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Investing in Montenegro, the pearl of the Adriatic. July 2011 Version 04 July 2011 “At the moment of the creation of our planet, the most beautiful merging of land and sea occurred at the Montenegrin seaside... when the pearls of nature were sworn, an abundance of them were strewn all over this area…” Lord Byron From the top of Mount Lovćen: “Am I in Paradise or on the Moon?!” Bernard Shaw July 2011 Copyright © 2011 Pytheas Limited July 2011 3 Map of Montenegro July 2011 4 Location & National Symbols Flag Coat of Arms July 2011 5 It is Pytheas opinion that Montenegro could become the business bridge of Europe across the Adriatic, both a business hub and an economic gateway; an exclusive destination for Europeans and other nationals that seek to invest in a holiday, a retirement home or an investment home! July 2011 Why Montenegro ■ At the borders of the old and new ■ Liberal trade regime; Europe; ■ Customs exemptions for ■ An EU candidate state; investments in goods imported as ■ The Euro (€) has been its official investors’ deposits; currency since 2001; ■ Free access to EU markets; ■ Political stability; ■ FTA zones and also to the ■ Reformed according to the EU Russian market (only 1% of the legal framework for investment; custom evidence); ■ Relatively developed ■ The quality and diversity of its telecommunication infrastructure; natural and anthropological ■ One of the most competitive values, makes it a most attractive corporate tax regimes in Europe; tourist and permanent living destination; ■ No restrictions on profit, dividend ■ Land laws that give foreign or interest; investors equal status with local ■ Significant tax reliefs and ones, i.e. with full deeds and titles concessions; to land and real estate. Slide(s) About Montenegro Geography 9 - 10 Demographics 11 - 12 Government 13 - 14 Climate 15 Ports 16 Yachting Marinas 17 Nature beyond conception 18 - 33 History and culture 34 - 42 July 2011 Geography ■ Montenegro is a smaller, predominantly mountainous state in southwest Balkans (Southeastern Europe). ■ It borders Croatia and Bosnia and Herzegovina to the northwest, Serbia to the northeast, Albania to the south and the Adriatic Sea (across Italy) to the west. ■ The length of its borders are 614 km; with, Croatia 14 km, Bosnia and Herzegovina 225 km, Serbia 203 km and Albania 172 km. ■ The length of the coastline is 293,5 km with 56.9 km of beaches and 16.1 km of island coast. Geography (continued) ■ Its surface area is 13,812 km² (Sicily is 25,460 km² and Cyprus is 9,251 km²). ■ By its geographical position, it belongs to Southern Europe. ■ The two furthermost points of the country are only 190 km apart in a straight line, but between them the northbound air streams of Africa meet the southbound from the Polar circle. ■ The distance between capital Podgorica and Rome is around 500 km by air, from Paris and Berlin it is around 1,500 km, from Moscow almost 2,000 km, and 7,500 km from New York. Hotel Sveti Stefan, Sveti Stefan Demographics ■ The population of Montenegro is 620,029 (2011 census). ■ The capital is Podgorica (formerly Titograd) with 185,937 inhabitants, Nikšić 72,443, Bijelo Polje 46,051, Bar 42,048, Berane 33,970, Pljevlia 30,786, Herceg Novi 30,864 (2011 census) . ■ Ethnic groups: Montenegrin 45%, Serbian 29%, Bosniak 9%, Albanian 5%, other (Muslims, Croats, Roma) 12% (2011 census). ■ Population growth rate: - 0.777% (2010 est.) ■ Birth rate: 11.09 births/1,000 Montenegrins in national costumes population (2010 est.) Demographics (continued) ■ Urban population: 63% of total population (2011). ■ Rate of urbanization: - 0.8% annual rate of change (2005-10 est.). ■ The official language of Montenegro is Montenegrin. It became the official language in October of 2007. ■ Standard Serbian, Bosnian, Albanian, and Croatian are also spoken and are officially recognized languages. ■ It is a multi-ethnic and multi- confessional community (vast majority Christian orthodox, the rest are Islamic, Roman Catholic, Jewish, Protestant and other). Majorettes in the old city of Kotor . Government ■ Montenegro is a parliamentary representative democratic republic whereby the Prime Minister is the head of the government. ■ Executive Power Government; The Government is appointed by majority vote of the Parliament; The Prime Minister submits to the Parliament the Government's Program including a list of proposed ministers – the resignation of the Prime Minister will cause the fall of the Government. ■ Legislative Power Parliament (4-year term) and Government. ■ Judicial Power Independent of Executive and Legislative; It includes a constitutional court composed of five judges with nine-year