for redundancies (2.1 million euros) represented the most important expenditure item.

Outstanding liabilities of the Fund amounted to 166.7 thousand euros as at 31 December 2017.

TheCompensation (Indemnification) Fundrecorded total revenues in the amount of 2.5 million euros and total expenditure were the same. This is 5.7% lower in relation to the plan, and represents a minor year-on-year increase.

92 PUBLIC DEBT 06

Public debt is defined under the 2014 Law on Budget and Fiscal Responsibility.55 The Law defines the public debt as debt at the Central Government Level and at Local Government Level.56

The intensive implementation of the project for the construction of the largest infrastructure project in 2017 caused the continuation of the trend of Montenegro’s public debt growth. According to the Min- istry of Finance data, gross public debt of Montenegro amounted to 2.758,8 million euros or 65.1% of GDP at end-2017. Compared to end-2016 it increased by 8.4%, primarily due to the withdrawal of the assets of a Chinese Exim Bank. Public debt structure reveals that the government debt accounted for 2.214 million euros (95.3%),57 while the local self-government debt accounted for 130.9 million euros (4.7%).

When we include deposits of the Ministry of Finance along with 38.477 ounces of gold, the net public debt of Montenegro amounts to 2.687,9 million euros, or 63.4% of the estimated GDP. Compared to end-2016, net public debt increased by 7.6%.

Table 6.1

Structure of public debt, in million euros Public debt 2014 2015 2016 2017 Domestic debt 381.2 320.3 400.2 413.9 External debt 1,561.7 1.956.4 2.002.8 2.214 Government debt 1,942.9 2,276.7 2,403.0 2,627.9 Local self-government debt 128.8 142.2 143.1 130.9 2,071.7 2,418.8 2,546.1 2,758.8 Total public debt (gross) 59.9% of GDP 66.2% of GDP 64.4% of GDP 65.1% of GDP Deposits of Ministry of Finance, including 38.477 49.5 57.3 47.4 70.9 ounces of gold 2,022.2 2,361.6 2,499.3 2,687.9 Total public debt (net) 58.5% of GDP 64.6% of GDP 63.2% of GDP 63.4% of GDP

Source: Ministry of Finance and CBCG calculations

Planned intensification of works on the priority highway section construction project is expected to induce a further public debt increase in the upcoming period.

55 OGM 20/14 and 56/14 56 Central Government Level includes the State authorities and State administration authorities, legal entities, and business organisations predominantly providing services of public interest which are controlled and mostly financed by the State. Local Government Level includes the municipal authorities, legal entities and business organisation predominantly providing services of local interest and which are controlled and mostly financed by the municipalities. 57 The amount of public debt includes a part of the local self-governments debt in the amount 36 million euros (amount of withdrawn, unpaid funds) for which the Ministry of Finance is the direct borrower (the Ministry of Finance concluded agreements with foreign creditors, and sub-credit agreements with municipalities).

95 Central Bank of Montenegro CBCG Macroeconomic Report 2017

6.1. Government debt

At end-2017, gross public debt amounted to 2.627,9 million euros or 62% of GDP. Public debt recorded annual increase of 224.9 million euros or 9.4%. The increase in state debt in 2017 was largely affected by the withdrawal of funds from a Chinese Exim Bank for financing the intensive construction of a section of the highway.

Of the total amount of gross government debt, 2.214 million euros or 84.2% referred to external debt, while the remaining 413.9 million euros or 15.8% referred to domestic debt.

Table 6.2

Structure of public debt, in million euros

December September December March 2017 June 2017 2016 2017 2017 Domestic debt 400,2 481,3 474,1 431,3 413,9 External debt 2.002,8 2.001,7 2.008,9 2.059,0 2.214,0 Government debt (gross) 2.403,0 2.483,0 2.483,0 2.490,3 2.627,9 Deposits of Ministry of Finance, including 38.477 47,4 61,8 56,9 94,1 70,9 ounces of gold Government debt (net) 2.355,6 2.421,3 2.426,1 2.396,2 2.557,0

Source: Ministry of Finance and CBCG calculations

When we include deposits of the Ministry of Finance along with 38.477 ounces of gold, the net public debt of Montenegro, amounted to 2.557 million euros or 60.4% of GDP at end-2017. Compared to end- 2016, the debt increased by 8.5%.

The currency structure of the public debt was favourable at end-2017. The total domestic debt and about 84% of the total external debt are in euros.

Interest structure can also be assessed as favourable. Most of the public debt (loans and bonds) is ser- viced at fixed interest rates (78.6% of public debt).

Graph 6.1 Graph 6.2

The currency structure of public debt is The interest structure of public debt favourable at end-2017 at end-2017

Source: Ministry of Finance Source: Ministry of Finance

96 6.1.1 Domestic debt

At end-2017, domestic debt amounted to 413.9 million euros, recording the year-on-year increase of 13.7 million euros or 3.4%. Withdrawal of funds based on new loan arrangements with domestic banks is the main reason for a significant growth of debt towards residents during 2017 (Table 6.2).

Table 6.2 58

Domestic public debt structure

Debt balance Debt balance Share in as at as at Change Change domestic 31 December 31 December debt Domestic debt structure 2016 2017 1 2 3 (2-1) 4 (2/1) 5 million euros % % Foreign currency deposits 29,5 13,7 -15,7 -53,3 3,3 Restitution 91,0 87,8 -3,2 -3,5 21,2 Loans with commercial banks 60,6 107,5 46,9 77,5 26,0 Accrued pensions 1,9 1,9 0,0 -0,5 0,5 T-bills 77,7 77,5 -0,2 -0,2 18,7 Labour Fund bonds 1,4 0,0 -1,4 -100,0 0,0 Government bonds 97,6 86,3 -11,3 -11,6 20,8 Legal persons and companies58 40,6 39,1 -1,5 -3,6 9,5 TOTAL 400,2 413,9 13,7 3,4 100,0 Public debt Source: Ministry of Finance and CBCG calculations

Following new loan arrangements with domestic banks, the structure of domestic debt recorded significant changes. In the structure of domestic debt at the end of 2017, the largest share was recorded by liabilities for loans with commercial banks, 26%, followed by restitution obligations with 21.2%, while the share of liabilities on the basis of issued government bonds in the domestic debt amounted to 20.8% (Table 6.2).

6.1.2. External debt

According to the Ministry of Finance data, external debt amounted to 2,214 million euros or 52.3% of GDP at end-2016, recording an increase of 211.2 million euros or 10.5% compared to end-2016.

The growth of external debt during 2017 was primarily due to the withdrawal of the funds of the Chi- nese Exim Bank for the financing of the intensive construction of a part of the Bar-Boljare highway, in the amount of 171.42 million euros. In addition, the following also contributed to the external debt increase in the reporting year: • Withdrawal of syndicated loans in the amount of 81 million euros, in support of the budget, • Withdrawal of funds from Credit Suisse Bank in the total amount of 78.44 million euros; • Withdrawal of Intesa bank funds in the amount of 30 million euros (for the needs of financing the budget), • Withdrawal of KfW funds in the amount of 6.48 million euros (for the projects: „Water-supply and Waste Water Discharge, phases III, IV, and V“, and „Energy Efficiency Program in Public Institutions“, phase II“),

58 Legal entities and business organisations predominantly providing services of public interest which are controlled and mostly financed by the State

97 Central Bank of Montenegro CBCG Macroeconomic Report 2017

• Withdrawal of the Council of Europe Development Bank funds in the amount of 4.85 million euros (for the project „1000+ apartments phase II“), • Withdrawal of IBRD funds in the amount of 3.76 million euros (for the projects „Lamp“, „Mi- das“, „Midas - additional financing”, “Energy efficiency - additional financing“, and „Higher Education and Research for Innovation and Competitiveness“), • Withdrawal of EBRD funds in the amount of 2.38 million euros (for the purpose of local roads reconstruction and the municipal parliament building in Danilovgrad). • Withdrawal of funds from the International Fund for Agricultural Development (IFAD) in the amount of 0.15 million euros (for the project „Creation of Clusters and Transformation of Rural Areas“).

The structure of external debt shows that the highest share belongs to liabilities arising from issued Eurobonds (49% of external debt), while the Chinese Exim Bank stands as the largest individual creditor with a share of external debt of 15.3%.

Table 6.3

External debt structure as at 31 December 2017

Debt External debt Share in Share in balance GDP external debt public debt Creditor million euros % International Bank for Reconstruction and Development (IBRD) 197.6 4.7% 8.9% 7.2% Member countries of the Paris Club of creditors 87.5 2.1% 4.0% 3.2% International Development Association (IDA) 44.4 1.0% 2.0% 1.6% European Investment Bank (EIB)1 98.2 2.3% 4.4% 3.6% EBRD 14.9 0.4% 0.7% 0.5% Council of Europe Development Bank 20.7 0.5% 0.9% 0.8% European Commission 1.7 0.0% 0.1% 0.1% Kreditanstalt für Wiederaufbau – Germany (KFW)2 40.8 1.0% 1.8% 1.5% Loan from Hungary 5.5 0.1% 0.2% 0.2% Loan from Poland 6.2 0.1% 0.3% 0.2% Loan from France - Natixis3 4.7 0.1% 0.2% 0.2% EUROFIMA - debt of “AD Željeznica Crne Gore” 8.6 0.2% 0.4% 0.3% Czech EXIM - debt of “AD Željeznica Crne Gore” 1.0 0.0% 0.0% 0.0% Steiermarkische Bank und Sparkassen AG4 7.7 0.2% 0.3% 0.3% Erste Bank 0.0 0.0% 0.0% 0.0% Credit Suisse Bank 138.4 3.3% 6.3% 5.0% Chinese EXIM Bank 337.9 8.0% 15.3% 12.2% Loan from Spain for the construction of landfill 3.4 0.1% 0.2% 0.1% Loan from Austria (Erste Bank) 3.8 0.1% 0.2% 0.1% EUROBOND 1,080.0 25.5% 48.8% 39.1% Banka Intesa 30.0 0.7% 1.4% 1.1% International Fund for Agricultural Development (IFAD) 0.2 0.0% 0.0% 0.0% Syndicated loan of OTP-Erste-Zagrebačka banka 81.0 1.9% 3.7% 2.9% TOTAL 2,214.0 52.3% 100.0% 80.3%

1 EIB loans amounting to 47 million euros that are services by state-owned enterprises (“Monteput”, “Airports of Montenegro” and “EPCG”) are not calculated in the external debt but treated as guarantees. 2 Loans with KfW for the needs of water supplies are used by municipalities, but they are considered a part of external debt. 3 Commodity loan - EPCG 4 Loan for financing the purchase of fire engines for the Ministry of Interior. Source: Ministry of Finance

98 It should be noted that there are granted credit lines which have not been withdrawn. The total amount of available non-withdrawn funds amounted to 663 million euros (where 449.2 million euros refers to Chinese Exim Bank).

Table 6.4

Structure of external debt and non-withdrawn funds, in million euros

Amount of Creditor Debt balance non-withdrawn funds million euros International Bank for Reconstruction and Development (IBRD) 197,6 51,9 Member countries of the Paris Club of creditors 87,5 0,0 International Development Association (IDA) 44,4 0,0 European Investment Bank (EIB) 98,2 50,9 EBRD 14,9 23,5 Council of Europe Development Bank 20,7 6,3 European Commission 1,7 0,0 Kreditanstalt für Wiederaufbau – Germany (KFW) 40,8 77,5 Loan from Hungary 5,5 0,0 Loan from Poland 6,2 0,0 Loan from France - Natixis 4,7 0,0 EUROFIMA - debt of “AD Željeznica Crne Gore” 8,6 0,0 Public debt Czech EXIM - debt of “AD Željeznica Crne Gore” 1,0 0,0 Steiermarkische Bank und Sparkassen AG 7,7 0,0 Erste Bank 0,0 0,0 Credit Suisse Bank 138,4 0,0 Chinese EXIM Bank 337,9 449,2 Loan from Spain for the construction of landfill 3,4 0,0 Loan from Austria (Erste Bank) 3,8 0,0 EUROBOND 1.080,0 0,0 Banka Intesa 30,0 0,0 International Fund for Agricultural Development (IFAD) 0,2 3,7 Syndicated loan of OTP-Erste-Zagrebačka banka 81,0 0,0 TOTAL 2.214,0 663,0

Source: Ministry of Finance

6.2. Local self-government debt

Total consolidated debt of local self-governments amounted to 166.9 million euros at end-2017, recording a 5% decline y-o-y. In the total amount of consolidated debt, 116.7 million euros (69.9%) referred to external debt, while the remaining 50.3 million euros (30.1%) referred to debt towards residents.

The consolidated debt structure reveals that the municipality of Budva is the largest debtor with 65.8 million euros (39.4% of total consolidated debt). Other major debtors include the municipalities of Nikšić (10.2%), Podgorica (9.7%), and Bijelo Polje (7.2%), while the municipalities of Petnjica and Gus- inje were not indebted (Graph 6.3).

99 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Graph 6.3 Compared to the debt balance at the end-2016, all Local self-government consolidated debt (by municipalities), end-2017, in million euros municipalities recorded a debt reduction, except Andrijevica, Bar, Herceg Novi and Plužine.

In total amount of local self-government consolidated debt, 36 million euros was already included in external public debt on the basis of the agreement signed by the Government of Montenegro. Thus, at end-2017, the local self-government debt balance was 130.9 million euros. In relation to end-2016, local self-government debt decreased by 8.5%.

