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Montenegro Country Report September 2014 [IntelliNews - Country Reports](IntelliNews - Country Reports Via Acquire Media NewsEdge) EXECUTIVE SUMMARY This report covers the main macroeconomic releases from September 4 until October 6, 2014 as well as the financial and political events that took place in Montenegro during this period. In the past month, the finance ministry cut its GDP forecast for the current year to 2.5% from 3.5%, which is less optimistic than the confirmed EBRD forecast for a 3.0% expansion in 2014. Meanwhile, the country's statistic office said the GDP growth slowed down to just 0.3% y/y in Q2 2014 from 1.5% y/y in the previous quarter. The office also revised down the 2013 GDP growth estimate to 3.3%. In addition, the finance ministry revised up to 1.9% of GDP its budget gap forecast for 2014. It now sees the deficit doubling to EUR 65mn this year, up by EUR 38mn compared to the previous forecast. The tourism ministry expect that the sector's revenues will hardly exceed EUR 730mn this year. The report also contains information on the latest developments at the Kumbor-based luxury resort project Portonovi in the Bay of Kotor, which is scheduled for completion by 2017. It also informs about Uniprom's partial payments for acquiring aluminium firm KAP. The report provides details as well for Montenegro's loan from China Exim Bank for the construction of the first priority section of the Bar-Boljare motorway project. Key points: • CPI dropped 1.1% y/y in July, softer than the 1.2% y/y decrease in July. Retail sales rose for a sixth consecutive month, going up by a real 5.3% y/y in July - the same as the month before. • Industrial output dropped 12.7% y/y in August, softening from the 16.5% annual contraction the month before. • The current account gap widened by 5.6% to EUR 442mn in H1 2014, equalling to 12.6% of the full year GDP forecast. • The number of foreign tourists visiting Montenegro rose 1.7% y/y in the first eight months of the year. Total arrivals climbed 1.1% y/y to 1.2mn despite the 3.0% y/y drop in the number of domestic visitors. REAL SECTOR 1. GDP EBRD keeps Montenegro's 2014 GDP growth forecast unchanged at 3.0% The European Bank for Reconstruction and Development (EBRD) predicted a 3% economic growth for Montenegro in 2014 in the September edition of its Regional Economic Prospects report, keeping unchanged its forecast from the previous edition released in May. The EBRD's 2014 outlook is slightly more optimistic than the projections of the IMF and the European Commission, which envisage a GDP growth of 2.8% and 2.9%, respectively. In contrast, estimations of the country's authorities are more optimistic - the government's latest official forecast ponts at a 3.5% expansion this year, while the central bank expects growth to be between 3.2% and 3.8%. For 2015, the EBRD predicts Montenegro's GDP growth to slow to 2.5%. It will be underpinned by better prospects for major public infrastructure projects, the bank said. The 2014 projection for Montenegro compares favourably with the 1.9% average growth expected for the SEE region, but the 2015 outlook is slightly below the average of 2.6%. Montenegro's economy expanded by 3.5% in 2013, recovering from a 2.5% contraction in 2012, thanks to rising exports, electricity production and a good tourism season. In the first quarter of 2014, the country recorded a 1.7% y/y GDP growth. Montenegro's GDP growth slows to 0.3% y/y in Q2 2014 Montenegro's GDP expanded by a real 0.3% y/y in the second quarter of 2014, slowing from a revised 1.5% y/y growth in the previous three months, preliminary statistics office data showed. This is the worst performance since Q4 2012, when the economy shrank 2.8% y/y. The Q1 GDP growth was revised down from a previous estimate of 1.5% y/y. The nominal GDP growth slowed to 1.1% y/y in Q2 2014 from a revised 2.9% in Q1 2014. Measured at current prices, Montenegro's total economic output stood at EUR 788.7mn in Q2, up from EUR 647.4mn in Q1. The statistics office did not provide sector or expenditure breakdown. The office revised down the 2013 GDP growth to 3.3% from 3.5%. In 2012, the Montenegrin economy contracted 2.5%. According to more detailed data for full 2013, which was also published on Sept 24, the sectors that recorded the highest real growth rates were electricity, gas, steam and air conditioning supply (+38.7%), agriculture (+16.1%), and administrative and support service activities (+14.5%). In May, the government projected a 3.5% economic growth for both 2014 and 2015, accelerating to 3.8% in 2016 and 4.0% in 2017. Also in May, the central bank forecast a GDP growth of between 3.2% and 3.8% for this year. However, in late August, the vice governor of the central bank, Nikola Fabris, said the national output will likely expand by just 2% this year. In September, the European Bank for Reconstruction and Development (EBRD) predicted a 3% growth in 2014. The projections of the IMF and the European Commission envisage a GDP growth of 2.8% and 2.9%, respectively. Montenegro finance ministry cuts 2014 GDP growth forecast to 2.5% from 3.5% The Montenegrin finance ministry said it has cut its GDP growth forecast for the current year to 2.5% from the previous 3.5% due to the delay of a planned investment cycle, the shrinking credit activity and the volatile global environment. The downgrade was announced on Sept 25 as part of the latest revision of the ministry's macroeconomic and fiscal forecasts for 2014-2018. The new forecast for 2014 makes the ministry more pessimistic that the EBRD, which confirmed earlier this month its 3.0% growth projection for the current year. The ministry expects the growth to quicken to 3.5% next year, to 3.8% in 2016 and 4.0% in each of 2017 and 2018. This means an average annual growth of 3.8% for 2015-2018. The main drivers of the economic growth this year are the expected positive results of the tourism