The potential issuance of domestic government bonds could prove to be a success, breathing new life into the capital market, as assessed by Bratislav Pejaković, the Secretary-General of the Association of Banks in Montenegro (UBCG).
In an interview with Pobjeda, Pejaković also predicted a decrease in variable interest rates linked to EURIBOR starting from June of this year.
Pejaković believes that deposit interest rates in the Montenegrin banking system are well-adjusted, given the substantial annual growth and the historical high of deposits reaching nearly 5.5 billion euros, witnessing an increase of 250 million euros compared to the previous year’s end.
“Observing the average interest rate at the systemic level, it is evident that it aligns with the region. Nevertheless, you won’t find an offer for an annual euro deposit at four percent anywhere in the region. The amount of deposits and bank liquidity, achieved through strategic banking practices in preserving and augmenting value, has also positively impacted the banks’ profits. This contributes to the solvency and stability of the banking system, bringing contentment to clients and the state, as we possess quality foundations to support the economy,” stated Pejaković.
He added that a significant portion of the banks’ profits is reserved to fortify existing capital, resulting in a 22% increase in their capitalization over the year. This is encouraging in light of anticipated challenges in the medium term.
“I endorse the idea of issuing bonds tailored for individuals. Certainly, a detailed analysis of the impact on the banking system, liquidity, and the potential reduction in funds for the economy and the population should be prepared before making a decision, as suggested by the Central Bank (CBCG). In the past, bond issuances totaling 940 million euros in 2016 and 2019, with a measured interest rate of four percent per annum, did not achieve the expected results, despite attempts to engage the population. Only around 20 million euros were collected from them, which is negligible compared to the total amount. Nevertheless, fostering the development of the capital market is valid,” argued Pejaković.
According to him, the International Monetary Fund’s (IMF) perspective is that investment banking, or the inclination of individuals to invest in domestic and foreign securities, is low. However, this creates an opportunity for the capital market’s development.
Banks have always been responsible for meeting the state’s demands, and Pejaković mentioned that half of the total issuance of 500 million euros, due in April 2025, is owned by Montenegrin banks, insurance companies, and institutions.
“In this liquidity range and the state of the banking sector, answers to the obligations due should be sought,” advised Pejaković.
He emphasized that the IMF’s stance toward the banking system is positive, confirming that indicators of capital adequacy, liquidity, and profitability of banks in the entire system are high. Non-performing loans continue to decline, with a reduced level of variable-rate loans.
“Bankers, along with clients, would be happy to see a reduction in interest rates on loans, indicating significantly reduced risks, a broader client base, increased economic activity, and overall turnover. The public is most interested in a possible decrease in variable interest rates related to EURIBOR from June. Optimists expect it earlier, but due to the consistent fight against inflation, the IMF’s recommendation to central banks is to be cautious about lowering the basic interest rates,” explained Pejaković.
He added that the expected decline in EURIBOR is based on economic slowdowns, where 11 EU countries are experiencing such a trend. Additionally, elections play a role, as politicians in power want increased economic activity.
“Future economic developments will depend on three key factors: geopolitical situations globally, the vulnerability of individual economies to external shocks, and the effectiveness of macroeconomic policies achieved through the proper coordination of monetary and fiscal policies,” Pejaković said, adding that loan interest rates depend on the cost of money, including deposit interest rates, and the risks associated with loans.
If the average inflation rate in the previous year was 8.6%, and the average interest rate on bank loans is around 6.5%, there is a realistically negative real interest rate.
“If, by binding opinion, they administratively want to increase deposit interest rates, it can be expected that loan interest rates will also rise, or there will be higher fee volumes, all of which is not good for clients. Nevertheless, those who deal with day-to-day issues, i.e., bankers, should be allowed to strategically manage their business following international standards,” Pejaković said, attributing the significant deposit amount to trust in the banking sector.
To reduce the gap between active and passive interest rates, institutional risks need to be reduced.
A significant portion of loan interest rates depends on risks reflected in business conditions.
“Risks include informal business, frequent regulatory changes, economic illiquidity, where every fifth company is in blockade, and creditors try to collect claims by freezing accounts. Legal processes for debt collection last an average of three years, and the shadow economy threatens business,” Pejaković listed, adding the country’s credit rating to the list.
He concluded that the banking sector demonstrates stability and reliability, with all banking entities being domestic, and regulatory measures and practices ensure the safety of deposits.