Source: Ministry of Finance

6.3. Issued guarantees

At end-June 2017, total government guarantees amounted to 312.8 million euros or 7.4% of estimated GDP, recording a decrease of 9.3% in relation to end-2016. With the inclusion of issued government guarantees, Montenegro’s public debt would amount to 3,071.6 million euros or 72.5% of GDP.

Graph 6.4 Graph 6.5

Public debt, with and without guarantees, Issued foreign guarantees, in million euros in % of GDP

Source: Ministry of Finance and CBCG calculations Source: Ministry of Finance

100 Foreign guarantees of Montenegro amounted to 262.5 million euros or 6.2% of GDP. If foreign guarantees were included into the external public debt, the external government debt of Montenegro would amount to 58.5% of GDP. It should be noted that the above amount of foreign guarantees refers to withdrawn credit assets. Considering the total underwritten amount, foreign guarantees reached the amount of 486.4 million euros.

At end-June 2017, total domestic guarantees amounted to 50.3 million euros (1.2% of GDP). Domestic debt with the guarantees amounted to 11% of GDP. In the total amount of domestic guarantees, 35 million euros referred to guarantees issued to municipalities for loans with various commercial banks for the implementation of the debt recovery plan59.

No guarantees were called in 2017.

6.4. Debt repayment Graph 6.6 In 2017, according the preliminary data of the Ministry of Finance, total debt repayment Debt repayment in 2017, in million euros amounted to 497.2 million euros or 11.7% of estimated GDP. The main share referred to the repayment of principal of debt to residents and non- residents in the amount of 358.6 million euros

and to the repayment of interest arising from loan Public debt arrangements to residents and non-residents in the amount of 98.7 million euros. The repayment of debt from the previous period amounted to 40 million euros, in which repayment of obligations arising from frozen foreign currency deposits accounted for 15.4 million euros and the repayment of liabilities from restitution totalled 2.4 million euros.60

Source: Ministry of Finance

59 The total underwritten amount of guarantees for loans used by municipalities for the recovery plan implementation is 42.89 million euros. 60 Total debt repayment includes repayment of debt arising from principal, interest repayment, as well as repayment of debt from previous years.

101

EXTERNAL SECTOR 07

In 2017, the current account imbalance grew due to the domestic demand increase. The current account deficit amounted to 799.3 million euros, which is the annual increase of 11.8%. The increase is a result of an increase in imbalances in the goods account. An increase in net capital inflow was recorded in the financial account.

In international visible trade, there was an increase in deficit as a result of the implementation of infrastructure projects and investments in the fields of tourism and energy. Foreign trade deficit amounted to 1.9 billion euros61 or 12.2% more than in 2016 as a result of an increase in personal and investment spending, leading to a considerably higher growth of visible imports in relation to exports. In the observed period, total visible exports amounted to 376.6 million euros, recording an increase of 9.1% mainly as a result of an increase in the export of mineral ores and non-ferrous metal. Visible imports increased by 11.7% and amounted to 2.2 billion euros, which is largely the result of higher imports of machinery and transport equipment, mineral fuels and lubricants, chemical products and materials classified by material.

The services account ran a surplus of 836.4 million euros, which is the annual increase of 8.8%. The -in crease in the surplus resulted from an increase in revenues of 8.6%, while expenditures grew by 8.3%. Total revenues from services amounted to 1.4 billion euros, while total expenditures amounted to 525.7 million euros. In the observed period, the volume of invisible trade recorded the annual increase of 8.4% and amounted to 1.9 billion euros. The goods and services balance was negative, amounting to 1 billion euros, or 15.2% more than in 2016.

The primary income account ran a surplus of 87.9 million euros or 66.3% less in relation to 2016. The sector External increase in the surplus was affected by an increase in revenues by 6.2%, which amounted to 273.9 million euros, while expenditures reduced by 9.3%, amounting to 186 million euros. Secondary income account ran a surplus of 136 million euros or 13% more in relation to 2016. Total inflow of transfers to Montenegro recorded the annual increase of 11.7% and amounted to 211.4 million euros. The most significant inflow came from personal transfers to Montenegro in the amount of 125 million euros, while the outflow of personal transfers from Montenegro amounted to 37.8 million euros. This year, there has been an increase in the inflow by the government sector based on transfers from IPA funds.

As for the financial account, net foreign direct investments amounted to 474.3 million euros, recording the year-on-year increase of 27.6%, and accounting for 11.2% of GDP. The portfolio investment account recorded a net inflow of 25.6 million euros. In the observed period, the other investments account recorded a net inflow of 253.2 million euros. Developments in this account show lower liabilities of banks based on borrowings, while liabilities of the government and other sectors increased. In 2017, domestic banks increased their foreign deposits.

61 Monstat data with adjustments performed by the CBCG in line with the IMF methodology (Balance of Payments Manu- al, Sixth edition, IMF, 2009); Data on visible imports and exports are presented by f.o.b.

105 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Table 7.1 62

Balance of Payments of Montenegro, thousand euros62

No. Item 2016 2017 Change in % 1 A. CURRENT ACCOUNT -714,954 -799,294 11.8 1.A GOODS AND SERVICES BALANCE -888,211 -1,023,240 15.2 1.A.a Goods -1,657,272 -1,859,595 12.2 1.A.a.1 Export f.o.b. 345,331 376,592 9.1 1.A.a.2 Import f.o.b. 2,002,603 2,236,188 11.7 1.A.b Services 769,061 836,356 8.8 1.A.b.1 Income 1,254,581 1,362,066 8.6 1.A.b.2 Expenses 485,520 525,710 8.3 1.B Primary income 52,882 87,935 66.3 1.B.1 Income 257, 828 273,915 6.2 1.B.2 Expenses 204,946 185,980 -9.3 1.C Secondary income 120,374 136,010 13.0 1.C.1 Income 189,323 211,394 11.7 1.C.2 Expenses 68,948 75,384 9.3 2 CAPITAL ACCOUNT 782 0 2.A Income 825 0 2.B Expenses 43 0 CURRENT AND CAPITAL ACCOUNT BALANCE -714,172 -799,294 11.9 3 FINANCIAL ACCOUNT, net -490,082 - 655,211 33.7 3.A Financial assets net increase -80,985 217,668 3.B Net increase in obligations 409,097 872,878 113.4 3.1 Direct investment, net (=assets-liabilities) -371,568 -474,292 27.6 3.1.1 Financial assets net increase -167,024 10,115 3.1.2 Net increase in obligations 204,543 484,408 136.8 3.2 Portfolio investments, net (=assets-liabilities) 19,255 -25,563 3.2.1 Financial assets net increase 54,287 -9,065 3.2.2 Net increase in obligations 35,031 16,498 -52.9 3.3 Financial derivatives, net (=assets-liabilities) 0 0 3.3.1 Financial assets net increase 0 0 3.3.2 Net increase in obligations 0 0 3.4 Other investment, net (=assets-liabilities) -298,348 -253,246 -15.1 3.4.1 Financial assets net increase -128,826 118,727 3.4.2 Net increase in obligations 169,522 371,973 119.4 3.5 CBCG reserves 160,578 97, 891 -39.0 4 NET ERRORS AND OMISSIONS (3-2-1) 224,090 144,083 -35.7

Source: CBCG

62 Montenegro’s balance of payments data are published in accordance with the new IMF methodology (IMF Balance of Payment Manual, sixth edition - BMP 6). Financial account is presented according to the principle of net assets and liabilities increase. Increase in assets/liabilities is presented by a plus (+) sign, while decline is shown by a minus (-) sign. Net value is obtained as a difference between net assets and net liabilities.

106 7.1. Current and capital account

The current account was marked by deficit wid- Graph 7.1 ening, mainly as a result of the annual increase in imbalances in the goods and services account. Current account structure, in thousand euros Coverage of visible imports by exports amounted to 16.8%, recording the annual decline of 0.4 percentage points. Visible import was trending upward over the past few years and exceeded the pre-crisis level in the reporting year (2 billion euros in 2007). The services account and the primary and secondary income accounts recorded surpluses higher than in the previous year. The coverage of foreign trade deficit with the surplus recorded in the goods accounts amounted to 57%, which is approximately the same as in 2016.

7.1.1. Visible trade 63

Preliminary Monstat data shows that Montene- gro’s total international visible trade amounted to 2.6 billion euros in 2017, which is the annual Source: CBCG growth of 12%. The increase in visible trade occurred as a result of increased visible exports Graph 7.2 and imports. Coverage of imports by exports amounted to 16.1%, which is the annual increase Coverage of imports by exports, 2005 - 2017 of 0.3 percentage points. sector External

Preliminary Monstat data shows that the total visible exports amounted to 371.1 million euros, recording a 13.9% y-o-y growth, while imports amounted to 2.3 million euros or 11.7% more y-o- y. The structure of visible exports was dominated by non-ferrous metals, mineral ores and waste, cork and wood as well as electricity, while visible imports are dominated by oil and oil derivatives, road vehicles and electrical machines, apparatus and devices. The growth of exports was mostly contributed by two sub-categories in the structure of exports: mineral ores and metal waste, as well as other transport vehicles and equipment.

In the export structure, according to SITC64, products classified by materials recorded the Source: Monstat

63 Methodological remarks: Data on Montenegro`s foreign trade and balance of payments are shown according to the spe- cial trading system. The CBCG performs adjustments of data received by Monstat for the purpose of compiling the balance of payments in line with the IMF methodology (Balance of Payments Manual, Sixth edition, IMF, 2009). Data on visible import and export are presented by f.o.b. 64 Standard International Trade Classification

107 Central Bank of Montenegro CBCG Macroeconomic Report 2017

highest share of 28% of total exports, followed by raw materials, except fuels (27.6%) and mineral fuels and lubricants (12.4%). Within the category products classified by materials, non-ferrous metals (aluminium) accounted for the largest share of 71.9 million euros, followed by iron and steel with 17.8 million euros. The category as a whole recorded a 20.1% growth. Export of raw material other than fuels recorded a growth of 42.4%, with the greatest share of mineral ores and metal waste (66.7 million euros) and cork and wood (28.9 million euros). The export of mineral fuels and lubricants decreased by 11% and the largest share in this category was of electricity (23.3 million euros), which represents a decline due to a fall in production recorded in the electricity, gas and steam supply, and a sub-category of oil and oil derivatives (18 million euros), which recorded a growth of 42.4% as compared to 2016.

Table 7.2

Visible exports structure in 2017, in thousand euros

Change Share 2016 2017 (%) (%) 0 Food and live animals 27,337.3 26,389.6 -3.5 7.1 1 Beverages and tobacco 22,506.4 20,523.4 -8.8 5.5 2 Raw materials, except fuels 71,967.7 102,498.7 42.4 27.6 3 Mineral fuels and lubricants 51,648.0 45,984.9 -11.0 12.4 4 Animal and vegetable oils and fats 579,8 584.4 0.8 0.2 5 Chemical products 17,588,0 17,569.0 -0.1 4.7 6 Products classified by materials 86,569.2 103,943.6 20.1 28.0 7 Machinery and transport equipment 31,134.6 41,619.4 33.7 11.2 8 Miscellaneous manufactured articles 11,565.0 11,978.1 3.6 3.2 9 Products and transactions, otherwise not mentioned 4,950.0 0.0 -100.0 0.0 TOTAL: 325,846.0 371,091.1 13.9 100.0

Source: Monstat

Monstat data show that in 2017 total visible imports amounted to 2.3 billion euros, which represents an annual increase of 11.7%. Machinery and transport equipment (24%),) took the main share in imports, followed by products from the food and live animals sector (18.5%) and products classified by materials (17.8%). The highest value of import under machinery and transport equipment was in road vehicles, amounting to 162.7 million euros, as well as electrical machinery and apparatuses in the amount of 127.7 million euros. The import of food and live animals amounted to 425.3 million euros, growing by 7.1%. Under this category, the most representative categories included: meat and meat preparations and vegetables and fruits with the respective amounts of 103.2 and 67.4 million euros.

Observed by SITC categories, the increase in imports in 2017 was mainly due to the growth of imports in subcategories: oil and oil derivatives by 37.7 million euros, electricity by 29.1 million euros (as a result of the decline in electricity generation due to bad weather and hydrological conditions), as well as in subcategory industrial machinery for general use for 28.7 million euros.

In 2017, the price of crude oil, as well as some other energy products and raw materials was recorded, which affected the higher value of imports of these categories. Imports of oil and oil derivatives amounted to 171.6 million euros (growth of 28.1%), while imports of electricity increased by 65% compared to the previous year. The largest decline in the import of goods was recorded in the subcategory of power machinery and devices, as well as other transport vehicles and equipment due to lower import demand.

108 In order to diversify visible exports, it is necessary to increase the added value in export-oriented production, which would have a significant impact on the coverage of imports as well as on the reduction of the international visible trade deficit. Investments in processing capacities that would increase the level of processing in the production intended for export are one of the most important requirements.