sector, and the start of production at aluminium firm KAP along with the rise of global aluminium prices and the weakening euro, which Montenegro uses as its currency. On the other hand, some of the factors that affected negatively the Montenegrin economy in the first seven months of 2014 included the fact that in this period the anticipated investment cycle, based on which the previous projects were made, did not start, the ministry said. Also, the banks' lending activity shrank both due to the lack of quality investment programmes and because of the lenders' increased risk perception amid the worsening liquidity of the real sector. In addition, the bad weather affected the agriculture and tourism sectors, while on the global front, the escalation of the Ukraine-Russia conflict and the subsequent trade war resulted in a stagnation of the economic activity in the eurozone and its surrounding. The macroeconomic scenario for 2015-2018 is based on the following assumptions: The volume of FDI in the period, including investments in companies, banks and real estate, reachesan average of 13.3% of GDP. The projections for this high level of FDI are grounded on the assumptions for the launch of part of the announced investments in infrastructure, tourism and energy; Lending to companies and households will grow by an average of 4.7% in line with the nominal GDP expansion; Household spending will benefit from a mild growth of personal incomes and an increase in employment. It will also feel the positive impulses from the tourism revenue. Yet, the real growth of household spending will remain below the real GDP growth; The gross fixed capital formation will expand by an average of 9.9% in the mid-term - with the growth accelerating in the beginning of the period and cooling down in 2018 due to the higher base from the previous years; The share of public spending will grow parallel with the implementation of budget consolidation measures and a significant rise in capital spending; The exports of goods and services will increase by an average of 5.2% in 2015-2018 as the exports of services (foreign tourist spending in the country) is seen rising faster than the exports of goods; Imports will climb by an average of 5.4%, boosted by rising imports of goods to meet investment needs (including construction material and equipment) and rising imports of services in particular for the needs of the construction sector (for building the Bar-Boljare motorway and other projects); Employment will gradually rise by an average of 1% over the period to reflect the economic expansion; The ILO-unemploymentwill steadily decline to 16.3% in 2018from 18.8% in 2014 thanks to the GDP growth and the rising construction sector needs. The real annual growth of the Montenegrin economy slowed to some 0.5% y/y in the second quarter of 2014 from 1.7% y/y in the first quarter. In the first half of the year, the GDP was up 1% in annual terms. The construction, retail and real estate sectors as well as the good tax collection contributed positively to the six-month GDP. On the other hand, the higher prior-year base for the electricity production this year had a negative impact of minus 1.4% of GDP in the second quarter of 2014. The lower power production in the first seven months of 2014 (down 32.2%), resulted in an overall drop of 15.5% in the Montenegrin industrial production over the period. The economy of the Adriatic country expanded by 3.5% in 2013, recovering from a 2.5% contraction in 2012, thanks to rising exports, electricity production and a good tourism season. The ministry also said it sees the end-2014 inflation at minus 0.5%. However, it expects there will be a mild rise in prices in 2015-2018. They are expected to increase by 1% next year, by 1.5% in 2016, and by 2% in each 2017 and 2018. 2. Inflation Montenegro's CPI deflation softens to 1.1% y/y in Aug 2014 Montenegro's annual CPI deflation softened to 1.1% in August 2014 from 1.2% the month before, largely due to a slower decline in food prices as well as a rise in transport and restaurant and hotel costs, the statistics office said. Deflation has thus persisted for eight straight months. On a monthly basis, consumer prices edged up 0.1% in August, following a 0.4% decline in July. Compared to the 2013 average, prices were by 1.1% lower in August. The average deflation for the first eight months of the year stood at 0.9% y/y. The y/y deflation was dragged down mainly by falling prices of food, communications, clothing, and furnishings. Food and non-alcoholic beverage prices decreased 2.3% y/y in August following a 3.2% y/y drop the month before. Communication costs fell 4.0% y/y last month, at the same rate as the month before. Furnishing prices went down 1.5% y/y, narrowing from a 1.8% annual contraction in the previous two months. In addition, clothing and footwear prices swung to a 1.2% y/y drop in August from a 2.9% y/y growth in the previous month. On the other hand, the biggest positive contribution to August's y/y CPI came from health prices, which rose 1.7% y/y following a 1.5% y/y growth in July. Montenegro's EU harmonised deflation softens to 0.7% y/y in Aug 2014 Montenegro's EU harmonised inflation index (HICP) inched down 0.7% y/y in August 2014, softening from a 0.9% y/y drop the month before as food prices declined at a slower pace and hotel and restaurants costs increased, the statistics office said. On a monthly basis, the HICP index remained flat in August, the same as in the previous month. Food and non-alcoholic beverage prices shrank 2.4% y/y in August, following a 3.3% annual drop in July. Restaurant and hotel prices recorded a 1.4% y/y hike last month, quickening from 1.1% in July. Health prices also rose at a faster rate in August – 1.7% y/y versus 1.5% in July. In addition, alcoholic beverages and tobacco costs grew 1.7% y/y in August, after rising by 2.3% y/y the month before. In contrast, communication charges were by 3.9% y/y lower in