terms and a supreme court with justices that have life terms. ■ The President (5-year term) is the head of state. The President performs some executive and legislative functions in addition to ceremonial duties. July 2011 Government (continued) ■ Igor Lukšić is the current Prime Minister of Montenegro and Head of Government. The current members of the cabinet were elected on 29 December 2010; and supported by a ruling coalition of DPS, SDP, DUA, HGI and BS. ■ Montenegro’s local government has 21 municipalities. The municipal authorities are the Municipal Assembly and the Mayor; The Municipal Assembly (4-year tem) is the representative body of the citizens of the Municipality; The Mayor (4-year term) is the Map of Montenegro municipalities executive body of the municipality. July 2011 Climate ■ Montenegro has a rather diverse climate, The South part is characterized by Mediterranean climate with long, hot and dry summers, and gentle rainy winters. The Central and northern part is characterized by mountain climate, and The utmost North part by continental climate, with small, considerably equilibrated quantities of rainfalls, and great daily and yearly amplitudes of temperature. ■ Average temperature of the air is 27.4°C in the summer and 13.4°C in the winter; 180 average sunny days per year. At Rafailovići, Budva July 2011 Ports ■ International Seaports Bar; Kotor; Herceg Novi; Tivat; Zelenika. ■ International Airports Podgorica; Tivat. Port of Bar, a view July 2011 Yachting Marinas ■ Yachting Marinas Ulcinj; Sveti Nikola, Bar; Budva; Herceg Novi; Kaliman, Tivat; Kotor; Meljine; Kordić, Prčanj; Risan; Zelenika. Mega-yacht marina (under construction), Tivat July 2011 Nature beyond conception ■ Although small in area, nature has produced here unique contrasts that is truly beyond conception. ■ The diversity of its, geological background, areas, climate and landscape, as well as the position of Montenegro in the Balkans and on the Adriatic, provide conditions of very high biological diversity, making Montenegro one of the hot spots of European and world biodiversity. ■ The Parliament of Montenegro, in 1991, adopted the Declaration whereby Montenegro got proclaimed the first ecological Ada Bojana beach, Ulcinj state in the world. Nature beyond conception (continued) ■ Over a span of only 100 km in a straight line, three natural environments are distinguishable: the seaside, the Karstic field zone and the high mountain region. ■ A most attractive resource is the 313 km long coastline with 117 natural sandy and rocky beaches and 8 small islands – The longest beach is at Ulcinj (12 km) also the longest natural sandy beach on the Mediterranean. ■ The seaside is a very narrow strip of land (2 to 10 km wide), separated from the inland by high and steep dolomite mountains of Rumija, Sutorman, Mogren beach, Budva Orjen, and Lovćen. Nature beyond conception (continued) ■ The abundance of underwater caves, shipwrecks, cliffs and rich marine life make Montenegro a scuba diving heaven. ■ The fauna of the Montenegro sea (although not yet fully investigated) includes over 300 species of algae, 40 species of sponges, 150 species of crustaceans, 340 species of mollusks, and almost 400 species of fish, with 3 species of marine turtles and 4 species of dolphins, the economically important Norway lobster and petrified sponge. Several species of whales are also occasional visitors. Shipwreck at the area of Ţanijce Nature beyond conception (continued) ■ With the longest fiord of South Europe, Fiord Kotor (Boka Kotorska), which is 28 km long and 30 meters deep, surrounded by mountains which are 1.900 meters above sea level – a stunning dolomite rock walled chasm with its entrance in the town of Herceg Novi, decorated with small fishing shelters, picturesque villages and islands all the way to Kotor, one of the prettiest, unspoiled existing medieval towns; founded by the ancient Greeks (named Kattaro), fortified by the Byzantines (named Askrivion), later ruled by the Venetians and today a Fiord Kotor, a view UNESCO world heritage site. Nature beyond conception (continued) ■ Numerous caves and sinkholes, some of which are particularly beautiful (cave Lipska, cave Đalovića), while others are among the deepest in the Balkans (sink holes at Vjetrena brda in Durmitor, Duboki do in Lovćen) – characterized by an exceptionally complex and rich fauna, with many endemic and relict forms. ■ There are 40 lakes in Montenegro and its rivers have still remained the purest of Europe's. ■ Lake Skadar, (also called Lake Scu2ari) can vary 2etween 370 km and 530 km , of which 2/3 is Cave Lipska, Cetinje in Montenegro and 1/3 in Nature beyond conception (continued) Albania. Declared a national