Table 7.3

Visible imports structure in 2017, in thousand euros

Change Share 2016 2017 in % in % 0 Food and live animals 397,228.1 425,337.8 7.1 18.5 1 Beverages and tobacco 70,777.5 79,885.5 12.9 3.5 2 Raw materials, except fuels 37,260.7 42,349.1 13.7 1.8 3 Mineral fuels and lubricants 187,538.9 255,913.0 36.5 11.1 4 Animal and vegetable oils and fats 13,936.8 13,944.6 0.1 0.6 5 Chemical products 203,403.5 227,64 4.3 11.9 9.9 6 Products classified by materials 341,789.8 410,189.4 20.0 17.8 7 Machinery and transport equipment 527,754.3 552,396.1 4.7 24.0 8 Miscellaneous manufactured articles 279,238.9 295,364.0 5.8 12.8 9 Products and transactions, otherwise not mentioned 2,759.3 7.0 -99.7 0.0 TOTAL: 2,061,687.6 2,303,030.8 11.7 100.0

Source: Monstat

Regarding the export by regions in 2017, the main external trade partners of Montenegro were CEFTA countries with 41.1%, the EU (34.7%), followed by EFTA countries (1.1%) and other countries (23.1%).

In terms of imports, the largest share belongs to the EU (31.2%), followed by CEFTA countries (31.2%), sector External EFTA (1.2%) and other countries (20.3%). Observed by individual countries, the biggest export part-

Graph 7.3

Structure of visible exports and imports by the country in the period 2005-2017, million euros

Source: Monstat

109 Central Bank of Montenegro CBCG Macroeconomic Report 2017

ners were: Serbia (66 million euros), Bosnia and Herzegovina (47.2 million euros) and Hong Kong (31.7 million euros). In terms of imports, most goods were imported from Serbia (495.5 million euros), followed by China (221.4 million euros) and Germany (196 million euros).

7.1.2. Ser vices

In the international invisible trade in 2017, a positive trend was registered, and the largest surplus of services was recorded since 2010. In the observed period, surplus was recorded in the services account in the amount of 836.4 million euros or a 8.8% y-o-y increase. During the reporting period, the total volume of invisible trade amounted to 1.9 billion euros, which represents the year-on-year increase of 8.5%. Total revenues from services amounted to 1.4 billion euros, recording the annual increase of 8.6%. The highest revenues of 901.3 million euros were recorded in travel-tourism, 260.5 million euros was recorded in transport, while 75.2 million euros was recorded from other business services, which had the most significant impact on total revenues from services.

Graph 7.4 In 2015, expenditure from services amounted to 525.7 million euros, recording an annual in- Service revenues structure in 2017 crease of 8.3%. In the expenditure structure, expenditure arising from transport accounted for the main share of 40.8% (214.6 million euros). Expenditure from other business services amounted to 112.8 million euros or 21.5% of total expenditure. Within other business services, the highest expenditure arose from professional and consulting services which amounted to 69.5 million euros, while various technical, trade and other business services accounted for 35.5 million euros.

In the transport services account, a surplus of Source: CBCG 45.9 million euros was recorded, which is 5.9% less compared to the previous year as a result of a significant increase in transport expenditures. Graph 7.5 Transport revenues amounted to 260.5 million euros, recording an increase of 11.3%. The high- Service expenditure structure in 2017 est revenues were recorded in air transport (62.5 million euros), which represents an increase of 4.6% in relation to 2016. Such developments are the result of an increase in the volume of traffic at Montenegrin airports and the provision of services to foreign air carriers. In the area of maritime transport, revenues amounted to 57.6 million euros, which is a 10.8% growth. Electricity transmission services recorded revenue growth of 42.9%, i.e. they amounted to 56.3 million euros, while revenues in road and rail transport amounted to 49.8 million euros and 8.6 million

Source: CBCG euros, respectively.

110 Graph 7.6 Graph 7.7

Transport revenues in 2017, in thousand euros Transport expenditure 2017, in thousand euros

Source: CBCG Source: CBCG

Total transport expenditure amounted to 214.6 million euros, recording the year-on-year increase of 15.9%. The most significant expenditures were recorded in road transport, pipeline transport and transmission, as well as in air transport. Expenditure in road transport amounted to 91 million euros and was almost the same as in the previous year, expenditure in electricity production amounted to 51.2 million euros or 52% more, while air transport expenditure amounted to 38.7 million euros, being 4.7% higher y-o-y.

Estimated revenues from travel-tourism recorded growth in 2017. Investments in the field of tourism, increase and improvement of accommodation capacities, expansion of supply in all parts of our coun- sector External try, as well as the extension of the season resulted in an increase in the number of arrivals and overnights of foreign tourists. Estimated revenues in the field of travel-tourism amounted to 901.3 million euros and they were 7.8% higher than in 2016, which contributed to the surplus in this sub-account of 846.2 million euros or 9.1% more compared to the previous year. Foreign trade deficit in the current account was significantly mitigated by realized revenues from foreign tourists in this year.

Revenues from other business services amounted to 75.2 million euros, with the main share of revenues arising from providing various business, professional and consulting services in the amount of 52.8 million euros. Expenditure for other business services amounted to 112.8 million euros, resulting in a deficit in this account of 37.6 million euros (37.5 million euros in 2016).

Income to the sub-account of telecommunication, computer and IT services amounted to 53.8 million euros, of which the main share came from telecommunication services (41 million euros). Total expenditures amounted to 57.6 million euros, resulting in a deficit of 3.8 million euros in this sub-account.

Total revenues from construction services amounted to 31.2 million euros or 1.2% less y-o-y. Simul- taneously, expenditures arising from hiring non-residents in construction amounted to 29.4 million euros, recording an increase of 14.3% in relation to the previous year. Such developments in the construction services account resulted in a smaller surplus in 2017, which amounted to 1.8 million euros in relation to 2016 (5.9 million euros).

111 Central Bank of Montenegro CBCG Macroeconomic Report 2017

7.1.3. Primary income

Graph 7.8 In 2017, the primary income account ran a surplus of 87.9 million euros, or 66.3% more in relation to Factor income revenues structure in 2017 2016. The surplus increase was mostly affected by an increase in employees’ compensations.

Revenues from primary income amounted to 273.9 million euros, which is 6.2% more than in 2016. The main portion of revenues referred to employees’ compensations in the amount of 259.1 million euros. Revenues from international investments amounted to 14.9 million euros, with the main share referring to collected interest in the amount of 13.8 million euros. Interest- based inflow increased 47.4% compared to 2016, Source: CBCG which resulted in increase in the revenues from international investments.

Expenditure from factor income amounted to 186 million euros, with the main share of 160.7 million euros referring to the expenditure from international investments, and 25.3 million euros referring to wages and salaries of non-residents employed in Montenegro. In total expenditures arising from international investments, interest repayment accounted for 104.6 million euros, recording the year- on-year increase of 26.9%. The outflow for paid dividends amounted to 56.2 million euros or 44.2% less than in 2016.

7.1.4. Secondary income Graph 7.9 The increase in surplus in the secondary income Secondary income account trends, account is the result of higher revenues compared in thousand euros to the previous year and it amounted to 136 million euros or 13% more than in 2016.

Inflow from secondary income amounted to 211.4 million euros or 11.7% more in relation to 2016. The inflow structure shows that 171.9 million euros referred to other sectors, while 39.5 million euros referred to the government sector. In total inflow of other sectors’ transfers, 125 million euros came from personal transfers to Montenegro, which is the annual increase of 11.4%, while the inflow from other current transfers increased by 11% and amounted to 46.9 million euros (including pensions and other social allowances). Source: CBCG

112 Transfers from Montenegro amounted to 75.4 million euros which is the annual growth of 9.3%. The government sector accounted for 12.3 million euros, while 63 million euros related to other sectors, of which cash outflows from personal transfers amounted to 37.8 million euros or 12.8% more than in 2016, while outflow from other current transfers amounted to 25.3 million euros.

7.2. Financial account

In 2017, a net inflow of capital was recorded, Graph 7.10 which was a result of a net inflow to the account Structure of financial account by investment of direct investments, and the portfolio account, categories, in thousand euros and the other investments account.

Net FDI inflow amounted to 474.3 million euros or 27.6% more compared to 2016. Foreign direct investments recorded growth in 2017 and continued the growth trend of net inflows which amounted to about 11.2% of GDP in the reporting year. Total FDIs inflow amounted to 649.2 million euros, which represents a decrease of 5.5%, while the outflow amounted to 174.9 million euros.

In the observed period, increase was recorded in inflow from equity investments as well as in loans between sister companies. FDI inflow in the form of equity investments amounted to 366.9 million euros or 19% more than in 2016. Of this amount, External sector External 219.7 million euros related to investments in Source: CBCG

Graph 7.11 Graph 7.12

Total FDI inflow, in thousand euros Total FDI inflow structure in 2017

Source: CBCG Source: CBCG

113 Central Bank of Montenegro CBCG Macroeconomic Report 2017

companies and banks, while the inflow from investments in real estate amounted to 147.2 million euros. Investments in companies and banks rose 25.3%, while investments in real estate increased by 10.6%. The inflow of FDIs in the form of intercompany debt amounted to 247.1 million euros, which represents an increase of 32.2% in relation to the same period in 2016. Equity investments made up 56.5% of the total FDI inflow, and inflow from intercompany debt mad up 38.1%. Withdrawal of residents’ funds invested abroad amounted to 35.2 million euros.

Total FDI outflow amounted to 174.9 million euros, recording the annual decline of 44.6%. This trend is the result of reduced withdrawal of non-residents’ funds invested in Montenegro. During 2017, with- drawals amounted to 129.6 million euros, which is 55% less than in the previous year. The outflow of residents’ investments abroad amounted to 45.3 million euros or 82.6% more compared to 2016.

Total inflow arising from portfolio investments amounted to 150.1 million euros, which is 69.6% less than in the previous year. Investments in domestic securities amounted to 69.9 million euros, whereby investments into equity securities amounted to 15.4 million euros, while investments into debt securities amounted to 37.1 million euros. The inflow arising from the withdrawal of funds invested in foreign securities amounted to 80.2 million euros. The outflow of funds based on portfolio investments amounted to 124.12 million euros, which is 75.7% less than in 2016. As a result of these trends a net inflow in the amount of 42 million euros was recorded in the portfolio investments account in 2017.

The other investments account recorded a net inflow of 253.2 million euros. Other sectors’ (corporate sector) foreign borrowing recorded the annual increase. Inflow arising from the withdrawal of funds by the corporate and household sectors amounted to 258.5 million euros or 26.6% less compared to the previous year. At the same time, the outflow from the repayment of principal amounted to 182.9 million euros, which is 21.8% less than in 2016.

At end-2017, the CBCG monetary assets in foreign accounts and in the vault increased by 97.9 million euros compared to 31 December 2016.

114 INTERNATIONAL ECONOMY 08

8.1. Global economic trends

Growth of the global economy was stronger in 2017 than in the previous year as a result of an obvious pick-up in the global economic growth that started in mid-2016. As per the IMF estimates, the global economy`s growth rate in 2017 was 3.7% compared to 3.2% in 2016. The IMF expects that the 2018 and 2019 growth rates will exceed that recorded in 2017, reaching 3.9% in both years.

Table 8.1

Key global indicators, year-on-year, in %

Deviations from Assessment Projections the October 2017 projections, Indicator in percentage points 2016 2017 2018 2019 2018 2019 GDP growth World 3.2 3.7 3.9 3.9 0.2 0.2 Advanced economies 1.7 2.3 2.3 2.2 0.3 0.4 Emerging and Developing economies 4.4 4.7 4.9 5.0 0.0 0.0 USA 1.5 2.3 2.7 2.5 0.4 0.6 Euro area 1.8 2.4 2.2 2.0 0.3 0.3 Germany 1.9 2.5 2.3 2.0 0.5 0.5 France 1.2 1.8 1.9 1.9 0.1 0.0 Italy 0.9 1.6 1.4 1.1 0.3 0.2 Spain 3.3 3.1 2.4 2.1 -0.1 0.1 Japan 0.9 1.8 1.2 0.9 0.5 0.1 UK 1.9 1.7 1.5 1.5 0.0 -0.1

Canada 1.4 3.0 2.3 2.0 0.2 0.3 International economy Advanced economies outside the G7 and the 2.3 2.7 2.6 2.6 0.1 0.1 euro area Emerging and developing economies 3.2 5.2 4.0 3.8 0.5 0.5 Russia -0.2 1.8 1.7 1.5 0.1 0.0 China 6.7 6.8 6.6 6.4 0.1 0.1 India 7.1 6.7 7.4 7.8 0.0 0.0 Latin America and the Caribbean -0.7 1.3 1.9 2.6 0.0 0.2 Middle East and Northern Africa 4.9 2.5 3.6 3.5 0.1 0.0 Sub-Saharan Africa 1.4 2.7 3.3 3.5 -0.1 0.1 Volume of global trade (goods and services) 2.5 4.7 4.6 4.4 0.6 0.5 Consumer prices Advanced economies 0.8 1.7 1.9 2.1 0.2 0.1 Emerging and Developing economies 4.3 4.1 4.5 4.3 0.1 0.2

Source: IMF, January 2018.

The IMF data show that advanced economies grew at a rate of 2.3% in 2017, and the forecasts for the next two years have been significantly upgraded, amounting to 2.3% for 2018, and 2.2% for 2019.

117 Central Bank of Montenegro CBCG Macroeconomic Report 2017

In the euro area, economic activity recorded vigorous growth (2.7%) driven by domestic demand. This was fuelled by the increasing consumer and business confidence, improved market conditions, and the measures implemented by the ECB. On the back of the strong euro, exports recorded a substantial year-on-year increase. The US economy continued recording high growth rates (2.3% for 2017) as a result of a prominent increase in personal spending and investments. Upon the implementation of a set of incentives, the Japanese economy saw constant quarterly growth over the past two years, averag- ing at 1.7% in 2017. Personal spending represented a significant growth factor, while increased global demand contributed to the strong expansion of exports as well as industrial output of Japan.