August, registering the same annual decline as in July. The annual price drop in miscellaneous goods and services deepened to 0.8% y/y in August from 0.2% y/y in the previous month. Prices of housing, water, electricity, gas and other fuels edged down by 0.3% y/y, reversing a 0.6% annual growth in July. According to the latest data from the country's statistic office, Montenegro's consumer prices continued to decline in August 2014 going down by 1.1% y/y and slightly softening from a 1.2% y/y drop in July. Montenegro's PPI inflation quickens to 1.0% y/y in Aug 2014 Montenegro's producer prices increased 1.0% y/y in August 2014, quickening from a 0.1% y/y growth in July, statistics office data showed. The reading was affected by an increase in manufacturing and utility producer prices. In monthly terms, producer prices rose 0.4% last month, after staying flat in July. Compared to the 2013 average, August's prices were by 0.4% higher. For the first eight months of the year, prices were by 0.3% lower y/y. Manufacturing producer prices, which had been on a steady downward trend since February 2013, swung to a 0.5% y/y growth last month from a 0.1% decline in July. The reading was underpinned by rising charges ofbeverages, basic pharmaceutical products, rubber and plastic products, and basic metals. Utilities prices turned to a 1.6% y/y growth last month from a 0.6% y/y fall in July, breaking a seven-month downward trend. Producer prices in the mining and quarrying sector increased 4.2% y/y in August, recording the same annual growth as in the previous two months. The average industrial producer price growth eased to 1.6% in 2013 from 1.9% the year before due to declining manufacturing prices. 3. Industry and Trade Montenegro's industrial output drop softens to 12.7% y/y in Aug 2014 Montenegro's industrial output dropped 12.7% y/y in August 2014, softening from a 16.5% y/y contraction the month before, on the back of higher mining production and a smaller decline in manufacturing production, statistics office data showed. In monthly comparison terms, industrial output increased 5.4% in August following a 29.2% growth in July. It was by 14.2% lower compared to the 2013 average. In the first eight months of 2014, industrial output was down 15.1% y/y. August's manufacturing production shrank 19.7% y/y, improving from a 24.6% y/y contraction in July. The higher paper products, printing and reproduction of recorded media, other non-metallic mineral products, machinery and equipment, and furniture output partly offset the falling production of fabricated metal products, basic pharmaceutical products, rubber and plastic products and basic metals. Production in the mining and quarrying sector increased 12.1% y/y last month, quickening from a 3.3% y/y growth in July. The utilities output, remained in the red for the ninth consecutive month in August, shrinking by 3.7% y/y at the same pace as in the previous month. In 2013, Montenegro's industrial production rose 10.6% after declining 7.1% the year before, entirely on the back of higher electricity output. Montenegro's industrial sales drop narrows to 1.9% y/y in August 2014 Montenegro's industrial sales declined 1.9% y/y in August 2014, narrowing from a 6.8% contraction in July thanks to a smaller decline in the manufacturing sector and a quicker growth in the mining industry, the statistics office said on Sept 30. In monthly comparison terms, the industrial turnover went up 5.1% in August following a 47.3% jump in July. Sales in the key manufacturing sector contracted by 9.9% y/y in August, improving from an 18.3% y/y drop in July, mainly because of a slower decline in beverages, tobacco, rubber and plastic products and basic metals. The reading was also underpinned by a stronger growth in the segments of printing and reproduction of recorded media and other non-metallic mineral products. Mining sales climbed 50.8% y/y in August, quickening from a 37.8% y/y rise in July. On the other hand, electricity sales growth slowed to 0.4% y/y from 5.2% y/y in July. August's annual drop in industrial turnover reflected a 13.8% decline in sales of consumer nondurables, a 7.1% fall in sales of intermediate goods and a 5.6% decrease in energy sales. In the first eight months of the year, industrial sales shrank 12.8% y/y. Montenegro's retail sales increase 5.3% y/y in July 2014 Montenegro's retail sales rose by 5.3% y/y in July 2014, registering the same annual growth as in the previous month, the statistics office said in a statement. Retail sales in the country increased for the sixth straight month in July signalling a recovery in household consumption. On a monthly basis, retail sales climbed 17.9% in July, quickening from a 5.5% y/y hike in June and May. In January-July, retail trade turnover grew 4.4% y/y in real terms. The July's annual growth was mainly supported by a 2.6% y/y hike in retail trade in non-specialized stores and an 18% y/y rise in other retail trade in the specialized stores. In contrast, sales of food, drink and tobacco shrank by 7.4% y/y in July, reversing an 11% hike the month before. The average monthly growth of retail sales in 2013 quickened to 9.4% from 5.3% a year ago, partly due to stronger tourism activity. 4. Labour Market Montenegro's average wage edges down 0.4% y/y net in August 2014 Montenegro's average net monthly wage edged down by 0.4% y/y to EUR 473 in August 2014, following a 0.2% hike in July, the statistics office said on September 22. It was by 1.2% lower compared to the 2013 average. On a monthly basis, the net wage ticked higher by 0.6% from July when it declined by 1.7% m/m. In real terms, wages climbed 0.5% m/m in August after decreasing 1.3% m/m in the previous month. The steepest monthly decrease was recorded in the sectors of other service activities (down 7.1%), agriculture, forestry and fishing (down 3.9%), information and communication (down 3.1%) as well as arts, entertainment and recreation (down 2.3%). In contrast, salaries rose the most in monthly terms in the sectors of electricity, gas, steam and air conditioning supply (up 8.6%), mining and quarrying (up 4.4%), real estate activities (up 3.0%), professional, scientific and technical activities (up 2.2%). The average monthly gross wage declined 0.4% y/y but inched up 0.7% m/m to EUR 718 in August. The net wage remains much lower than the average monthly household expenditures, which amounted to EUR 790.8 in August - of which EUR 244.9 go for food and non-alcoholic beverages. The value of the complete minimum consumer basket (EUR 790.8) in August was down 1.2% y/y and 0.03% on the month. 