CHIEF ECONOMIST ANNUAL REPORT 2006 Podgorica, 2007 PUBLISHED BY: Central Bank of Montenegro Bulevar Svetog Petra Cetinjskog 6 81000 Podgorica Telephone: +381 81 665 331 Fax: +381 81 665 336 WEBSITE: http://www.cb-cg.org CENTRAL BANK COUNCIL: Ljubiša Krgović, MS, President Milojica Dakić, MS Goran Knežević, MS Petar Drakić Krunislav Vukčević Radmila Savićević Franjo Štiblar, PhD PREPARED BY: Nikola Fabris, PhD, Chief Economist Research and Statistics Department TRANSLATED BY: Translation Services Division DESIGNED BY: Andrijana Vujović PRINTED BY: Grafo Crna Gora PRINTED IN: 200 copies Users of this publication are requested to make reference to the source of information whenever they use data from the Report. BASIC INFORMATION ABOUT MONTENEGRO Surface: 13,812 km2 Population: 620.145 Length of borders : 614 km Podgorica (169,132 inhabitants) - Capital: administrative and economic centre Royal Capital: Cetinje– historical and cultural centre Length of seacoast: 293 km Length of beaches: 73 km The longest beach: Velika plaza, Ulcinj - 13.000 m The highest peak: Bobotov kuk (mountain Durmitor) - 2,522 m The largest lake: Skadarsko lake - 391 km2 The deepest canyon: river Tara - 1,300 m The biggest bay: Boka Kotorska Time zone: GTM+1 Electric system: 220V/50Hz Climate: Mediterranean Average air temperature: in summer 27.4 C Maximum sea temperature 27.1 C Average number of sunny days in a year: 240 Swimming season: 180 days Sea: Adriatic Sea transparency: from 38 to 56 m CONTENTS MACROECONOMIC ENVIRONMENT IN MONTENEGRO 9 1. REAL SECTOR DEVELOPMENTS 13 1.1. Gross Domestic Product 15 1.2 Activities 21 1.3. Prices 31 1.4. Labour Market 39 1.5. Results of the Processing of Annual Financial Statements of Legal Entities in Montenegro 43 2. MONETARY DEVELOPMENTS 51 2.1. Money Supply 54 2.2. Banks’ Liquidity 55 2.3. Aggregated Balance Sheet of Banks 56 2.4. Banks’ Reserve Requirement 67 2.5. Micro Credit Financial Institutions 69 2.6. Lending Interest Rates 71 3. FINANCIAL MARKETS 75 3.1. Money Market 77 3.2. Capital Market 78 4. FISCAL SECTOR 85 4.1. Budget Review 87 4.2. Review of Budgetary Funds in 2006 94 5. PUBLIC DEBT 97 5.1. Foreign Public Debt 99 5.2. Domestic Public Debt 102 5.3. Public Debt Repayment 103 6. EXTERNAL DEVELOPMENTS 105 6.1. Balance of Payments Current Account 108 6.2. Capital and Financial Transactions Account 117 7. INTERNATIONAL ECONOMY 121 7.1. Economic Trends 124 7.2. Interest Rate Movements 126 7.3. Exchange Rate Movements 127 7.4. Montenegro and International Environment 128 8. IMPORTANT EVENTS IN 2006 131 9. ANNEX 139 Review of macroeconomic developments Percentage 2005 2006 change REAL SECTOR DEVELOPMENTS GDP (in current prices in EUR million) 1,690.0 1,829.0 8.22 Industrial output index (compared to the same period the year before) -1.9% 1.0% --- Forestry (compared to the same period the year before) 14% 14.2%** --- Construction (compared to the same period the year before) 10.6% 47.8%** --- Employment Number of employed people (period-end) 145,261 155,566*** 7.0% Number of unemployed people (period-end) 48,825 38,876 -20% Inflation rate CPI (compared to December the year before) 2.4% 2.8% --- RPI (compared to December the year before) 1.8% 2.0% --- Average salary (EUR, without taxes and contributions) 213 245.95 15.5% MONETARY DEVELOPMENTS M11 (EUR million) 614.7 1.096.7 78.4 Total deposits (EUR million) 487.9 1.071.5 119.6 Deposits by economy 143.9 318.0 121.0 Government deposits 97.8 113.0 15.5 Central government 20.2 21.3 5.4 Institutions and agencies of central government 14.4 20.3 41.0 Funds and municipalities 63.2 71.4 13.0 Deposits by financial institutions 40.1 75.2 87.5 Deposits by households (savings) 175.8 498.6 183.6 Deposits - other 30.3 66.7 120.1 Total loans (EUR million) 375.9 844.4 124.6 Loans to economy 230.1 471.6 105.0 Loans to government 30.8 40.1 30.2 Central government 9.9 12.1 22.2 Institutions and agencies of central government 5.4 3.7 -31.5 Funds and municipalities 15.5 24.3 56.8 Loans to banks and financial institutions 0.1 6.5 6.400 Loans to private citizens 104.3 310.9 198.1 Other loans 10.6 15.3 44.3 Turnover in stock exchanges (EUR million) 198.45 377.01 90.0 NEX stock exchange 116.13 135.70 16.9 Montenegroberza stock exchange 82.31 241.31 193.2 Stock exchange indices NEX20 9,781.28 18,050.80 NEX PIF 7,992.50 17,763.63 MOSTE 465.60 918.88 Average interest rates on 28-day T-bills 4.65% Average interest rates on 56-day T-bills 1.64% Average interest rates on 91-day T-bills 0.98% 0.97% Average