Government of Montenegro Ministry of Finance Questionnaire Information requested by the European Commission to the Government of Montenegro for the preparation of the Opinion on the application of Montenegro for membership of the European Union – ADDITIONAL QUESTIONS – VI Financial markets Minister: Igor Luksic VI Financial markets - Additional Questions - 2 VI Financial markets - Additional Questions - TABLE OF CONTENTS ECONOMIC CRITERIA...................................................................................................................5 VI Financial markets ......................................................................................................................6 A. General ..............................................................................................................................6 B. The banking sector.............................................................................................................8 a) Liquidity risk..............................................................................................................................11 b) Credit risk .................................................................................................................................11 c) Market risk ................................................................................................................................11 C. Capital market..................................................................................................................19 E. Non-bank financial institutions ..........................................................................................21 Annex........................................................................................................................................25 1. National strategy of sustainable development of Montenegro ............................................25 2. Economic policy of Montenegro for 2010. ..........................................................................25 3. Quarterly macro-analytical report 31.12.2009. ...................................................................26 3 VI Financial markets - Additional Questions - 4 VI Financial markets - Additional Questions - ECONOMIC CRITERIA 5 VI Financial markets - Additional Questions - VI Financial markets A. General 23. (Ref to Q. 32): Please provide examples of private sector access to international financial markets In relation with the borrowing of banks abroad, loans from the international financial markets account for 99.91% of the overall bank loans on 31 December 2009 (excluding subordinate debt), the beneficiaries thereof being ten banks in the system. Loans to the subsidiaries in Montenegro by their parent banks account for 76.74% of the overall foreign-loan-amount. Terms for the banks’ access to the international financial markets are provided in the table hereunder: Original Date of Maturity Creditor amount Interest rate approval date (000€) 1 EFSA 11/23/2005 1 100 31/12/2010 EURLIBOR+3 2 EFSA 4/13/2005 1 000 31/12/2010 EURLIBOR+2 3 EFSA 12/15/2005 3 000 31/03/2011 EURLIBOR+3 4 EFSA 10/5/2006 10 000 31/03/2016 EURL IB OR+ 3 , 5 5 EFSA 5/22/2006 500 31/03/2012 EURL IB OR+ 3 , 5 6 EFSA 7/16/2008 10 000 30/09/2015 EURLIBOR+3 7 KFW 6/30/2008 15 000 30/06/2015 EURL IB OR+ 2 , 3 8 KFW 11/25/2008 15 000 31/12/2018 EURL IB OR+ 2 , 4 9 KFW 3/28/2008 420 31/12/2015 EURLIBOR+1,305 10 KFW 7/15/2008 300 31/12/2015 EURLIBOR+1,306 11 EFSE Luxembourg 01/09/2007 3 516 22/03/2010 4.00% 12 EFSE Luxembourg 01/03/2008 2 500 22/03/2018 7.25% 13 EFSE Luxembourg 01/03/2008 7 500 22/03/2015 6.87% 14 EFSE Luxembourg 01/07/2008 3 000 22/09/2013 7.66% 15 ING NETHERL ENDS 6/19/2008 3 000 6/19/2010 3 month EURIBOR +2,75% 16 STEIERMAERKISCHE BANK UND SPARKASSEN AG 12/31/2009 2 665 12/31/2014 1 month EURIBOR +3,7% 17 KFW 7/31/2009 2 000 6/30/2016 2.4% FIXED 18 KFW 7/31/2009 4 000 6/30/2016 6.6% FIXED 19 KFW 10/1/2009 4 500 6/30/2016 6.6% FIXED 20 KFW 12/8/2009 4 500 6/30/2016 6.6% FIXED 21 EURO PEA NINV ESTMENT B A NK 12/22/2009 1 400 12/21/2021 0.0392 22 EURO PEA NINV ES TMENT B A NK 11/16/2009 2 600 11/16/2021 0.041 6 VI Financial markets - Additional Questions - 23 European Investment Bank 12/1/2009 1 000 01.12.2016 0.0337 24 EURO PEA N INV ES TMENT B A NK 12/7/2009 2 000 07.12.2020 0.03 25 Raiffeisen bank 5/23/2008 10 000 23.05.2010 6month.eurib.+2.25% 26 EFSE 4/23/2007 10 000 22.09.2014 6month.eurub.+2.20% 27 EFSE 3/31/2008 5 000 22.09.2013 6month.eurib.+2,00% 28 EFSE 4/30/2009 7 000 22.03.2014 6month.eurib +4,25% 29 SID banka 11/30/2007 10 000 30.11.2014 6month.eurb.+1,45% 30 KFW 10/26/2009. 14 000 30.12.2016 6month.eurib.+3,60% 31 IFC Washington 6/16/2009 10 000 16.06.2013 6month eurib.