5. Tourism Foreign tourist arrivals to Montenegro rise 1.7% y/y in Jan-Aug 2014 The number of foreign tourists visiting Montenegro increased 1.7% y/y to 1.07mn in the first eight months of 2014, the statistics office said on October 3. Foreigners spent 7.1mn overnights in the eight- month period, up 2.0% on the year. Including domestic visits, the total arrivals climbed 1.1% y/y to 1.2mn in January-August with domestic tourists registering a 3.0% y/y drop. The statistics office data significantly differs from estimates announced in mid-September by the tourism ministry that said the number of tourists visiting the country in the first eight months of the year was by 13% higher than in the same period of 2013. In August alone, the number of foreign tourists visiting Montenegro increased by 2.4% y/y to 456,135, following a 1.2% annual drop the month before. Including domestic visits, total arrivals increased 2.5% y/y to 513,317, also helped by a 3.3% annual hike of domestic tourists. Foreign tourists' overnights went up 2.4% y/y in August, speeding up from a 1.6% y/y growth in July. Foreigners accounted for 88.9% of all arrivals and for 88.8% of all overnight stays in August. During the month, Montenegro was mainly visited by Serbs (24.7% share in total), Russians (22.8%), and Bosnian tourists (7.9%). Also in mid-September, the state secretary of the tourism ministry Predrag Jelusic said that Montenegro's tourism revenue is unlikely to exceed EUR 730mn in 2014, thus recording only a slight improvement from last year when the figure stood at EUR 721mn. Montenegro's tourism revenue rises 6% y/y to EUR 800mn in Jan-Aug 2014, NTO says Montenegro's tourism revenues rose 6% y/y to EUR 800mn in the first eight months of 2014, the National Tourism Organisation (NTO) said in a statement. The reading equalled to 22.8% of the full-year GDP forecast, according to IntelliNews calculations. Tourism proceeds have been rising steadily during the past five years contributing positively to the country's GDP.Revenue growth is underpinned by higher foreign tourists arrivals and overnight stays. According to the latest data from the statistics office, the number of tourists visiting Montenegro edged up by 0.1% y/y to 686,424 in January to July 2014. Of them, foreign tourists accounted for nearly 90% rising by 1.1% y/y to 615,156. Foreigners spent 3.7mn overnights in the seven-month period, up 1.7% y/y with total night stays reaching 4.05mn, up 0.2% on the year. In May, Montenegro's tourism ministry projected that over 1.5mn tourists will visit the country this year, which will be close to the number of 2013. The country collected over EUR 720mn in tourism revenue last year equal to around 21% of GDP. Montenegro's 2014 tourism revenue unlikely to exceed EUR 730mn – tourism ministry Montenegro's tourism revenue is unlikely to exceed EUR 730mn in 2014, thus recording only a slight improvement from last year when the figure stood at EUR 721mn, the state secretary of the national tourism ministry Predrag Jelusic told Portalanalitika.me in an interview. The ministry's estimates differ from those of the Montenegrin National Tourism Organisation (NTO) that recently said the country's tourism revenue rose 6% y/y to EUR 800mn in the first eight months of 2014. According to data from the ministry, the number of tourists visiting the country in the first eight months of the year was by 13% higher than in the same period of 2013 mainly thanks to strong August figures that compensated for the weak results in the first half of the year. The latest data from the statistics office showed the number of tourists visiting Montenegro edging up by 0.1% y/y to 686,424 in January to July 2014. Of them, foreign tourists (nearly 90% of total) increased 1.1% y/y to 615,156. Foreigners spent 3.7mn overnights in the seven-month period, up 1.7% y/y with total night stays reaching 4.05mn, up 0.2% on the year. The statistic office will publish data on the tourist arrivals and overnights stays in August on September 30. FISCAL SECTOR Montenegrin fin min revises up 2014 budget gap projection to 1.9%/GDP, just above govt target table The Montenegrin finance ministry has revised up its 2014 budget gap projection, saying the deficit will actually reach 1.9% of GDP - almost double the previous 0.8% of GDP forecast made back in April. This year's budget gap is now seen reaching EUR 64.7mn, up by EUR 38.2mn compared to the April forecast. It is seen also higher by EUR 3.1mn compared to the official target for a EUR 61.6mn deficit, or 1.8% of GDP, included in the Montenegrin budget bill. The new deficit figure was released as part of the latest revision of the ministry's macroeconomic and fiscal forecasts for 2014-2018, published on Sept 25. The ministry said it now expects the current budget revenue this year to be 2.4% higher than planned, reaching EUR 1.3bn, due to an underestimate of the revenues from contributions in the budget bill. This type of revenue is now considered a main growth driver of the overall budget collections, jumping 7.5% above plan to EUR 428mn. On the other hand, what could not have been envisaged before but is now affecting Montenegro's fiscal position are the effects of the deflationary pressure, as well as the regional and European crises (linked to the May floods on the Balkans and the