The IMF estimates show that the group of European developing and emerging economies, which includes Montenegro,65recorded a growth of 5.2% in 2017. For the period 2018-2019, the IMF forecasted lower growth rates of 4% and 3.8%, respectively.

The growth of global economy can be observed through the growth of global trade which, as the IMF estimated, grew at a rate of 4.7% in 2017, whereas in 2016, the growth rate stood at 2.5%. For the next two years, the IMF expects the global trade growth to match this year`s level of 4.6%.

Global consumption of oil and oil derivatives extended its longstanding uptrend into 2017. An average price per barrel amounted to 53 USD or 24% more than in 2016. Later in the year, the price dropped to 46 USD/barrel but rose back up to 60 USD/barrel shortly before the end of the year. This year’s oil price trends were affected by multiple factors - better global economic outlook, bad weather conditions in the USA, reduced world’s oil supplies, the OPEC countries’ agreement on curbing production, along with higher outputs by the USA, Libya and Nigeria, and the geopolitical situation in the Middle East.

Oil price growth had an impact on advanced economies’ inflationary trends. On the other hand, core inflation and wage prices grew at different paces. At the end of the year, the consumer price index and core inflation in developing and emerging economies recorded slight growths.

In 2017, the FED increased its reference interest rate three times, making for a total hike of 1.25 percentage points since the beginning of the monetary policy normalisation. The FED started the reduction of its balance sheet in October 2017. As per market expectations, the FED will increase its reference interest rate at least three times in 2018. The ECB’s monetary policy has taken a turn toward bond purchase programme tapering and possible abandoning of the programme by end-2018. The ECB plans to continue the application of the current policy elements beyond the ending of the quantitative easing programme by keeping the interest rates at current levels and prolonging the bond purchase programme, if needed.

The USA as well as the euro area Benchmark 10-year Government bond yields were extremely low in 2017. The situation affected capital trends in the emerging/developing economies, especially those having an investment-grade credit rating.

Favourable monetary policy, weak inflation, and improved corporate income contributed to the achievement of record index values in many of the advanced capital markets in 2017. The US indices thus continued to break record highs, as did the Frankfurt`s DAX index. In general, the SE indices of other large euro area economies experienced prominently upward trends in 2016 and 2017. Such upturn was also seen in the SE indices of Tokyo’s Nikkei 225 exchange. When it comes to emerging/developing countries, commodities growth particularly affected the SE indices of the exporting economies.

65 Albania, Bosnia and Herzegovina, Bulgaria, Montenegro, Croatia, Kosovo, Hungary, Macedonia, Poland, Romania, Ser- bia, and Turkey

118 Graph 8.1 Graph 8.2

Indicators of volatility/stress on the financial MSCI global indices, 2016 - 2017 markets, June 2016 - 2017

Source: Bloomberg Source: Bloomberg

In 2017, the leading financial market stress and risk indicators - TED spread, LIBOR-OIS spread, and the VIX index generally stayed below the values recorded in 2016. The values of these indices have been receding for some time now. On the other hand, the price of gold, as a specific market volatility indicator, mainly grew in 2017 in response to a weaker dollar.

8.2. Advanced countries

In Q4, the quarterly economic growth in the euro area was 0.6%, while the annual GDP rate amounted to 2.7%. Growth rate of 0.6% represents a minor deceleration in relation to 0.7% recorded in Q3. Ob- International economy served per the country, the growth was most prominent in Estonia (2.2%) and Slovenia (2%), and the lowest in Greece (0.1%), and Italy and Latvia (0.3% each). Germany’s growth matched that of the entire euro area. Observed through the GDP components in line with the expenditure approach, the growth was spurred by external demand, i.e. visible and invisible exports that rose by 1.9%, making a 0.9 percentage point contribution to the growth. Visible and invisible imports increased by 1.1%, making a -0.5 contribution to the growth, thus the total contribution of the goods and services balance amounted to 0.4 percentage points. On the other hand, domestic demand’s contribution to growth was mar- ginal. Analysed per the industry, the growth was driven by growth in manufacturing industry (1.3%), as well as trade, transport, accommodation and food service activities (0.6%). Eurostat estimated the annual 2017 GDP growth at 2.3%, which represents a significant growth acceleration in relation to 1.8% from 2016. On the whole, the growth in the euro area was stable, and it has been steadily positive since the European debt crisis period (as of Q1 2013); over the past few years, it has been generally tal- lied with the growth of the US economy, which has experienced far more rapid growth compared to the European economy after the global ginancial crisis.

The unemployment rate stood at 8.6% in December, which is a 0.3 percentage points decline in relation to the rate of 8.9% recorded in September. This meant the continuation of unemployment downturn

119 Central Bank of Montenegro CBCG Macroeconomic Report 2017

in relation to early 2013 when, in the wake of the European debt crisis, the unemployment rate reached 12.1%. At the same time, 8.6% was the lowest unemployment rate recorded since January 2009. In absolute terms, 14.1 million of euro area citizens were unemployed. The unemployment rate was at the lowest level of 3.6% in Germany, which was the euro area’s main job „generator“, along with the Nether- lands (4.4%) and Austria (5.5%). Still, regardless of the evident decline in relation to its previous values, the unemployment rate remained high at 20.9% in Greece and 16.4% in Spain. In December, the unemployment rate of persons under 25 years of age amounted to 17.9%, whereby the lowest rate was recorded in Estonia (6.5%) and Germany (6.7%), and the highest in Greece, as much as 43.7%, and in Spain 36.8%. Generally, regardless of the significant unemployment rate drop that the euro area economy has experienced over the past five years, unemployment remains its structural feature. The unemployment rate is still notably above that of the US economy (4.1%), and remains particularly high in large Euro- pean economies -with the exception of Germany- as much as 9% in France and 10.9% in Italy.

The annual inflation rate was 1.4% in December 2017. Observed per the country, the highest inflation was recorded in Estonia and Lithuania (3.8% each), while the lowest rates were recorded in Cyprus (-0.4%), and Finland and Ireland (-0.5% each). Analysed per main HICP components, an increase of 2.1% was recorded in the prices of food, alcohol and tobacco, the energy prices rose by 2.9%, the prices of industrial products by 0.5%, and prices of services increased by 1.2%; these components made the following contributions to the total inflation rate: 0.41, 0.28, 0.13, and 0.5 percentage points, respectively. In regards to goods and services’ subcategories, transport fuel prices made the main positive contribution of 0.11 percentage points to the inflation rate as well as tobacco prices with 0.06 percentage points, while the main negative contribution of -0.1 percentage points referred to the telecommunication service prices. Following the period between 2013 and 2016, distinctive for risks of deflation, inflation in the euro area broadly stabilised in 2017.

In Q3 2017, the fiscal deficit of the euro area members stood at 0.3% of GDP66 or 0.7 percentage points below the deficit recorded in Q2 2017 (1% of GDP). Total budget revenues added up to 46.2% of GDP, and expenditure amounted to 46.5% of GDP. Several countries ran a surplus, most notably Malta (4.2%% of GDP), Germany (2.5% of GDP) and Luxembourg (2.4% of GDP). In reference to the states that ran a deficit, France stood out with its fiscal balance of -2.8% of GDP. In general, the deficit level recorded in Q3 represents a continuation of the fiscal deficit downtrend started between 2009 and 2010 when the deficit exceeded 7% of GDP. At the same time, the Q3 2017 deficit was the lowest since the introduction of the euro banknotes and coins (in 2002), which is indicative of the stabilisation of public finances in the euro area countries.

The public debt of the euro area countries stood at 88.1% of GDP (9,700 billion euros) at end-Q3 201767, which is just below the level recorded at end-Q2 (89% of GDP). Greece showed the highest debt level of 177.4% of GDP, followed by Italy with 134.1% of GDP and Portugal with 130.8% of GDP. In addition, the debts of Belgium and Cyprus were also above 100% of GDP. On the other hand, the lowest debt levels were seen in Estonia (8.9%% of GDP) and Luxembourg (23.4% of GDP). Latvia, Lithuania, Slo- vakia, Malta and the Netherlands also recorded debts below the Maastricht criteria of 60%. In regards to financial instruments, the main portion of debt or 80.3% referred to debt securities, 16.5% referred to loans, while 3.1% referred to cash and deposits. The fiscal deficit narrowing was ensued by a mild and gradual decline in public debt, which had reached 93% of GDP at end-Q2 2014. However, the debt remains high, particularly in large southern euro area countries, in which the fiscal position remains uncertain. The best indicator of the above is the credit rating of these countries. At end-December

66 The latest available, seasonally adjusted data. 67 The latest available data.

120 2017, Standard & Poor’s gave investment-grade credit ratings (albeit of poor quality) to Italy, Portugal and Spain while the rating of Greece was downgraded to below investment grade.

Table 8.2

Standard & Poor’s credit rating of the euro area countries, end-December 2017

Country Rating Outlook Austria AA+ stable Belgium AA stable Estonia AA- stable Finland AA+ stable France AA stable Greece B- positive The Netherlands AAA stable Ireland A+ stable Italy BBB stable Cyprus BB+ positive Latvia A- positive Lithuania A- positive Luxembourg AAA stable Malta A- positive Germany AAA stable Portugal BBB- stable Slovakia A+ stable Slovenia A+ stable Spain BBB+ positive

Source: Standard & Poor’s (https://tradingeconomics.com)

The euro area’s 2017 current account deficit amounted to 391.4 billion euros or 3.5% of GDP, which was 0.1 percentage points more than in 2016. As for Q3 2017, the surplus stood at 4.4% of GDP,68 significantly above 2.9% of GDP recorded in Q2, and made for the highest surplus recorded in the euro area since its establishment. The euro area has been running a continuous and generally ascending surplus since Q4 International economy 2011. In terms of individual countries, the analysis of the four-quarter cumulative of seasonally unad- justed data ending with Q3 201769 shows that the widest surpluses in relation to GDP were recorded in Malta (11.9%), the Netherlands (10.1%), Ireland (8.4%), and Germany, the latter being the main contrib- utor to the euro area surplus in absolute indicators (7.8%). As for the deficit, apart from Cyprus which had the most prominent negative current account balance of -6.9% of GDP, other euro area countries had no acute issues regarding international trade competiveness. Thus, the current account balances in relation to GDP of Greece, Italy, Portugal and Spain stood at -0.7%, 2.8%, 0.5% and 1.8%, respectively.

The March 2018 forecasts of the ECB’s analysts suggest that the growth in 2017 will amount to 2.5%, notably above the 1.8% from 2016, subsequently decelerating to still strong 2.4% and 1.7% in 2018 and 2019, respectively. It is expected that the unemployment rate will continue declining during the forecasting period, reaching 7.2% in 2020. The HICP will remain within the ECB’s target of below, but close to 2%, without deflation pressures. An overall improvement of government finances is expected, with the fiscal deficit dropping to 0.3% of GDP and public debt to 79.7% of GDP in 2020.

68 The latest published seasonally adjusted data. 69 The latest published data per the country.

121 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Table 8.3

Euro area macroeconomic forecasts for 2017−2020, in %

2017 2018 2019 2020 Real GDP 2.5 2.4 1.9 1.7 Private spending 1.9 1.7 1.7 1.5 Government spending 1.2 1.2 1.2 1.1 Gross investments in fixed assets 3.7 4.4 3.4 2.8 Exports 5.2 5.3 4.1 3.8 Imports 4.6 5.1 4.5 4.0 Employment 1.7 1.4 1.1 0.8 Unemployment rate, in % of workforce 9.1 8.3 7.7 7.2 HICP 1.5 1.4 1.4 1.7 HICP, excluding energy 1.2 1.2 1.6 1.9 HICP, excluding energy and food 1.0 1.1 1.5 1.8 HICP, excluding energy, food, and indirect taxes changes 1.0 1.1 1.5 1.8 Unit labour costs 0.8 1.1 1.2 1.8 Wages and salaries per employee 1.6 2.2 2.0 2.7 Labour productivity 0.8 1.0 0.8 0.9 Fiscal balance, in % of GDP -1.0 -0.7 -0.6 -0.3 Structural fiscal balance, in % of GDP -1.0 -1.0 -0.9 -0.9 Public debt, in % of GDP 86.7 84.4 82.1 79.7 Current account balance, in % of GDP 3.7 4.2 4.3 4.5

Source: ECB, March 2018

Graph 8.3 The US economy grew by 2.3% in 2017. In Q4 The US economic growth rate and GDP 2017, the annual growth rate was 2.5%, whereby components’ contributions, in % the rate had been recording consistent quarterly increase. In its latest World Economic Outlook, the IMF expects the US economy to maintain similar growth, thus the economic growth forecasts have been revised upwards to 2.7% (by 0.4 percentage points) for 2018, and to 2.5% (0.6 percentage points) for 2019. The World Bank’s forecasts for the US economy are somewhat lower, specifically 2.5% for 2018 and 2.2% for 2019. The FED70 expects that the GDP will grow at rates ranging from 2.6% to 3% in 2018, and from 2.2% to 2.6% in 2019.

As in the past four years, the US economy’s growth was based mainly on large personal spending, which rose by 2.7% in 2017. Personal spending rose on the back of personal income, which Source: Bureau of Economic Analysis (BEA) had been increasing consistently since 2009.

70 FOMC projections, March 2018

122 Investments in fixed assets rose by 3.2%. Government spending recorded minor annual increase (0.1%). In 2017, growth was recorded in both imports (3.4%) and exports (3.9%), however, the goods and services account balance was negative.