+3,375% 32 NLB Pristina 7/27/2007 1 100 21.07.2010 0.065 33 Zavarovalnica Triglav 7/27/2007 1 003 21.07.2010 0.065 34 Poteza Ljubljana 7/27/2007 1 001 21.07.2010 0.065 35 STEIERMA ERKISCHE BA NK UND SPA RKA SSEN A G GR 2/27/2007 3 000 2012.02.27 euribor+2% 36 L A NDESBA NK BERL IN A G 12/1/2008 450 2013.12.01 euribor+1.75% 37 L A NDESBA NK BERL IN A G 6/2/2007 432 2012.06.01 euribor+1.75% Data source: Reports submitted quarterly to the Central Bank by banks Private companies in Montenegro have free access to all the international financial institutions, therefore having a possibility of direct credit arrangement agreements. In addition, the possibility herein has been defined by the Law on Foreign Current and Capital Operations, where it has been defined as quoted: Current and capital operations, including transfers of property from and to Montenegro, shall be performed freely, unless otherwise prescribed by law. In the past period, the companies from Montenegro have mostly cooperated with the European Bank for Reconstruction and Development (EBRD), while one company has made cooperation with the International Financial Corporation (IFC). The arrangements herein refer to the following companies: Voli – DOO Podgorica (Voli – Ltd., Podgorica)(the export-import turnover and services company); Mesopromet – AD Podgorica (Mesopromet – JSC Podgorica) (the poultry production and processing company); MPM Cosmetics Markets – DOO Podgorica (MPM Cosmetics Markets – Ltd., Podgorica)(import and wholesale of cosmetic and decorative products, costume jewellery and hair accessories); and the Turkish company Gintas Inc, which has used the IFC funds in the construction of a shopping mall in Podgorica. The cooperation with the European Bank for Reconstruction and Development (EBRD) Company Amount Voli 4.23 mil. € Mesopromet 5.mil. € MPM Cosmetics 1.5 mil.€ Markets Total 10.73 mil. € Cooperation with the International Financial Corporation (IFC – WB) Company Amount Gintas Inc. 10 mil. € 7 VI Financial markets - Additional Questions - Based on the data hereabove, according to the information available to the Ministry of Finance, the overall cooperation between the companies in Montenegro and the international financial institutions amounts to EUR 20.73 million. Additionally, some companies from Montenegro have made direct credit arrangements with financial institutions, mostly with the parent banks (OTP, NLB, etc.). B. The banking sector 24. (Ref to Q. 40): Please provide data on the ownership of foreign public institutions in commercial banks. Foreign public institutions do not participate in the equity structure of the Montenegrin banking system. EBRD has the 8.08% share in the capital of one bank (NLB bank). 25. (Ref to Q. 42): Conclusion on competitiveness on bank market seems to clash with objective data. Could you explain why interest rates show an upward tendency and why access to bank financing for private citizens and SMEs appears to become more difficult? There is a number of reasons due to which the access to credit lines has become more difficult, but this has not been faced only by the citizens and SMEs but also by big companies. The first reason is that the crisis has largely been transferred to the real sector. The transfer of the crisis to the real sector has been manifested by a fall in economic activity, fall in employment, rise in enterprise illiquidity and fall in disposable income of population, which has reduced the possibility for the economy and households to savings and repayment of debts, and the possibility for further borrowing in terms of loans. This has resulted in a dramatic past-due loans’ growth which, according to the January data, exceeded 30% of overall loans. In addition, there has been a dramatic rise in the number of illiquid companies. The latest data shows that around one fourth of companies have their accounts blocked by the Commercial Court’s decisions, due to accounts payable thereof. The number of illiquid companies has been significantly higher than that. A significant number of citizens and enterprises have been over-indebted. As a result of the crises, a part of deposits has been withdrawn from banks while, at the same time, parent banks have reduced their credit exposure to Montenegro (to that sense, Montenegro is not protected as it is the case with the parties to the Vienna Initiative). Compared to October 2008, the deposits in the banking system have been reduced by 400 million euros, while parent banks’ lending has dropped by 117 million euros. It should be kept in mind that the abovementioned difficulties have resulted in a loss as to the banking system operations in 2009. At the same time, the access of Montenegrin banks to international financial market has been aggravated, while the assets have become more expensive. Thus, there is a combination of operational risk increase (risk premiums), decrease in available credit assets, and more expensive sources of assets. In such conditions it is logical that banks have reduced their credit activity and increased the amount of interest rates. The demand is constantly larger than the supply of credit assets, thus also making pressure as to the increase in interest rates. Such a trend, aggravated access to loans, and more expensive loans are not typical of Montenegro only, but of the rest of the region’s countries, and partly of the EU states. 8 VI Financial markets - Additional Questions - 26. (Ref to Q.