Ukraine-Russia conflict) that have direct repercussions on the economic activity in Montenegro, the ministry said. On the expenditure side, the latest forecast sees budget spending up 2.5% above plan at EUR 1.37bn, mainly because of payments on activated state guarantees and higher volume of social transfers. The latter occurs amid a rise in the number of social protection beneficiaries, as well as due to the social programme for the former workers of aluminium firm KAP. Compared to last year, expenditures for gross wages and for social transfers this year will rise nearly 5%, by EUR 40.7mn, to EUR 895mn. On the other hand, the total budget expenditure will drop 5% compared to 2013 (down by EUR 70mn) due to lower spending on activated state guarantees. Last year, the government had to pay some EUR 107mn mainly on activated guarantees on KAP's bank loans. This year, the budget bill envisaged no expenditure on this account. However, the ministry now corrected this, saying the state will actually pay a cumulative EUR 15mn in 2014 following the activation of state guarantees given to mining firm Rudnici Boksita (EUR 5.1mn), Bar- based Melgonia-Primorka (EUR 4.5mn) and publisher Pobjeda (EUR 5.6mn). This will additionally hike the deficit above the target. In addition, the ministry expects that Montenegro's public debt will drop by EUR 65mn to EUR 1.958bn, or to 57.7% of GDP at end-2014 from 59.4% of GDP at end-June. The foreign borrowing dominates the debt structure totalling EUR 1.571bn, or 46.1% of GDP. Domestic debt will end this year at EUR 387mn, or 11.4% of GDP. Montenegro sells EUR 6mn of 6mo T-bills at lower yields Montenegro's central bank said it sold EUR 6mn worth of 182-day Treasury bills on Tuesday (Sept 23), in line with its original target. The average yield fell to 0.64% from 0.79% at the previous such auction held on Sept 2. The value of bids placed totalled EUR 19.77mn, compared to EUR 23.1mn on Sept 2. Since the beginning of the year, Montenegro has placed 10 issues of 6- month T-bills and two issues of 3-month T-bills, borrowing a total of EUR 170.42mn. Montenegro's budget gap narrows 77.4% y/y to EUR 29.5mn in Jan-Aug 2014 Montenegro's budget deficit narrowed 77.4% y/y to EUR 29.46mn in the first eight months of 2014, on raising revenues and falling expenditures, data from the finance ministry showed. The gap equalled to 0.87% of the full-year GDP projection, down from 3.9% a year ago, according to IntelliNews calculations. The January-August budget gap remains 69.7% below that the plan for the period due to lower-than-expected goods and services, employment, interest, subsidies, current maintenance, social and capital expenditures. Total budget revenue grew 7.3% y/y to EUR 821.96mn in the first eight months of the year thanks to higher taxcollection and social contributions. VAT proceeds climbed 9.2% y/y to EUR 302.7mn. They accounted for a 36.8% share in total budget income. Social contributions, likewise, increased by 11.8% y/y to EUR 252.5mn on the back of higher pension and health contributions. However, income from excise duties shrank 2.8% y/y to EUR 100.5mn in the eight-month period, denting the overall revenue growth. Budget expenditures declined by 5.0% y/y to EUR 851.43mn mainly due to lower repayment of guarantees, reserves as well as other personal income, other expenditures and capital outflows of current budget. Capital expenditures reached EUR 37.1mn in the first eight months of the year, up from EUR 28.45mn a year ago, but remained considerably below the plan for the period. Earlier this month, Montenegrin finance ministry has revised its 2014 budget gap projection, saying the deficit will actually reach 1.81% of GDP (EUR 61.55mn) - almost double the previous 0.8% forecast made back in April. Total revenue this year will reach EUR 1.28bn, or 2.6% higher compared to 2013, while total expenditures will rise also 2.6% y/y to EUR 1.34bn. FINANCIAL INTERMEDIATION Montenegro's bank assets growth quickens to 2.4% y/y at end-Aug 2014 Montenegro's commercial bank assets totalled EUR 3.12bn at end- August 2014, up 2.4% y/y, faster than the 2.0% y/y growth in July, data from the central bank (CBCG) showed. The total assets-to-GDP ratio stood at 88.6% at end-August, up from 86.4% a year ago, according to IntelliNews calculations. Bank loans, which accounted for 78.5% of total assets, declined 3.4% y/y to EUR 2.45bn, softening from a 4.1% y/y contraction the month before. The improvement reflected a slower decline in loans to financial institutions and quicker growth of household loans. Montenegro's lending portfolio fell 3.5% on average in January-August as compared to an average growth of 6.0% in the same period of 2013. Corporate lending shrank for the eighth consecutive month in August, going down by 3.6% y/y to EUR 985.05mn, at the same pace as the month before. Loans to financial institutions, which accounted for 17.8% of total loans, also continued retreating, shrinking 6.6% y/y to EUR 436.6mn at end-August, but also slowing from an 18.7% y/y drop at end-July. The annual growth in household loans quickened to 1.4% y/y from 1.3%, with the stock of loans totalling EUR 892.98mn at end-August. Cash and deposits held with the central bank climbed 20% y/y to EUR 417.86mn at end-August, slowing from a 25.7% y/y increase at end- July. They accounted for 13.4% of total banking sector assets, up from 11.4% a year ago. The average monthly lending growth stood at 5.5% in 2013, supported by both the corporate and retail segments. Credit supply in Montenegro remains constrained by the high level of non-performing loans (at 17.4% as of end-July, according CBCG). Montenegro's bank deposits growth slows to 5.1% y/y in Aug 2014 2.25bn at end-August 2014, slowing from a 5.5% y/y growth at end- July, central bank data showed. The average deposit growth in January-August slowed to 6.1% from 9.5% a year ago. On a monthly basis, deposits, however, increased 3.0% in August following a 