In the final quarter of the reporting year, the industrial output recorded high growth rates, with the annual growth rate reaching 3.4% in December. At end-Q371, the most significant growth rates were observed in the following activities: financial and insurance activities (14.7%), manufacturing industry, especially the manufacturing of durable goods (7.5%), and information and communications (9%). Significant growth was recorded in retail trade (6.3%), professional, scientific and technical activities (2.7%), and human health and social work activities (5%).

In 2017, the unemployment rate mainly declined, and in December it dropped to 4.1%, the lowest level compared to its pre-crisis values. The unemployment rate has been on a downtrend as of late 2009. The dynamism in the labour market and the economy are reflected in the number of new jobs72, which recorded the average monthly increase of 185 thousand during the year. The following industries generated the main portion of new jobs: construction, manufacturing industry, health services, and professional and business services. The long-term unemployment rate was also on a downtrend in 2017, dropping to 0.94% in December. Observed through the Alternative Measures of Unemployment and Labour Underutilization, i.e. the „U6“ unemployment73, the unemployment rate also downturned and amounted to 8.1% at end-December.

The annual inflation rate, measured by the per- Graph 8.4 sonal consumption expenditure (PCE) index,74 exceeded the central bank’s target rate of 2% Annual CPI, PCE and core inflation measured by PCE, 2013 -2017 only in the first two months, while in Decem- ber it stood at 1.7%. If the movements in the food and energy prices were to be excluded, the value of the PCE index would remain below 2% throughout the year, amounting to 1.5% in De- cember. The annual CPI inflation rate exceeded 2% throughout the major part of 2017, and it De- cember it stood at 2.1%. Food prices recorded the International economy year-on-year rise of 1.6%, while energy prices increased by 6.9% y-o-y.

The fiscal deficit rose from 585.6 billion USD recorded in FY 2016 to 665.7 billion USD in FY 2017, or from 3.2% of GDP to 3.5% of GDP. In the upcoming period, the deficit might widen, fuelled by the tax overhaul package implemented by the Source: FRED, Federal Reserve Bank of St. Louis

71 The latest available data, quarterly rates expressed at the annual level. 72 Nonfarm payrolls, of nonfarm business sector, which does not include economic activities of the following entities: Gen- eral Government, private households, nom-profit organisations and farmers. Military and security agencies are also not included. 73 Refers to a group of "marginally attached" (Persons who want and are available for work, and who have looked for a job sometime in the prior 12 months, but were not counted as unemployed because they had not searched for work in 4 weeks preceding the survey), the group of "discouraged" (a subset of the marginally attached - Persons who are not currently looking due to specific reasons related to the labour market), as well as to a group of part-time employees. 74 Personal Consumption Expenditure, the chain price index used by the FED for inflationary trends assessment.

123 Central Bank of Montenegro CBCG Macroeconomic Report 2017

US administration in late 2017, as well as by the 300 billion USD increase in the next two years’ budget expenditure. Deficit widening would entail an increase in the public debt which stood at 105.4% of GDP at end-2017.

Graph 8.5 Japan’s economy extended its growth streak into 2017, expanding by 1.7%. The Japanese economy Quarterly GDP growth, % 2014-2017 saw positive growth rates in all quarters of 2017, thus maintaining the series of eight successive quarters and one of the longest „positive growth intervals“ in almost three decades. In Q4 2017, the GDP growth rate stood at 1.6%.75

As per the IMF forecasts, the growth of the Japa- nese economy will decelerate over the next two years, particularly in 2019. However, the latest forecasts were revised upwards, specifically to 1.2% for 2018 (by 0.5 percentage points) and 0.9% (0.1 percentage points) for 2019. The World Bank forecasts for the next two years are similar, 1.3% for 2018 and 0.8% for 2019. The Bank of Japan forecasted growth of 1.4% for FY 2018. As for 2019, lower growth rate (0.7%) is expected Source: Government of Japan due to investment cyclicality and the announced tax increase.

In addition to the government incentives, Japan’s economy trends were supported by an increase in global demand in 2017. Exports recorded the annual increase of 6.8%, while imports rose by 3.6%. Contribution of exports to the annual growth rate was substantial (1.1 percentage points). Corporate profits of the Japanese companies reached record levels in 2017. Private (non-residential) investments rose by 3% at the annual level.

On the other hand, personal spending recorded the annual increase of 1.1%, providing a 0.6 percentage point contribution to the growth rate. Measured by annual growth rates, the industrial output recorded monthly growth throughout 2017, which amounted to 4.5% at the annual level. Retail trade saw negative growth only in one month, and this was due to bad weather conditions.

The Nikkei 225 SE index recorded growth that was especially prominent in the second half of the year. Values of TANKAN, the Bank of Japan index in December, suggested continued improvement of the business sentiment. The index extended its growth throughout 2017 - for large companies in manufacturing industry as well as for small businesses outside of manufacturing industry. Furthermore, the consumer confidence index (CCI) upturn, evident as of 2014, additionally increased in 2017.

At end-December, the unemployment rate was 2.8%. Unemployment had been on a downtrend since 2009. The latest data reveal that the unemployment rate dropped to 2.4% in January 2018, making it the lowest rate since April 1993. In addition, both, the number of employed persons and new jobs reached record levels.

75 Quarterly rate expressed at the annual level.

124 The annual inflation rate was positive in all months of 2017, ranging between 0.2% and 1% in Decem- ber. Inflation particularly surged in the final two months of the year. On the other hand, when excluding the prices of food and energy, the picture completely changes. Core inflation76 was relatively low, ranging between 0.2% at the beginning and 0.9% for the year`s two closing months. In January 2018, the Central Bank made an upward revision to its core inflation growth forecast made in October 2017. The new forecasts are ranging between 1.3% and 1.6% for 2018, and between 2% and 2.5% for 2019 (including the tax increase effects).

The Bank of Japan announced that its “quantitative and qualitative monetary easing with yield curve control” started in 2016 will continue until they reach the 2% price growth level.

Fiscal deficit trended downwards to 4.5% of GDP.

8.3. Emerging countries

In 2017, the Chinese economy recorded growth of 6.9%, exceeding the Government’s 6.5% target, as well as the 6.8% estimate made by the IMF, the World Bank, and the OECD. Furthermore, this was the first increase in the annual GDP growth rate in the past seven years. In Q1 and Q2, the economy grew at the rate of 6.9% compared to the same period of 2017, while in Q3, the year-on-year growth was 6.8%.

The latest IMF projections suggest that Chinese economy’s growth will notch up to 6.8% in 2018, slow- ing down to 6.4% in 2019. Both rates were revised upward by 0.1 percentage points in relation to previous forecasts. Looking at the next two years, the World Bank projected growth of 6.8% for 2018 (0.1 percentage points increase) and 6.3% for 2019.

In 2017, investments in fixed assets rose by 7.2%, experiencing the lowest growth rate since 1999. Real estate investing increased by 7%, with investments in commercial real estate rising by 7.7% and investments in residential real estate by 9.4%. In 2017, industrial output grew by 6.6%, which was 0.6 percentage points more than in 2016. Manufacturing industry grew by 7.2% and its vigorous growth was deemed a result of the progress made in high-tech sectors. In 2017, retail trade rose by 10.2%. International economy

The CPI index saw the annual increase of 1.8% in December. In this month, core inflation stood at 2.2%. At the same time, the unemployment rate was 3.9%.

Supported by the recovered global economy China’s economy recorded a 14.2% growth in trade surplus in 2017. The current account surplus stood at 1.4% of GDP.

Preliminary data show that the 2017 fiscal deficit was 3.5% of GDP, exceeding the Government’s target of 3%. In 2016, the deficit was 3.8%. Budget expenditure increased by 7.7%, while the revenues rose by 7.4%.

The Chinese economy`s leverage is extremely high, showing a particularly worrying pace. Channels of borrowing in the previous period (government bailouts, domestic and foreign banks, shadow banking, etc.) are also a matter of concern. Reining in the leveraging of state-owned enterprises has become a priority of the Chinese authorities, with four financial regulators introducing strict rules aimed at

76 When it comes to Japan, the fresh food prices affected the CPI reduction.

125 Central Bank of Montenegro CBCG Macroeconomic Report 2017

combating shadow banking. In their latest reports, the IMF also warns of the „alarming“ level of leverage, calling upon Chinese banks to recapitalise in the effort to reinforce resilience to economic shocks. The stress testing77 of 33 Chinese banks conducted by the IMF revealed that as much as 27 of them needed recapitalisation, noting that the Big Four state-owned commercial banks were adequately capi- talised.

As per preliminary data, the economy of Russia grew by 1.5% in 2017, which was below most estimates. The Central Bank’s expectations regarding economic growth ranged between 1.7% and 2.2%. The IMF’s estimated 2017 growth rate was 1.8%, the World Bank forecasted 1.7%, while the OECD’s growth prognosis was 1.9%.

The IMF made an upward revision of 0.1 percentage points to the forecasted 2018 growth rate, estimating it at 1.7%. As per the latest World Bank Global Economic Prospects78 the forecasted 2018 growth rate stood at 1.8%, after an upward revision of 0.3 percentage points.

Investments in fixed assets grew over the past five quarters. The 2017 growth was 4.4%. However, the volume of private investments in sectors other than oil and natural gas remained limited, posing as one of the main reasons for moderate economic growth rate. In 2017, exports increased by 25.3% and imports rose by 24.1%. The export of energy generating products compensated for a soar in imports recorded throughout the year, fuelled by stronger domestic currency and a surge in domestic demand.

In 2017, industrial output recorded the annual growth of 1%, rising throughout the first three quarters and declining in the final. The consumer confidence index was picking up, while the retail trade saw a 1.2% growth - the first upturn in two years.

The unemployment rate declined over the first half of 2017; however, this trend was halted in the second half of the year. It stood at 5.1% during all three months of Q4. The rate dropped to its three-year low in August, when it amounted to 4.9%. In December, the real growth of wages was 6.2%. On the other hand, the real disposable income growth did not show positive growth rate.

Consumer prices have been on a downturn throughout the year, with the inflation rate at 2.5% in De- cember, missing the central bank’s target of 4%. The latest available data show that this trend extended into 2018. The decline in core inflation was more balanced and evident in all the months of 2017.

The Bank of Russia cut its reference interest rate six times this year, thus the rate started the year at 10%, dropping to 7.75% at year-end. The banking sector stability has improved considerably as compared to the crisis period. Yet, three large private banks were practically nationalised,79 suggesting that the situation in the banking sector is still not quite satisfactory. Economic activity expansion leads to a gradual decline in credit risk, thus the percentage of past due loans declined for the corporate sector (by 0.6 percentage points to 6.6%) as well as the retail sector (by 0.6 percentage points to 7.5%).80

In 2017, the General Government budget ran a deficit of 1.5% of GDP. In addition to fiscal consolidation measures, the Russian Government has presented a fiscal rule aimed at mitigating the external

77 Financial System Stability Assessment (FSSA) - report was based on the FSAP mission (IMF and WB) findings for the P.R. China in October 2015; January, June and December 2016; and February, April, May, and September 2017. 78 Global Economic Prospects, January 2018. 79 "Bank Otkritie", "Binbank" and "Promsvyazbank" 80 Financial Stability Review, Q2-Q3 2017, Bank of Russia

126 volatility impact on the budget and the real exchange rate. Specifically, the Government plans a more efficient way of managing oil and gas revenues. Unlike the previous two rules, which were based on historical oil prices, a portion of the oil and gas revenue the federal government can spend in a given year will be determined by a fixed oil price benchmark ($40 per barrel in 2017 prices). If actual oil prices exceed the benchmark price, the difference will be saved in the National Welfare Fund, and if below, the government can supplement the shortfall by withdrawing an equal but limited amount from the Fund. The implementation of the rule is set for 2019, and the rule is essentially meant to reduce the budget cyclicality by separating spending from the volatility of commodities and protecting the Fund from unexpected movements.

At the beginning of 2018, Standard & Poor’s gave Russia the BBB- investment-grade credit rating, with stable outlook. Fitch Ratings confirmed BBB- rating with positive outlook. Moody’s confirmed Ba1, revising the outlook upwards from stable to positive.

Considering the fact that energy companies make up about a half of the Russian capital market, oil price was the main catalyst of the trends of indices in the Moscow Exchange. These indices declined during the first half of the year, recovering in the second - driven by the mild oil price increase, yet failing to reach the values recorded at the beginning of the year.

In Q3 2017, the Turkish economy recorded quarterly growth of 1.2%, seeing its fourth “positive” quarter in a row. In relation to Q3 2016, economic activity expanded by 11.1%. The IMF estimated that the Turkish economy grew by 7% in 201781, while according to the World Bank the growth was 6.7%. The World Bank revised its growth forecast by 0.4 percentage points, down to 3.5%.

The recovery experienced by the Turkish economy in 2017 was based on interim fiscal incentives aimed towards spending increase and unemployment reduction, then on Credit-Guarantee Fund backing the manufacturing industry and exporters, and on the rise in global demand, primarily by European countries.

In Q3 2017, the household spending rose by 11.7% y-o-y. Visible and invisible exports grew by 17.2%, while imports increased by 14.5% over the same period. Government spending rose by 2.8%, while gross investments in fixed assets rose by 12.4%, y-o-y. International economy

In the second half of the year, the industrial output recorded significantly higher growth rates compared to the first six months, and its annual growth rate stood at 8.7% in December. The number of tourists reached the levels seen before 2016, however, the tourist structure changed and the revenues declined. The number of tourists increased by 23.1% and tourism revenues rose by 18.9%.