park in 1983, is one of the largest bird reserves in Europe, having 271 bird species, among which are some of the last curly pelicans in Europe. ■ The Tara is the longest river in Montenegro (150 km). The canyon of the river is about 80 km long cut between the mountains of Sinjajevina and Durmitor, the average depth is about 1,000 meters, and reaches a maximum depth of 1,600 meters which makes it the deepest and longest canyon of the world after the Grand Canyon. Lake Skadar, a view Nature beyond conception (continued) ■ Additional canyons include that of Morača and Cijevna rivers, Piva, Mrtvica and Komarnica and gorges such are Ibarska, Tifranska and Đalovića. ■ Eighty percent of the territory of Montenegro is comprised of forests, natural pasturelands and meadows. Notably there are more than 54 peaks higher than 1,900 meters (two at 2,522 m). ■ A total of 2,833 plant species (3,650 including subspecies), many of them unique, grow in Montenegro which makes up nearly a quarter of the entire European flora! All that in a mere Edraianthus montenegrinus, Durmitor 0.14% of the continents territory. Nature beyond conception (continued) ■ Characteristic flora includes, the Alpine flower Edelweiss, the endemic Edraianthus montenegrinus, Edraianthus glisichi, Edraianthus pulevici, Wulfenia blecicii, Durmitor mullein, Potentilla montenegrina, Draba betriscea, and many relict glacial species. ■ There are 305 protected bird species in Montenegro. Some of the rarest nesting birds include the Dalmatian Pelican, Ferruginous Duck , White Eyed Pochard, Scops owl, the Black Crowned Night Heron and the European nightjar. Potentilla montenegrina, Durmitor Nature beyond conception (continued) ■ Other characteristic bird fauna includes, Pyrhocorax graculus, Antus pratensis, Prunella collaris, Phoenicurus ochruros, Golden Eagle, Griffon Vulture, Wall Creeper. There are also a number of glacial relicts among the bird fauna, including Snow Finch, Horned Lark and Alpine Accentor. ■ With its 271 bird species, Lake Skadar is a real attraction for birdwatchers and nature lovers – since 1995 it has been a designated Wetland of International Importance by the Ramsar Convention as a habitat for water birds. Grey Heron, Lake Skadar Nature beyond conception (continued) ■ Especially interesting bird species at Lake Skadar are the, Dalmatian Pelican colonies, Pygmy Cormorant (the biggest world colony of approximately 2,000 bird pairs), Whiskered Tern, Great Cormorant, Ferruginous Duck, White-tailed Eagle, Grey Heron. ■ There are five ornithological reserves at Lake Skadar (at, Manastirska tapija, Grmozur, Omerova gorica, Crni zar, Pančevo oko), four bird-watching towers (at, Stanaj, Radus, Plavnica and Zabljacke) and several organized bird-watching tours offered by the Lake Skadar Pygmy Cormorants at Lake Skadar National Park. Nature beyond conception (continued) ■ Mountain forests occupy 54% of the territory, with natural forests covering about 45% of the land, making Montenegro one of the most forested countries in Europe. ■ Fir Abies alba, Spruce Picea excelsa and Mugho Pine Pinus mugo, Abieto-Picetum, Picetum abieti montenegrinum, Heldreich (Whitebark) Pine, Pine Pinus peuce are some of the coniferous species. ■ Beech Fagetum forests, Chestnut forests, Macquis and Evergreen Oak, Mountain Maple Acer heldreichii are only some of At Mrtvica Canyon the species. Nature beyond conception (continued) ■ There is maybe no other country in Europe where the nature lover can enjoy so many activities (rafting, freshwater and deep sea fishing, climbing, hunting, hiking, caving, skiing, etc.) within a most diverse morphological environment, in an easily accessible area in terms of distance; four national parks and a number of other places of unique flora and fauna, some of which protected by UNESCO. ■ The five national parks are Lake Skadar National Park, Lovćen National Park, Durmitor National Park, Biogradska Gora National Park and National Park Prokletije. Tara Canyon, a view Nature beyond conception (continued) ■ National Park Biogradska Gora, a 5,650 ha area reserve, in the municipality of Kolašin, contains 26 different habitats of plants with 220 different plants, 150 kinds of birds and 10 kinds of mammals and 86 kinds of trees some more that 500 years old. In the waters of the Park exist three kinds of trout and 350 kinds of insects. Also large mountain slopes and tops, glacier lakes at altitude of 1,820 meters, forests, all in a most unique and complex geological and morphological environment. Biogradsko Lake, National Park Biogradska Gora Nature beyond conception (continued) ■ National Park Durmitor is in the Northwest of Montenegro, in the municipality of Ţabljak, limited by