1.9% growth in the month before. They accounted for 71.2% of total banking sector liabilities at end-August, up from 70.2% a year ago. The annual growth of household deposits slowed at end-August to 5.8% from 6.5% the month before, totalling EUR 1.29bn. Corporate deposits increased 6.2% y/y to EUR 718.77mn at end-August, following a 5.3% y/y growth in the previous month. The average household deposits growth in the first eight months of the year cooled to 8.5% y/y from 9.7% y/y in the same period last year and the average growth of corporate deposits slowed to 6.7% from 11.3% a year earlier. Deposit growth in Montenegro has strengthened following the 2009 slump, translating into improved access to local funding of banks. The average monthly deposit growth stood at 8.6% in 2013, up from 3.1% a year ago, thanks to both stronger retail and corporate deposit collection. Foreign-owned banks control around 90% of the banking sector assets. Average lending interest rate in Montenegro increases to 10.4% in Aug 2014 The weighted average effective lending interest rate on newly- extended loans in Montenegro increased by 1.45pps y/y to 10.4% in August 2014 after falling by 0.15pps y/y the month before, central bank data showed. Compared to the previous month, August's average landing rate rose by 0.22pps, following a 0.13pps m/m growth in July. Effective interest rates on new retail loans climbed by 0.05pps y/y and 0.1pps m/m to 11.85% last month, following a decline by 0.1pps y/y and 0.19pps m/m in July, mainly due to higher rates on consumer and housing loans. On the other hand, rates on corporate loans fell by 0.37pps y/y to 8.97% in August, following a 0.45pps y/y decline in July. Corporate borrowing costs edged up by 0.25pps on the month. The value of newly-extended loans in the country shrank 42.7% y/y to EUR 48.5mn in August, following a 0.1% y/y decline to EUR 57.2mn the month before, reflecting a drop in government loans. In January-August, the value of newly-extended loans went down 4.3% y/y to EUR 464.3mn. Montenegro's NPL ratio inches down to 17.4% in July 2014 – c-bank The share of non-performing loans (NPL) in Montenegro stood at 17.4% in July 2014, central bank data showed. The bank did not provide year-on-year comparison figures. According to data released earlier, the NPL ratio was 17.5% at end-May and at end-2013 also. The stock of NPLs reached EUR 417.2mn at end-July, up 3.6% m/m, but down 1.4% y/y. The central bank also provided data about the stock of total overdue loan payments (including such that are still not qualified as NPLs), which increased 11.4% y/y and 4.1% m/m to EUR 533.1mn. The total overdue debt of companies, whose accounts have been blocked due to unpaid debts, fell 8.7% m/m to EUR 445.7mn at end- July. The total number of blocked accounts, however, grew 0.7% m/m to 13,653. The top 10 debtors owed almost 14.2% of the total debt, while the top 50 debtors owed 39.5% of the total. EXTERNAL SECTOR Montenegro's current account gap widens 5.6% y/y to EUR 441.8mn in H1 2014 Montenegro's current account gap widened by 5.6% y/y to EUR 441.8mn in the first half of 2014 on the back of higher foreign trade deficit coupled with lower surpluses on the primary and secondary income accounts, data from the country's central bank (CBCG) showed. The six-month current account gap equalled 12.6% of the full- year GDP projection, up from 11.8% a year earlier, according to IntelliNews calculations. Exports dropped 20.1% y/y to EUR 161.5mn in the first six months of the year, while imports shrank 2.3% y/y to EUR 805mn over the period. The H1 foreign trade deficit worsened to 18.3% of GDP from 17.6% a year ago. The H1 net primary income dropped 33.3% y/y to EUR 22.7mn due to higher outward direct and portfolio investment. The net secondary income declined 5.1% y/y to EUR 57.7mn. In contrast, the surplus on the services account rose 11.6% y/y to EUR 121.4mn, supported by higher tourism and construction proceeds. The financial account surplus narrowed by 30.3% y/y to EUR 157.2mn in H1. Net FDI went up 5.5% y/y to EUR 163.7mn over the period thanks to higher investments in debt instruments. Montenegro's current account gap is expected to decline from 14.6% of GDP in 2013 to 14.4% in 2014 and to edge up to 14.5% in 2015, the EC said in its latest forecast. Its projection is more optimistic than the one by the IMF, which sees the shortfall rising to 17.9% of GDP in 2014 and further to 21.9% in 2015, before narrowing to 16.7% in 2016. Montenegro's Jan-July net FDI inflow up 1.2% y/y to EUR 189.8mn Net FDI flows to Montenegro grew 1.2% y/y to EUR 189.8mn in January-July 2014, the central bank (CBCG) said in its monthly bulletin. The reading equals 5.4% of the full-year GDP forecast, according to IntelliNews calculations. Montenegro's total FDI inflows reached EUR 259.2mn, while outflows stood at EUR 69.4mn, the CBCG said. Investments in equity totalled EUR 123.3mn, or 47.6% of the total inflow in January-July. In the equity investments structure, investments in real estate amounted to EUR 96.2mn, while the remaining EUR 27mn went to companies. Another big share of total inflows (50.9%) was generated by FDI in the form of intercompany debt, which equalled EUR 131.9mn in the seven- month period. Inflow from the withdrawal of monetary assets invested abroad amounted EUR 4.0mn. FDI outflows jumped 23.6% y/y to EUR 69.4mn in January-July. Most of them referred to withdrawal of non-residents' investments in the country, totalling EUR 59.3mn. The remainder was generated by investments of Montenegrin residents abroad (EUR 10.1mn). Last year, net FDI inflow to Montenegro contracted 29.6% y/y to EUR 323.9mn following a 16.6% growth in 2012. The FDI-to-GDP ratio last year stood at some 10%, well below its 2008 peak of 20%. Montenegro's trade gap widens 4.6% y/y to EUR 972.4mn in Jan-Aug 2014 Montenegro's foreign trade deficit widened 4.6% y/y to EUR 972.4mn in the first eight months of 2014 with exports declining