The inflation rate exceeded the target by far and is expected to stay along these lines should the -ad equate economic policy adjustments not be implemented. Although the significant depreciation of the Turkish lira had initially sparked inflation, the rising demand and costs also contributed to the increase in prices. The annual CPI inflation rate stood at 11.9% in December. Inflation has been above that of 2016 throughout the year, with the exception of January.

81 Article IV, February 2018.

127 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Moody’s downgraded Turkey’s rating from Ba1 to Ba2, changing its outlook from negative to stable.82 Moody’s stated that the downgrade of Turkey’s rating had been driven by two key developments - first is the continued loss of institutional strength and second is the increased risk of an external shock based on Turkey’s wide current account deficit, which exceeded 5% of GDP. Standard & Poor’s matched the ratings for Turkey (BB), however, with negative outlook.

Turkey’s banking system is stable. Non-performing loans trended around 3% throughout the year, with even lower corporate non-performing loans. Small and medium-sized enterprises experienced increase in the amount of non-performing loans between 2014 and 2016. However, this uptrend was halted in 2017. Profitability was high, with the ROA trending around 2% and the ROE between 14% and 15% throughout the year. The capital adequacy rate rose significantly over the year, mainly owing to the Credit-Guarantee Fund, and it exceeded 17% at end-Q3.

The unemployment rate stood at 10.3% in November, accounting for a positive trend compared to 13% in January - its highest value as of early 2010.

8.4. Neighbouring Countries

In 2017, the neighbouring countries experienced a moderate economic activity pick-up. Employment was restored to its pre-crisis levels, although the unemployment remained high. Real wages and salaries increased. Lending activity recovered. Inflation trends were determined mainly by the recovery of the raw material prices in the global market. Neighbouring countries show high public debt levels, and further stabilisation of such dynamics will require the continuation of fiscal consolidation and structural reforms.

Graph 8.6 Graph 8.7

Annual GDP growth rates of the neighbouring Selected neighbouring countries’ annual countries, 2015 - 2017 CPI rate, in %, 2015–2017

Source: National Statistical Offices Source: National Statistical Offices

82 March 2018

128 Analysed in terms of the results achieved in the four quarters of 2017, the economy of Serbia recorded real annual growth of 1.9%. Although positive economic trends continued into 2017, the growth was decelerated due to bad weather conditions and slower growth recorded in the energy sector early in the year. Growth was boosted by a positive 0.7 percentage point contribution made by industry and that of 0.2 percentage points made by the construction sector, while agriculture provided negative contribution to the growth in the amount of -0.6 percentage points. On the other hand, observed through the GDP components in line with the expenditure approach, the main contributors to the growth were personal spending with 1.3 percentage points, and investments with 1.1 percentage points.

In 2017, the annual inflation rate stayed within the National Bank of Serbia’s target range of 3±1.5%, maintaining this year’s average of 3% at end-Q4. In Q4 2017, the unemployment rate amounted to 14.7%.

The share of central government`s public debt in GDP declined in 2017, standing at 61.5% at the end of the year. Successful fiscal consolidation and structural reform implementation along with forecasts of growth continuing in the upcoming period, have led both Standard&Poor`s and Fitch to upgrade Serbia`s rating to BB in December 2017.

Preliminary data indicate that Croatia’s economy experienced a 2.8% growth in 2017. In Q4 2017, the year-on-year growth amounted to 2%. The growth recorded in Q4 of this year was driven by a 3.4% rise in household spending.

This year brought a boost in inflation, with the annual rate accelerating to 1.2% in December. It is expected that monetary policy will continue to drive growth by supporting high liquidity of the monetary system and maintaining a stable exchange rate of the kuna against the euro.

At the end of the year, the unemployment rate was 12.2%.83 In addition to economic activity pick-up, the rise in employment was also boosted by the government measures aimed at labour cost reduction. The public debt, which had trended upwards between 2008−2015, declined in 2016, and the IMF forecasts indicated that in 2017 the public debt will settle at 81.9% of GDP.

Following a downturn in economic activity in the first half of 2017, Macedonia saw favourable trends International economy in the second part of the year. As per the IMF forecasts, growth of 2.5% is expected in 2017. After a 0.2% deflation which had marked 2016, the annual inflation rate rose in 2017 and amounted to 2.4% at end-Q4 2017. Unemployment declined over the year, reaching 21.9% at end-Q4. At end-Q3, public debt amounted to 37.8% of GDP.

83 Interim data of the Croatian Bureau of Statistics

129 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Table 8.4

Public finances and current account balances in economies of the region, in % of GDP

Budget balance Gross public debt Current account balance Country 2016 2017 2018 2016 2017 2018 2016 2017 2018 Albania -1.8 -2.1 -2.0 72.4 70.5 68.5 -7.6 -7.9 -7.8 Montenegro -3.7 -6.2 -5.6 67.2 69.5 73.2 -17.9 -18.0 16.7 Croatia -0.9 -0.9 -0.9 82.9 80.3 77.4 2.3 3.1 1.9 Macedonia -2.7 -2.9 -3.0 39.6 39.7 40.4 -3.1 -2.5 -2.4 Slovenia -1.9 -0.8 0.0 78.5 76.4 74.1 5.3 5.9 5.4 Serbia -1.3 0.8 0.0 72.5 64.9 63.9 -4.0 -5.4 -5.7 EU -1.7 -1.2 -1.1 84.8 83.5 81.6 - - - Euro area -1.5 -1.1 -0.9 91.1 89.3 87.2 3.3 3.0 3.0

Source: European Commission - autumn 2017 European Economic Forecast

8.5. Interest rates of central banks and exchange rate trends

The ECB made no changes to its reference interest rates84 in 2017, stating that they shall keep their current levels beyond the ending of the bond-buying programme. The ECB reduced its asset-buying program from 80 to 60 billion euros in March, and this scheme was in effect until end-December 2017. As of January 2018, the program will be cut to 30 billion euros, with the ECB keeping the scheme up to and possibly beyond September 2018. The programme will continue if the Governing Council finds it necessary, i.e. until a sustainable inflation growth in line with the target rate (below, but close to 2% in the medium term) is achieved.

As per the ECB, the monetary aggregate M3 recorded the annual growth of 4.6% in December 2017, as a reflection of the ECB’s monetary policy measures. Furthermore, it was stated that monetary policy had been easing the lending conditions for the corporate and the household sectors, i.e. enabling access to financing (especially for small and medium-sized enterprises). In the same month, loans to nonfinancial corporations recorded the annual growth of 3.1%, while loans to households rose by 2.9%. In their media statements, the Governing Council regularly pointed out that, in addition to monetary policy, implementation of structural reforms were also necessary. The European Commission made the same point in their March 201885 report. The ECB also emphasised the necessity of improvement of the fiscal policy and completion of the banking union as well as the capital markets union.

The FED increased its benchmark interest rate three times throughout 2017, making its latest revision in December when the rate was increased to the range of 1.25%-1.5%. The FOMC stated favourable labour market conditions, economic activity expansion, growth of personal spending and investments as grounds for such actions. The Committee expects the inflation to settle around the target level in the medium term. After analysing the estimates for monetary policy from March 2018, the FED signalled more than three interest rate hikes this year. The FED initiated its balance sheet normalisation i.e. a gradual reduction of its securities portfolio in October 2017.

84 Overnight deposits -0.4%, main refinancing operations 0.0%, and overnight loans 0.25%. 85 Winter Forecast 2018, interim

130 The Bank of England increased interest rates for the first time in a decade, raising its benchmark by 0.25 percentage points to 0.5%. The central bank’s Monetary Policy Committee explained that the CPI inflation stood above 2% and that it was rising. Such intervention was necessary against the backdrop of a weaker British pound, the economy operating above potential, extremely low unemployment rate, and amidst the process of redefining relations with the EU (the country’s largest trade and investment partner) and bearing in mind the impact of those new relations on the trends of capital, labour force, and household income in the UK. The Bank of England signalled that any future interest rate hikes would be gradual. Graph 8.8 In December 2017, the Bank of Japan confirmed Reference interest rates of central banks, in %, its commitment to extending its current balance 2016 - 2017 sheet expansion policy into 2018.

Short-term market reference interest rates mir- rored the reference interest rates of the central banks. The 6-month US Dollar LIBOR interest rate continued its uptrend in 2017, rising particularly over the final quarter of the year. It stood at 1.837% at the year-end, which makes for an annual increase of 0.52 percentage points.

The 3-month EURIBOR recorded virtually no change compared to the end of the previous year, amounting to -0.329%. EONIA saw less fluctua- tion on average, closing the year at -0.346%. Both EONIA and EURIBOR have reached their nadirs in 2017. Source: Bloomberg

Graph 8.9 Graph 8.10

Euro against other currencies, 2017, 1 January International economy Reference market interest rates, in %, 2017=100 (rise/fall means strengthening/ 2016-2017 weakening of the euro)

Source: Bloomberg Source: Bloomberg, CBCG calculations

131 Central Bank of Montenegro CBCG Macroeconomic Report 2017

In nominal terms, the euro appreciated against the leading world currencies in 2017 in response to the above-expected economic activity expansion and the announced normalisation of monetary policy. It appreciated by 14.1% against the U.S. dollar, 10% against the Japanese yen, 9.2% against the British pound, and 4.1% against the Swiss franc.

132 MOST IMPORTANT EVENTS 09

IMPORTANT EVENTS IN 2017

JANUARY

The Government adopted the 2017 – 2019 Economic Reform Programme of Montenegro, which envisages a sustainable and inclusive economic growth that will contribute to reducing the developmental lag behind the EU average and increasing the citizens’ quality of life.

The Government also adopted the reports on the process of granting concessions for the construction of small hydro power plants (SHPP) Vinicka and Lijevak.

FEBRUARY

The CBCG Council adopted a decision on licensing the micro-credit financial institution (MFI) Capital - Invest from Berane.

The representatives of the Capital city of Podgorica, the Chamber of Economy (PKCG), the Montene- grin Foreign Investors’ Council, the Association of Montenegrin Managers (AMM) and businesswom- en, Montenegro Business Alliance (MBA), the Association of Women Entrepreneurs, and the Chamber of Skilled Crafts and Entrepreneurship signed the Protocol on joint cooperation on the improvement of investment environment in Podgorica.

Representatives of the Government of Montenegro and the Swiss Consulate General in Montenegro signed a MoU between the Montenegrin government and member countries of the Swiss constituency of European bank for reconstruction and development (EBRD).

MARCH

The State of Montenegro and the Energean Oil & Gas PLC signed a concession contract for hydrocar- bon exploration and production in the Montenegro’s off-shore. Most important events important Most Montenegro’s Chamber of Economy and the Mexican Business Council for Foreign Trade, Investment and Technology (COMCE) signed an agreement on cooperation on the margins of a meeting where the opportunities for business cooperation of the two countries were presented.

APRIL

The Government adopted the Information on the results of negotiations with Credit Suisse Bank in relation to borrowing in the form of loan arrangement of 30 million euros, i.e. 50 million euros, which represents a more favourable arrangement for Montenegro.

The governments of Montenegro and Slovenia signed an Action plan on cooperation of their respective ministries in the area of agriculture, forestry, food safety, beekeeping and aquaculture, as a part of

135 Central Bank of Montenegro CBCG Macroeconomic Report 2017

the meeting of the Joint Commission for implementation of the Agreement on economic cooperation between the two countries.

Representatives of the company Luštica Development and Belgian BESIX group signed a Memoran- dum of Understanding on joint investment in development and construction of a hotel Chedi Luštica Bay, including the construction of residential blocks Kamelija and Magnolija.

MAY

The Government adopted the Programme of incentive measures in tourism in 2017/2018, which includes specific measures of financial support for improving the quality of tourist offer.

Representatives of the governments of Montenegro and China signed a Memorandum of Understand- ing in Beijing as a part of the 21st Century Maritime Silk Route Economic Belt.

The Union of young entrepreneurs of Montenegro (UMPCG) was founded, aimed at fostering development of entrepreneurship.

Agricultural producers from Montenegro, 168 of them, signed Contracts on the allocation of grant support for agricultural holdings through the IPARD-like 1.2 public invitation, with a total investment of projects amounting to 4.2 million euros, for which 2.4 million euros of grants from the EU funds and the national budget had been provided.

JUNE

The Parliament adopted amendments to the Budget Law of Montenegro for 2017, which came as a result of necessary technical harmonisation with the new organisation and the increase of source revenues of eight million euros.

The Parliament of Montenegro adopted amendments to the Law on voluntary financial restructuring towards financial institutions, which, inter alia, should contribute to the lower level of non-performing loans.

The Associations of Banks of Montenegro and Serbia signed a Memorandum of understanding in Bel- grade, aimed at improving the image and trust in the banking system, promoting high standards and corporate governance in banking.

The Government adopted the Action plan for combating shadow economy, aimed at contributing to the reduction of fiscal deficit and encouraging companies to legalise their business operations.

Representatives of the Ministry of Finance of Montenegro and the U.S. Embassy to Montenegro signed an Agreement on the improvement of international tax compliance and implementing FATCA regulations with annexes between the governments of these two countries.

The Government adopted Proposed amendments to the Immovable Property Tax, changing the pro- visions that have posed as a business barrier, i.e. the lessees of state property who have concluded long-term lease agreements with the state, pursuant to the amendments to the Law, are not subject to immovable property tax.