rivers Piva and Tara between which there are 23 mountain tops over 2,300 meters of altitude; a 39,00 ha area reserve. It includes part of Tara Canyon which is 1,600 meters above river level, dense forests, 17 glacier lakes and the highest peak in the country, Bobotov Kuk at 2,522 m. Durmitor National Park boasts 1,500 kinds of flora, 314 protected animals including 163 kinds of birds. Crno Jezero (Black Lake), Durmitor Nature beyond conception (continued) ■ National Park Lovćen is in the Southwest of Montenegro in the cliff area of Dinara Alps, a 6,220 ha area reserve. Due to the influence of two extreme climatic zones in a rather small area, Mediterranean and Continental, nature here formed a unique habitat. There are 1,158 plant species out of which four are endemic and 200 bird species. The park is dominated by mountain Lovćen and by the mausoleum of Petar II Petrović Njegoš. It has two mountain peaks, Štirovnik (1,749 m) and Jezerski Vrh (1,657 m). View of the Bay of Kotor from National Park Lovćen Nature beyond conception (continued) ■ National Park Prokletije is in the Southeast of Montenegro. Most of the 1,052 ha reserve is within the territories of Plav and Roţaje with glacial lakes (Hridsko, Visitorsko, Ropojansko, Tatarijsko, Bjelajsko, the Vizier), larger and smaller streams, springs and rivers, underground aquifers and mountain ponds (Treskavac, Koljindarsko). There are also numerous hills, ravines, steep slopes, river valleys, alpine type and numerous peaks over 2,000 meters above sea level (at Carnation-Bjelički). Lake Hridsko, National Park Prokletije History and culture ■ Montenegrins have accumulated a rich cultural and historical heritage, which dates from the pre-Romanesque, Gothic and Baroque periods. ■ Montenegro has been influenced by both eastern and western civilizations – whether these were Greeks, Illyrians, or Romans, Byzantines, Venetian, Slavs, Austro-Hungarians or Ottomans, they all left their mark forming a most interesting multicultural society. ■ The historical roots of Montenegro lie long before the arrival of the Slavs in the Balkans in the 6 and 7 century Ancient city of Dioclea, Podgorica AD. History and culture (continued) ■ The first recorded settlers of present-day Montenegro were Illyrians; the Illyrian Kingdom emerged during the 3 century BC with its capital at Skadar, named Docleata. th th ■ Prior, during the 6 and 7 centuries BC substantial Greek colonies were established on the Montenegrin coast (Apollonia, Epidamnus, Lissus, Kattaro). ■ Celts are also known to hath settled there in the 4 century BC. ■ In 9 AD the Romans (and Byzantines) conquered the Roman mosaics (4 century BC), Risan region. July 2011 History and culture (continued) ■ Slavs colonized the area after the 6 century AD, forming a semi-independent principality called Doclea, that was involved in Balkan medieval politics with ties to Rascia (Raška) and Byzantium and to a lesser extent Bulgaria. ■ Doclea (or Duklja) gained its independence from the Byzantine Empire in 1042 – the Byzantine influence in art and architecture is especially felt in continental part of Montenegro. ■ Over the next few decades, it expanded its territory to neighboring Rascia and Bosnia and also became recognized as Reţevići Monastery, Petrovac a kingdom. History and culture (continued) ■ Its power started declining at the end of the 11 century and by 1186, it was conquered by Stefan Nemanja and incorporated into Serbian realm. ■ The newly acquired land, then called Zeta, was governed by the Serbian Nemanjić dynasty. ■ After the Serbian Empire collapsed in the second half of the 14th century, another family, the Balšićs, came to prominence. ■ Coastal Montenegro from 1420 to 1797 was a province of the Venetian Republic. The Venetian territory was then centered around the area of the Bay of Ostrog Monastery, Nikšić Kotor, and included the towns of History and culture (continued) Kotor, Risan, Perast, Tivat, Herceg Novi, Budva, and Sutomore. ■ The Montenegrin coastal region is especially known for its cultural monuments, such as the Cathedral of St. Tryphon, the basilica of St. Lucas (over 800 years), Our Lady of the Rock (Scrpjelo), the Savina Monastery and many others. ■ The name "Montenegro" meaning Black Mountain was first mentioned in the 15 th century. ■ Montenegro's resistance to Ottoman attacks (15 century), which in the end resulted in Kotor Venetian Walls, a view History and culture (continued) strengthening its statehood, marks this time period. ■ Renowned about their bravery Montenegrins forced Giuseppe Garibaldi to state: “Montenegro undoubtedly takes one of the first places; the legendary heroism of its people brings honor to mankind”. ■ The printed word