at a much faster rate than imports over the period, statistics office data showed. The January-August export-import coverage ratio dropped to 17.5% from 21.6% a year earlier. The gap accounted for 27.7% of the full-year GDP forecast, up from 26.3% a year ago, according to IntelliNews calculations. Exports dropped 19.6% y/y to EUR 206.1mn in the eighth-month period dragged down by falling iron and steel (down 79%), electricity (down 63% y/y), non-metallic mineral manufactures (down 56%) and non- ferrous metals (down 23%) sales abroad. Montenegro's imports inched down 0.6% y/y to EUR 1.178bn in January-August due to falling domestic demand for other transport equipment (down 84%), metalliferous ores and metal scrap (down 25%), electricity (down 23% y/y) and petroleum products (down 3%). The main exports destinations for Montenegrin producers in January- August were Serbia (23.5% share in total), Croatia (15.6%) and Belarus (11.4%). The major import partners were Serbia (27.5% share in total imports), Greece (8.1%) and Bosnia (7.3%). Montenegro's foreign trade gap shrank 3.9% to EUR 1.4bn in 2013 following a 6.2% expansion in the previous year underpinned by higher electricity, metalliferous ores and metal scrap and cork and wood sales abroad. STRUCTURAL REFORMS AND CORPORATE NEWS Montenegro's Uniprom pays part of purchase price for aluminum firm KAP Montenegrin privately-held firm Uniprom paid EUR 4mn out of the EUR 28mn it had to pay by Sept 10 for aluminium firm KAP, daily Vijesti reported. Uniprom's owner Veselin Pejovic said this amount is enough for KAP to pay its first priority payments, like wages, and he will transfer the remaining amount when the seller can transfer the property without any burden and lawsuits. The creditors' board of KAP has accepted the request of the company to postpone the payment of the other EUR 24mn until the seller fulfills the contract's conditions, Portalanalitika.me informed. Uniprom signed the deal to buy KAP on June 10 and had to pay the money within 30 days. After a Nicosia court adopted a decision to ban the sale of KAP it asked for a 60-day extension of the payment deadline. The Cyprus court has banned the sale of KAP's assets on request of the company's former owner - Russia's En+ Group of businessman Oleg Deripaska. The decision was taken within the process of consideration of CEAC's court claim for the repayment of a EUR 44mn debt it is owed by KAP. CEAC is the unit of En+ that held a stake in KAP. The ban concerns any transactions with KAP's assets, bank accounts and produced aluminium. The district court in Nicosia has rescheduled already two times (on July 23 and August 5) the hearing against Montenegrin aluminium firm KAP. The last date is September 15. Montenegro's trade gap widens 4.6% y/y to EUR 972.4mn in Jan-Aug 2014 The EUR 500mn luxury resort project Portonovi, located in the town of Kumbor in the Bay of Kotor in Montenegro, will be built by 2017, the country's government said in a statement, quoting a press conference of the investor, Azmont Investments. Azmont Investments is a Montenegrin subsidiary of Azerbaijan's State Oil Company (SOCAR). The company launched officially the construction of the resort in March 2014. According to previous reports, first guests were expected in May 2016. Portonovi will include the first One&Only hotel in Europe, a Henri Chenot spa, a Superyacht marina, authentic and high-end boutiques, a signature beach club, a tennis academy and a residential offering. Azmont executive Serber Birkan informed that during the preparatory phase they had to resolve a few technical challenges. He elaborated that since the construction site is the former military barracks in Kumbor, a major problem were unexploded mines in an area of 200,000 sqm (submarine and terrestrial part). The removal of the mines took nearly three months and the terrain is now safe. In addition, problems with the geotechnical nature of the ground have been addressed. We remind that in July 2012, Montenegro's government signed a 90- year lease agreement for the former military site with SOCAR, which ranked first in the tender for the seaside location. The rented land has an area of 240,000 sqm. China Exim Bank approves EUR 688mn loan for key motorway project in Montenegro China Exim Bank has approved Montenegro a EUR 688mn loan for the construction of the first priority section of the major Bar- Boljare motorway project, Montenegrin transport minister Ivan Brajovic said on Sept 18. Brajovic, speaking at a news conference after the weekly cabinet meeting, said that Exim Bank has completed the procedure for approving the loan and submitted its report to the Chinese government. Once the Chinese government gives its consent on the text, the contract on the project financing will be signed by the respective ministries and enter the Montenegrin parliament for debates. Brajovic said he believes all these procedures could be completed within a month and a half – and construction works could start by end- 2014. He added that talks with China Exim Bank on other infrastructure projects are in progress. Officials from the bank and from several Chinese companies, including the builders of the Bar-Boljare section, are on a visit to Montenegro this week. The priority 44-km motorway section of the future motorway will be built by Chinese firm CRBC. Construction works are expected to last four years. The complete cost of the section is EUR 809mn and the Montenegrin government is expected to provide the remaining EUR 121mn from other sources. Bar-Boljare will link Montenegro's Adriatic coast in the south with its border with Serbia in the north – and will be part of a bigger motorway connecting Bar with the Serbian capital Belgrade. Serbia and Montenegro have voiced plans earlier this year to seek EU financing for this and other cross-border infrastructure projects. China's CRCB and its parent company CCCC won last year the tender to build the priority Smokovac (a