interest rates on 182-day T-bills 1.01% 0.50% FISCAL DEVELOPMENTS (EUR million) Origin revenues 428.1 567.2 32.5 Total expenditure and net borrowings 425.3 532.5 25.2 Surplus/deficit of the government 2.8 34.6 1,135.7 Financing 35.1 -32.1 -191.5 Grants 2.5 0.0 Privatisation revenues 136.3 6.3 -95.4 Net indebtedness -103.7 -38.5 -62.9 EXTERNAL DEVELOPMENTS Current account (EUREUR million)million) -154 -568.2 269.0 Trade balance -513.6 -905.6 76.3 Balance of services (tourism +transport+fin.services+other services) 195.5 216.4 10.7 % of trade deficit/other balances coverage 70 37.3 Capital and financial account Current account in % of GDP (EUR) -9.1 -31 240.7 Old FX savings (EUR million) 117 105.2 -10.1 External debt (EUR million) 513.4 504 -1.8 *Government projection for 2006 ** Data for January - November 2006 *** Data for November 2006 MACROECONOMIC ENVIRONMENT IN MONTENEGRO The year 2006 may be viewed as a very successful year. It However, a somewhat higher inflation rate should was a transitional period from the phase of establishing be expected in 2007. Our forecast is that it will range stability to the phase of accelerated growth. The major between 2.5% and 4.5%. A similar estimate was trends that characterized this year were: a rapid growth obtained through the fan chart model that showed, in economic activity, a low inflation rate, the fiscal with a 90% probability rate, that inflation will vary surplus, the record inflow of foreign direct investments, between 1.9% and 4.2%. Inflation movement will and a remarkably dynamic development of the banking be greatly affected by the announced increase in the market. The only real imbalance is the high level of the prices of electricity. current account deficit. With a view to EU accession, 2006 was very important. According to preliminary estimates, GDP rose by 6.5%. The negotiations on the signing of the Stabilisation However, we believe that the actual growth is higher, and Association Agreement (SAA) were concluded, roughly estimated at being a minimum 8%. The GDP ratification being expected in the second quarter of increase was driven by growing demand, and the main 2007. Bearing in mind that Montenegro’s ultimate contributors to its growth were construction, tourism, objective is joining the European Monetary Union, an the banking system, and foreign direct investments. encouraging fact is that all the Maastricht Criteria were met both in 2005 and 2006 (except that with regard The inflation rate was only 2%, measured by the retail to the interest rate). It is not sufficient to fulfil these price index, thus continuing the five-year trend of one- criteria only one year but to keep doing so continuously. digit inflation. The achieved rate was much lower than Currently, most of the new EU member countries do the projected rate of 3%, thus being in line with the not fulfil these criteria. Maastricht Criteria. The somewhat higher rate than that recorded last year (by 2 percentage points) was The financial market developments were very primarily due to the amended methodology whereby encouraging. The amount of loans disbursed rose the oil derivatives weight was increased by almost five by 124%, placed deposits by 120%, and savings times in comparison with the previous year. The cost of by households by no less than 184%, while banks’ living index showed slightly higher growth, by 2.8%, assets increased by 105%. Banks have a high level of mainly as a result of the different weights of some food liquidity, showing that no part of the allocated reserve products. The inflation indicator that is going to be used requirements or loans for liquidity maintenance was as of 2007 is the cost of living index since the structure used during the reporting year. The privatisation of of the consumer basket has changed thus creating the the banking sector is nearing its completion and the conditions for the index change. This will provide a state, as a direct owner, has no bank shares. This data higher degree of comparability with the harmonized shows that the banking system reform process has consumer price index used by the European Monetary been successfully implemented. Union as the inflation indicator. MACROECONOMIC ENVIRONMENT IN MONTENEGRO 9 Interest rates have been on a downtrend, yet remain visited Montenegro in 2006 rose by 16.3% in comparison high. For the first time the average weighted effective with the previous year. A very encouraging fact is that lending rate was a one-digit figure.