136 Representatives of Montenegro`s electricity company (EPCG), Electricity Market Operator of Mon- tenegro (COTEE) and Electric Transmission System of Montenegro (CGES) signed the Articles of In- corporation and the Articles of Association of the power exchange company, which marks a significant step towards the establishment of the regional electricity market.

JULY

The Parliament adopted the Montenegro Fiscal Strategy 2017-2020 as well as the proposed amendments to the Law on Value Added Tax and the Law on Excise Taxes.

The government defined the Draft Law Amending the Law on Restitution of Seized Property Rights due to the need to extend the validity period of the restitution bonds, bearing in mind that the validity period of previously issued bonds was to expire next month.

AUGUST

The Government adopted the Decree on the Collection of Tax Receivables by Taxpayer Property that allows for the debt due to taxes, duties, contributions and other monetary benefits to be paid by the taxpayer’s property.

The amendments to the Law on Excise Taxes, which will induce the increase in the prices of tobacco product, came into force as of 1 August.

SEPTEMBER

On this year’s competitiveness list of the World Economic Forum (WEF), Montenegro was ranked 77th out of 137 countries.

Representatives of the Ministry of Agriculture and Rural Development and the Ministry of Culture signed in Cetinje the agreement on joint implementation of the project “Agro-design – Montenegrin food culture”, aimed at promoting and branding Montenegrin values.

OCTOBER

The Parliament adopted amendments to the Law on Budget and Fiscal Responsibility, pursuant to which the municipalities may submit a request to the Ministry of Finance for approval of exceeding events important Most the limit or budget deficit in excess of the said limit by no later than 15 October.

The Parliament adopted the Law Amending the Central Bank of Montenegro Law.

The CBCG Council adopted the Recommendations to the Government of Montenegro for 2018 Eco- nomic Policy, which encourage the promotion of the growth potential, increasing and improving the overall stability of the system, while simultaneously removing all recognized vulnerabilities of the Montenegrin corporate sector.

The Parliament adopted the Law on Financial Leasing, Factoring, Purchase of Receivables, Micro- Lending and Credit-Guarantee Operations which, inter alia, prescribes the obligation for any entity engaged in these operations to acquire a license. The Law is deemed an enhancement to the existing regulatory framework.

137 Central Bank of Montenegro CBCG Macroeconomic Report 2017

NOVEMBER

With a view to aligning with the amended CBCG Law, the CBCG Council adopted a Decision on detailed conditions for granting loans to banks in case of their liquidity needs. Pursuant to the Decision, liquidity loan can be granted to a solvent bank; the bank may use intraday loan provided that it has used 50% of allocated reserve requirements for maintaining daily liquidity.

The Montenegrin Government adopted the Information on the Results of the Negotiations between the Government of Montenegro and the International Bank for Reconstruction and Development (IBRD) in connection with the PBG-Policy Based Guarantee and accepted the proposals of the key documents that serve as the basis for the finalisation of the process of granting the Guarantee to Montenegro.

Deputy Prime Ministers of Montenegro and the Republic of Turkey signed a package of agreements aimed at achieving concrete results in the field of deepening and improving the economic cooperation between the two countries, while defining clear future goals.

The parliament adopted the Law on Budget Execution for 2016.

DECEMBER

The Parliament adopted the 2018 Budget Law and the Amendments to the 2017 Budget Law.

The Ministry of Finance and the European Bank for Reconstruction and Development signed a 40 million euro worth loan agreement designated for financing the reconstruction of Montenegro’s main roads.

The Council of Europe Development Bank granted 10 million euros for the financing of the third stage of the “1000+ Apartments” project.

Agreements among the Capital city of Podgorica, the International Finance Cooperation, and Erste Banka were signed in Podgorica. The agreements will create necessary financial preconditions for the construction of the section of the South-Western By-pass valued nearly 22 million euros.

138 ANNEXES 10

Annex A: Real Sector Developments

Table 1: Overview of macroeconomic developments

2016 2017 (chain index) Description XII/XI I II III IV V VI VII VIII IX X XI XII Industrial production (index) 101.0 63.4 134.1 104.1 85.4 105.8 92.2 123.0 103.4 92.0 107.5 111.4 98.4 Consumer prices (index) 100.2 100.3 100.1 100.1 100.1 100.1 99.9 100.2 100.5 100.9 99.9 100.1 99.8 Industrial producer prices (index) 99.8 101.9 99.0 99.8 99.9 99.9 99.6 100.1 99.8 99.8 99.9 100.1 100.4

Source: MONSTAT

Tabela 2: Industrial output

XII 2017 XII 2017 XII 2017 I-XII 2017 Description Ø 2016 XI 2017 XII 2016 I-XII 2016 INDUSTRIAL PRODUCTION INDEX - total 112.6 98.4 101.5 95.8 Capital goods 108.4 90.1 113.7 97.7 Consumer durables 102.3 73.7 90.5 148.7 Intermediate goods 159.1 94.3 144.9 142.6 Consumer non-durables 55.7 70.2 52.4 75.0 Energy 120.4 119.9 102.5 78.0 MINING AND QUARRYING 214.5 70.9 170.6 213.9 Mining of coal and lignite 86.2 60.7 58.8 108.1 Mining of metal ores 300.0¹ 74.3 300.0¹ 300.0¹ Other mining and quarrying 74.6 76.1 70.1 93.5 MANUFACTURING 95.1 89.1 89.1 97.0 Manufacture of food products 87.8 89.4 78.0 94.4 Manufacture of beverages 122.4 143.7 95.6 105.1 Manufacture of tobacco products - - - - Manufacture of wearing apparel 109.1 120.0 100.0 101.5 Manufacture of leather and related products - - - 75.0 Manufacture of wood and of products of wood and cork 95.4 84.2 94.3 100.7 Manufacture of paper and paper products 275.3 135.4 248.0 182.1 Printing and reproduction of recorded media 52.6 100.2 85.1 55.4 Manufacture of chemical and chemical products 173.2 145.7 119.4 140.4 Manufacture of basic pharmaceutical products 32.3 43.1 31.2 66.6 Manufacture of rubber and plastic products 104.2 102.6 102.3 101.6 Manufacture of other non-metallic mineral products 180.7 99.5 137.8 148.1 Annexes Manufacture of basic metals 102.1 96.7 109.0 101.6 Manufacture of fabricated metal products 99.0 210.6 95.7 90.8 Production of machinery and equipment, not mentioned 105.2 87.4 111.2 96.8 elsewhere Manufacture of furniture 102.3 73.7 90.5 148.7 Repair and installation of machinery and equipment - - - - ELECTRICITY, GAS, STEAM AND AIR COND. SUPPLY 123.3 127.4 107.2 75.4 Electricity, gas, steam and air conditioning supply 123.3 127.4 107.2 75.4

1 Calculated index is higher than 300.0.

141 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Table 3: Industrial production

Electricity, gas, steam and Total Mining and quarrying Manufacturing airconditioning supply Index Index Index Index period Monthly period Monthly period Monthly period Monthly on 2010=100 growth on 2010=100 growth on 2010=100 growth 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 2015 107.9 91.9 119.9 94.1 2016 95.6 81.9 92.2 103.5 I 84.1 -19.1 93.7 -26.7 66.5 -32.5 104.0 -3.5 II 92.6 10.1 114.3 22.1 84.5 26.9 99.8 -4.0 III 97.5 5.3 119.1 4.2 97.6 15.5 94.8 -5.0 IV 91.5 -6.2 69.7 -41.5 111.5 14.2 70.1 -26.0 V 69.3 -24.3 31.9 -54.2 99.9 -10.4 37.1 -47.1 VI 75.5 8.9 79.7 149.3 102.7 2.9 42.4 14.4 2015 VII 100.4 32.9 93.2 17.0 119.3 16.1 78.7 85.5 VIII 79.1 -21.3 89.0 -4.5 94.2 -21.0 59.7 -24.0 IX 83.2 5.1 90.1 1.2 96.9 2.6 65.8 10.2 X 97.8 18.0 83.9 -6.9 125.2 30.0 66.5 1.0 XI 102.0 4.3 91.3 8.8 129.8 3.6 70.0 5.3 XII 86.0 -15.7 90.3 -1.0 98.1 -24.4 71.0 1.4 I 73.8 -14.2 79.0 -12.5 68.5 -30.1 79.5 12.0 II 75.0 1.7 51.1 -35.3 83.05 21.2 68.25 -14.2 III 100.4 33.8 53.5 4.8 110.0 32.3 94.6 38.6 IV 80.05 -21.6 54.65 1.5 75.35 -31.5 85.6 -9.4 V 77 -3.9 63.95 -34.3 87.1 15.5 66.7 -22.1 VI 81.5 6.1 74.7 31.3 110.0 26.6 48.2 -27.8 2016 VII 86.3 5.4 102 64.1 102.9 -6.6 64.4 33.8 VIII 87.05 0.7 112.4 10.0 106.3 3.4 60.8 -5.7 IX 88.45 1.6 124.85 13.0 102.1 -4.0 67.6 11.2 X 86.15 -2.3 116.8 -5.6 92.15 -9.1 75.35 11.5 XI 94.2 9.6 117.8 2.5 92.3 0.1 93.8 24.5 XII 93.8 1.0 97.2 5.1 100.5 8.9 85.3 -9.1 I 59.4 -36.6 121.1 24.6 53.8 -46.5 58.7 -31.2 II 79.7 34.1 206.0 70.1 68.8 27.8 77.6 32.1 III 84.2 4.1 225.6 -2.8 73.6 7.0 80.1 3.3 IV 71.9 -14.6 161.6 -28.4 90.9 23.6 38.5 -52 V 76.1 5.8 169.5 4.9 116.1 27.7 17.0 -55.8 VI 70.2 -7.8 138.6 -18.2 112.6 -2.9 11.1 -34.5 2017 VII 86.5 23.0 228.1 64.6 87.9 -22.0 67.7 300.0¹ VIII 89.4 3.4 223.0 -2.2 104.4 18.8 55.4 -18.2 IX 82.3 -8.0 205.9 -7.7 99.7 -4.5 46.6 -15.9 IX 88.0 7.5 251.3 22.1 98.7 -0.2 55.5 19.3 XI 98.0 11.4 291.4 16.0 100.6 1.9 71.8 29.4 XII 96.5 -1.6 206.6 -29.1 89.6 -10.9 91.5 27.4

1 Calculated index is higher than 300.0.

142 Table 4: Industrial output

2017 I II III IV V VI VII VIII IX X XI XII Chain index 63.4 134.1 104.1 85.4 105.8 92.2 123.0 103.4 92.0 107.5 111.4 98.4 ø 2016 = 100 70.4 94.4 98.3 84.0 88.9 82.0 100.9 104.3 96.0 103.2 114.4 112.6 Month-on-month 80.5 106.2 82.6 89.8 98.8 86.1 100.2 102.7 93.0 102.6 104.0 101.5 Year-on-year 93.4 89.1 89.5 91.3 90.4 91.9 93.3 93.3 94.2 95.2 95.8

Table 5: Consumer prices

2017 I II III IV V VI VII VIII IX X XI XII Chain index 100.3 100.1 100.1 100.1 100.1 99.9 100.2 100.5 100.9 99.9 100.1 99.8 ø 2015 = 100 101.3 101.4 101.5 101.6 101.6 101.5 101.7 102.3 103.2 103.0 103.2 102.9 Month-on-month 102.0 102.5 102.7 102.3 102.3 102.1 102.4 102.8 102.8 102.3 102.4 101.9 Year-on-year 102.3 102.4 102.4 102.4 102.3 102.3 102.4 102.4 102.4 102.4 102.4 December 2016 = 100 100.3

Table 6: Producers’ prices of manufactured products

2017 I II III IV V VI VII VIII IX X XI XII Chain index 101.9 99.0 99.8 99.9 99.9 99.6 100.1 99.8 99.8 99.9 100.1 100.4 ø 2016 = 100 101.9 100.9 100.7 100.6 100.5 100.1 100.2 100.0 99.8 99.7 99.7 100.1 Month-on-month 101.9 100.8 100.7 100.6 100.8 100.2 100.1 100.0 99.9 99.8 99.5 100.1 Year-on-year 101.4 101.2 101.0 101.0 100.8 100.7 100.6 100.5 100.5 100.4 100.4 December 2016= 100 101.9