Podgorica suburb)-Matesevo section of the full 169-km project with the support of the China Exim Bank loan. As previously announced, the Chinese loan is expected to have a 20-year maturity and five-year grace period plus a 2% fixed interest. The World Bank and the IMF have warned that the project's borrowing needs might destabilise Montenegro's fiscal position and result in a jump of its public debt. World Bank lends Montenegro EUR 50mn for industrial waste management project The World Bank said its board of directors has approved a EUR 50mn loan to Montenegro to finance an industrial waste management and cleanup project. The project shall help protect Montenegro's natural resources and reduce the risks to public health from the exposure to industrial waste disposal sites, the World Banka said in a statement. It will also contribute to easing the significant environmental impact of such sites as they be fully remediated. In addition, future hazardous waste from industries related to these sites will be disposed of in line with Montenegrin and EU legislation. The loan has 27-year maturity and a 5-year grace period. Some important elements of the project include providing support to the regulatory framework and to the development of infrastructure for managing and proper disposal of ongoing industrial hazardous waste production. The World Bank participates in five active projects in Montenegro worth a combined USD 137mn. They cover the sectors of environment, agriculture and rural development, land administration, higher education, and energy. Montenegro to receive up to EUR 270.5mn EU funds under pre-accession instrument in 2014-2020 Montenegro will receive up to EUR 270.5mn under the EU's Instrument for Pre-Accession Assistance (IPA II) in 2014-2020, the European Commission said in the country's strategy paper. The funds are 14.8% more than in the 2007-2013 IPA period. For 2014, Montenegro can get up to EUR 39.5mn, out of which EUR 18.8mn for reforms in preparation for EU membership, EUR 14.8mn for socio-economic and regional development, EUR 3.5mn for education, employment and social policies and EUR 2.5mn for development of agriculture and rural sectors. In 2015, the country will receive slightly less – EUR 35.6mn, but the total amount increases in the remaining five years, with an average of EUR 38.6mn per year for the seven-year period, up from EUR 33.7mn in 2007-2013. Four Balkan states sign deal to cut roaming prices to EU levels in three years Serbia, Bosnia, Macedonia and Montenegro signed an agreement on Monday, Sept 29, to gradually work on cutting roaming prices on their territory, aiming to reduce them to the level of EU tariffs within three years, regional media outlets reported. The agreement was signed by the telecommunications ministers of the four countries during this year's edition of the Infofest in Montenegro's Budva, local broadcaster RTCG reported. Turkey and Albania were also expected to be part of the pact but their authorities have not yet completed all internal procedures to be able to join the initiative. Under the contract, the four Balkan states will start aligning in the coming month their legal rules in the sector and form a joint commission comprising the four regulators. Serb telecommunications minister Rasim Ljajic told news agency Beta that more things need to be done for the implementation of the agreement, including holding talks with telecom operators on the issue. He said that talks with the three mobile operators active in Serbia have already started. "I would lie if I say they are happy that we are initialling this process," he admitted, adding that the agreement will still be of benefit to the operators as it also targets boosting the telecommunications traffic. Ljajic has said previously that roaming fees in Serbia are up to five times higher than those in the EU. He explained that being an EU candidate, Serbia already tried earlier to join Brussels' directive on lowering roaming prices - but was told the directive covers exclusively the EU states. Under the Brussels' directive, roaming fees on the territory of the EU were reduced by 55% as of July 2014 and will be completely scrapped by the end of 2015. The initiative of the Balkan states aims to make them part of this trend. French-Austrian consortium Akuo-Ivicom seeks EUR 100mn EBRD loan for wind farm project in Montenegro French-Austrian consortium Akuo-Ivicom is seeking a EUR 100mn loan from the EBRD for the implementation of a 50MW wind farm project in Montenegro, Portalanalitika.me reported on Oct 1, quoting government information. Considering the big size of the needed investments in the project, seen at EUR 100-120mn, the consortium was not able to receive a loan from commercial banks and has therefore stepped into contact with development banks, which have put additional conditions for approve such a credit, according to information of the Montenegrin government. It added that several meetings on the topic have been organised with the EBRD, aiming to find a solution for enabling the investment in the planned project, which has already received a construction permit. Back in 2010, the government signed a deal with a consortium of Austria's Ivicom Consulting and Japan's Mitsubishi Heavy Industries for the construction of the 50MW Krnovo wind farm, to be located close to the central town of Niksic. The investors have said they plan an upgrade to 72MW and an overall investment of EUR 70-90mn. In 2012, Mitsubishi was replaced by Akuo who became the leading member of the consortium. Under the contract signed in 2010, the government is leasing to the investor state land for the project for a period of 20 years with the possibility of a five-year extension. Also, the feed-in tariff in the first 12 years of the wind farm's operation was set at no less than EUR 95.99 per MWh, the report reminds. (c) 2014 Emerging Markets Direct Media Holdings LLC Provided by SyndiGate Media Inc. (Syndigate.info). |