Source: MONSTAT Annexes

143 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Table 7: Prices

Producer’s prices of Export producer prices Import industrial Consumer prices industrial products of industrial products product 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 I -0.4 -0.8 -1.3 0.1 -7.4 2.1 -2.7 -0.1 II -0.6 0.0 -1.2 0.3 -6.4 -0.2 -2.7 0.1 III -0.9 0.1 -0.3 0.2 -9.1 0.0 -2.8 -0.4 IV -1.4 -0.2 -0.2 0.1 -3.7 1.9 -2.3 -0.2 V -1.3 0.3 -0.1 -0.1 -1.7 0.2 -1.7 0.2 VI -0.1 0.5 0.0 0.1 2.1 2.8 -1.3 0.1 2014 VII -1.2 -0.4 0.1 0.0 5.4 2.1 -0.9 0.1 VIII -1.1 0.1 1.0 0.4 12.4 5.1 -0.7 0.1 IX -0.7 0.5 0.9 0.0 14.1 1.9 -0.6 -0.1 X -0.5 0.1 1.0 0.0 16.3 -0.1 -0.4 -0.4 XI 0.0 -0.1 1.1 0.0 13.8 -0.1 -1.2 -0.6 XII -0.3 -0.4 0.9 -0.1 20.3 3.2 -2.0 -0.8 I 0.2 -0.2 0.8 0.1 15.9 -1.0 -3.2 -1.1 II 0.6 0.3 0.6 0.0 17.3 1.0 -3.1 0.1 III 1.6 1.1 0.5 0.1 16.4 -0.8 -1.7 0.9 IV 2.1 0.3 0.3 -0.1 8.6 -5.1 -1.7 -0.2 V 2.3 0.6 0.5 0.0 5.1 -3.1 -1.7 0.2 VI 1.9 0.1 0.4 -0.1 0.4 -1.9 -1.8 0.1 2015 VII 1.9 -0.5 0.3 -0.1 -3.2 -1.6 -1.7 0.1 VIII 1.9 0.1 0.1 0.1 -7.9 -0.2 -2.3 -0.5 IX 1.7 0.3 0.1 0.0 -19.5 0.1 -2.9 -0.7 X 1.5 -0.1 0.0 -0.1 -10.9 -1.7 -2.3 0.2 XI 1.4 -0.2 0.0 0.1 -9.9 1.0 -1.8 -0.1 XII 1.4 -0.3 0.0 -0.1 -12.2 0.4 -1.2 -0.3 I 1.0 -0.7 0.1 -0.3 -8.8 -0.7 -0.9 -0.6 II 0.3 -0.4 0.2 0.1 -9.0 1.6 -1.2 -0.4 III -0.9 -0.1 0.0 -0.1 -8.6 -0.3 -2.4 -0.1 IV -0.8 0.4 0.2 0.0 -5.0 -0.1 -1.8 0.4 V -1.2 0.1 -0.2 -0.3 -2.4 0.3 -1.8 0.2 VI -1.3 0.0 0.0 0.3 -0.4 0.7 -1.3 0.5 2016 VII -0.9 -0.1 0.1 0.2 0.9 0.1 -1.6 -0.2 VIII -0.8 0.1 -0.2 -0.1 0.7 0.2 -1.5 -0.6 IX -0.3 0.9 -0.4 -0.1 0.4 -0.9 -0.3 0.5 X 0.2 0.4 -0.3 -0.1 3.9 2.4 -0.4 0.1 XI 0.5 0.1 -0.1 0.3 6.0 2.6 -0.2 0.2 XII 1.0 0.2 -0.3 -0.2 6.4 0.5 0.6 0.5 I 2.0 0.3 1.9 1.9 9.3 2.0 3.3 2.0 II 2.5 0.1 0.8 -1.0 9.1 1.4 4.9 1.1 III 2.7 0.1 0.7 -0.2 10.9 1.2 4.8 -0.1 IV 2.3 0.1 0.6 -0.1 10.9 -0.1 4.1 -0.2 V 2.3 0.1 0.8 -0.1 9.8 -0.7 3.4 -0.4 VI 2.1 -0.1 0.2 -0.4 8.3 -0.6 2.7 -0.1 2017 VII 2.4 0.2 0.1 0.1 5.8 -2.2 2.6 -0.3 VIII 2.8 0.5 0.0 -0.2 7.2 1.4 3.6 0.4 IX 2.8 0.9 -0.1 -0.2 9.7 1.4 3.5 0.4 X 2.3 -0.1 -0.2 -0.1 8.4 1.2 3.8 0.3 XI 2.4 0.1 -0.5 0.1 5.1 -0.5 3.9 0.4 XII 1.9 -0.2 0.1 0.4 3.3 -2.3 3.6 0.2

Source: MONSTAT

144 Table 8: Tourism (collective accommodation)*

2016 2017 Index 2017 Structure XII I-XII XII I-XII 2016 Total 26,623 1,813,817 42,017 2,000,009 110.3 100.0 Arrivals Domestic 7,313 151,696 8,111 122,797 80.9 6.1 Foreign 19,310 1,662,121 33,906 1,877,212 112.9 93.9 Total 96,262 11,250,005 174,353 11,953,316 106.3 100.0 Overnights Domestic 18,169 721,530 19,529 483,184 67.0 4.0 Foreign 78,093 10,528,475 154,824 11,470,132 108.9 96.0

* 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 *** 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 *** 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 *** 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 *** 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 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 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 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 **** 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 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 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 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 169,719 170,486 171,855 174,208 177,865 180,884 182,444 181,232 177,027 174,761 174,402 172,517 2016 170,434 170,922 172,098 174,700 178,660 183,329 185,659 184,308 180,409 178,629 178,278 177,473 2017 177,058 178,112 179,783 181,687 185,886 188,167 191,770 188,161 184,719 177,369 178,078 177,627 Unemployed** 2004 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 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 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 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 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 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 31,055 32,375 33,117 33,188 32,377 31,324 31,118 30,595 31,016 31,900 32,199 32,106 2011 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 31,339 31,495 31,562 31,320 30,126 29,411 28,686 28,549 28,272 29,540 30,718 31,168 Annexes 2013 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 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 35,152 35,172 34,903 33,975 32,347 31,092 31,277 33,073 33,773 36,363 37,930 39,991 2016 41,191 42,616 42,406 41,478 40,242 39,983 40,123 41,088 42,483 45,273 47,757 49,487 2017 51,148 52,241 52,905 52,856 51,258 46,781 46,876 49,058 48,752 50,752 52,226 51,262

* Source: MONSTAT ** Source: Employment Agency *** 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).

145 Central Bank of Montenegro CBCG Macroeconomic Report 2017

7.3 1.0 2.9 6.7 0.0 0.0 0.0 2.8 21.1 61.7 10.9 78.1 12.3 64.6 100.0 100.0 in % Structure 31. 12. 2017 12. 31. - 0.0 11.1 93.7 99.9 99.9 99.4 83.5 90.3 111.8 113.5 113.8 110.3 110.5 110.3 105.6 8:4 index 0 0 84 43,312 8 514230 307,145 118,512 121,557 279,107 882,103 454,186 4,182,128 4,182,128 3,267,150 31. 12. 2,700,517 2,582,006 0 0 124 46,143 7 523150 787,415 118,918 130,146 326,859 446,713 304,772 2017 3,137,413 30. 09. 2,580,761 2,580,761 2,699,679 2,699,679 4,095,605 4,095,605 0 0 141 46,134 6 501573 323,101 350,795 350,795 138,605 125,444 125,444 462,272 690,354 2,912,266 2,912,266 30. 06. 2,599,231 3,890,219 3,890,219 2,460,626 0 0 41 49,028 5 496393 121,421 139,426 321,648 320,772 320,772 694,676 463,881 2,857,419 31. 03. 2,505,965 3,796,881 3,796,881 2,366,539 0 165 757 4 46,236 141,916 307,417 487184 121,665 798,215 456,792 308,969 2,415,818 31. 12. 2,871,680 2,273,902 3,790,255 3,790,255 0 84 813 41,100 3 501733 110,412 132,157 391,312 716,457 272,790 298,689 2,374,439 2,854,133 2,854,133 30. 09. 3,739,881 3,739,881 2,506,597 2,506,597 0 2016 416 102 41,214 2 277,127 277,127 119,765 488531 144,123 289,104 389,557 640,910 2,377,511 2,377,511 3,511,847 3,511,847 30. 06. 2,233,388 2,626,008 0 0 66 1 40,825 469437 251,134 109,375 279,996 144,387 564,625 406,340 406,340 31. 03. 2,610,435 2,230,178 2,374,565 3,440,381 3,440,381 ASSETS B 2. 1. Value adjustment2. 1. of loans 2.2. Net loans TOTAL LIABILITIES TOTAL TOTAL ASSETS LIABILITIES Deposits1. 3. Securities issued Other5. liabilities 6. Value adjustment of other assets derivatives Financial 4. capital 6. Total 2. Borrowings 4. Derivative financial assets financial Derivative 4. assets Other 5. 1. Cash and deposits1. with central banks 2. Loans 3. Securities3. Annex Balance 10: sheetTable of banks, EUR thousand

146 Annex C

Table 11: Auctions of treasury bills in 2017, in EUR 000

Maturity of Weighted issued treasury Issue date Issued Sold Total demand average interest bills, number of rate (annual) days I 182 13.01.2017 16,400.0 24,450.0 32,450.0 2.46% 182 21.02.2017 40,350.0 32,590.0 36,590.0 2.51% II 182 28.02.2017 20,964.3 32,495.0 42,495.0 2.69% III 91 15.03.2017 15,000.0 15,000.0 27,600.0 2.35% 2017 VI 182 14.06.2017 10,000.0 13,000.0 26,560.0 1.88% VII 182 17.07.2017 20,000.0 24,450.0 38,130.0 1.71% 182 22.08.2017 22,590.0 17,590.0 54,450.0 1.53% VIII 182 30.08.2017 22,495.0 32,495.0 62,750.0 1.32% XII 182 13.12.2017 3,000.0 3,000.0 32,200.0 0.20%

number of issued sold demand Total for 2017 auctions 9 170,799.30 195,070.00 353,225.00 Annexes

147 Central Bank of Montenegro CBCG Macroeconomic Report 2017

Annex D Table 12: Consolidated public consumption* in Montenegro 01. 01. - 31. 12. 2017

Realization Realization Realization Plan 2017 2017 Participation 2016 in relation DESCRIPTION in EUR in EUR in GDP % in EUR to 2016 million million million Index PUBLIC REVENUES 1786.4 1785.1 42.1 1684.3 106.0 Taxes 1104.6 1104.3 26.1 1012.8 109.0 Personal income tax 153.3 145.6 3.4 160.0 91.0 Corporate profit tax 48.7 49.2 1.2 45.3 108.6 Property turnover tax 13.8 15.2 0.4 13.2 115.2 Value added tax 550.5 548.7 13.0 500.7 109.6 Excises 225.6 225.1 5.3 182.7 123.2 Tax on international trade and transactions 25.8 25.4 0.6 24.3 104.5 Local taxes 77.7 85.9 2.0 77.4 111.0 Other republic taxes 9.2 9.2 0.2 9.2 100.0 Contributions 500.5 494.9 11.7 462.9 106.9 Contributions for pension and disability insurance 304.7 303.0 7.2 273.5 110.8 Contributions for health insurance 171.3 167.4 4.0 164.4 101.8 Contributions for unemployment insurance 12.8 12.6 0.3 13.0 96.9 Other contributions 11.7 11.9 0.3 12.0 99.2 Duties 19.4 20.2 0.5 18.9 106.9 Fees 73.0 79.8 1.9 120.2 66.4 Other revenues 48.4 49.1 1.2 47.5 103.4 Receipts from repayment of loans and funds carried over 6.9 6.3 0.1 4.7 134.0 from previous year Donations 33.6 30.5 0.7 17.3 176.3 CONSOLIDATED EXPENDITURES 1962.9 2012.9 47.5 1826.5 110.2 CURRENT PUBLIC CONSUMPTION 1669.3 1711.3 40.4 1720.6 99.5 Current expenditures 826.6 858.8 20.3 818.4 104.9 Gross salaries and contributions charged to employer 487.6 492.1 11.6 467.6 105.2 Other personal earnings 17.5 13.9 0.3 15.3 90.8 Expenditures for supplies and services 96.1 110.8 2.6 106.4 104.1 Expenditures for current maintenance 25.7 26.4 0.6 26.2 100.8 Interests 101.4 102.5 2.4 85.7 119.6 Rent 9.7 9.7 0.2 9.7 100.0 Subsidies 28.3 29.0 0.7 27.9 103.9 Other current expenditures 35.9 42.0 1.0 37.5 112.0 Current capital expenditure 24.4 32.4 0.8 42.1 77.0 Social security transfers 565.7 538.9 12.7 556.1 96.9 Transfers to institutions, individuals, NGO and public sector 209.3 212.8 5.0 213.2 99.8 Capital expenditure 293.6 301.6 7.1 105.9 284.8 Borrowings and loans 3.0 7.2 0.2 3.5 205.7 Reserves 24.7 21.7 0.5 20.8 104.3 Repayment of guarantees 40.0 0.0 0.0 0.0 - Repayment of liabilities from the previous period 0.0 71.9 1.7 108.6 66.2 Net increase of liabilities 0.0 0.0 0.0 -30.1 0.0 DEFICIT/SURPLUS** -176.5 -227.8 -5.4 -142.2 160.2 Corrected surplus/deficit -112.1 - Debt repayment to residents 81.9 236.3 5.6 240.5 98.3 Debt repayment to non-residents 137.8 135.5 3.2 309.9 43.7 Repayment of liabilities from the previous period 33.7 0.0 0.0 0.0 - Privatisation revenues 5.0 9.3 0.2 11.1 83.8 Transfers 3.0 3.6 0.1 1.8 200.0 Borrowings and loans from foreign sources 301.4 353.3 8.3 332.0 106.4 Borrowings and loans from domestic sources 110.0 264.4 6.2 329.2 80.3 Deposit increase/decrease 10.4 -23.7 -0.6 18.5 -128.1

* Consolidated public consumption includes budget revenues and expenditures, local self-government and state funds. ** Deficit / Surplus as difference between source revenues and consolidated expenditures. Source: Ministry of Finance

148 Annexes

149 CIP - Каталогизација у публикацији Национална библиотека Црне Горе, Цетиње ISSN 2337-0181 = Macroeconomic report COBISS.CG-ID 25885968