in Montenegro goes way back in history. Thirty- eight years after the Gutenberg's Bible, in 1494 the first book was printed in the Crnojević printing press in Cetinje – “Oktoih”, a precondition for the future development of literature in Montenegro. First bCetinje (1494)in the Balkans, History and culture (continued) ■ In the 15 thcentury it remained the only officially unconquered and free oasis, surrounded by the powerful Ottoman empire and the Venetians. ■ Montenegro was internationally recognized as a state in 1878. Its capital at the time was Cetinje. ■ On 1 August 1910 during the reign of King Nikola I of the Petrović Dynasty was declared a Kingdom. ■ From 1918 to 1941 it was part of the Kingdom of Yugoslavia. ■ After World War II, it became one of the six republics of the Socialist Federal Republic of Yugoslavia. Hussein Pasha Mosque, Pljevlja History and culture (continued) ■ In 1992, after the breakup of Communist Yugoslavia and the introduction of a multi-party political system, it became part of the Federal Republic of Yugoslavia (FRY). ■ In 2003 the FRY was renamed to Serbia and Montenegro and officially reconstituted as a loose union. ■ At a referendum held on 21 May 2006, the majority of its citizens voted for its independence. ■ Today it is an independent state internationally recognized. ■ UN received Montenegro as the 192 ndcountry member on 27 July 2006. Church Gospa od Skrpjela, Perast History and culture (continued) ■ The culture of present-day Montenegro is as pluralistic and diverse as its history and geographical position would suggest. ■ A very important dimension of Montenegrin culture is the ethical ideal of “Čojstvo i Junaštvo”, roughly translated as "Humanity and Bravery“ – another result of its centuries long warrior history, it is the unwritten code of chivalry that stipulates what is required to deserve a true respect of the people. Amongst other, in the old days of battle, it resulted in Montenegrins fighting to the death as being captured was Montenegrins in national costumes, Cetinje considered the greatest shame. Slide(s) Slide(s) The Economy – General 44 - 57 The Economy – Sectors & Bodies Banking 58 - 66 Minerals & Mining 113 - 119 Insurance 67 - 71 Agriculture & Forestry 120 - 123 Capital Market 72 - 75 Transport & Foreign Trade 76 - 82 Communications 124 - 129 Education 130 - 133 Hospitality & Tourism 83 - 94 Real Estate & Construction 95 - 104 Healthcare 134 - 137 Industrial 105 - 112 Environment 138 - 141 July 2011 The Economy – General ■ Montenegro is a small, open, middle-income economy. Despite a medium level of wealth, the country's economic strength is limited by the small size and concentrated nature of its economy. ■ Notably, Montenegro does not issue its own currency, but has been using the Euro as legal tender since 2002 and maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions. ■ As with other smaller economies, River Tara, a view the crisis reached the country The Economy – General (continued) with a lag, only starting to be felt in the last quarter of 2008. Officially the crisis fully hit Montenegro during 2009. As a Montenegro Real GDP Growth result the GDP growth rate in 2009 was -5.7%. Year % 2005 4.2 ■ Previously, in 2006 and 2007 the country achieved GDP growth 2006 8.6 rates of 8.6% and 10.7% 2007 10.7 respectively which continued strongly into 2008 with 6.9% 2008 6.9 growth. 2009 -5.7 ■ In 2007, Montenegro achieved a 2010 1.1 record fiscal surplus of more than 6% of GDP, which 2011 2.0* remained at 1% of GDP in 2008 Source: IMF, Pytheas Emerging Markets Research – positioning it at the time as one * Estimate of the fastest growing European countries. July 2011 The Economy – General (continued) ■ Since its independence in 2006, Montenegro has experienced an economic and financial roller coaster ride. The country’s abundant potential attracted large capital inflows, an increasing share of which were debt creating. ■ Wealth effects made real estate lending and absorption booms mutually reinforcing, and overstretched the nascent financial sector’s ability to guard against risks. The economy began to overheat and then, as elsewhere, the inflows juddered to a halt. The result was a sharp decline in output. Šareni Pasovi, National Park Durmitor The Economy – General (continued) # Montenegro Macroeconomic Indicators, selected 2009 2010 2011 1 Nominal GDP (€ million) 2,981 3,023 3,111 2 GDP real growth rate (%) -5.7 1.1 2.0 3 Inflation (%) 3.4 0.5 4.0 4 Unemployment rate (%) 11.5 12.2 12.0 5 Current account balance (€ million) -896 -775 -761 6 Current account balance as % of GDP (%) -26.2 -25.6 -24.5 7 External debt (€ million) 2,781 3,000 3,089 8 External debt as % of GDP (%) 93.3 98.9 99.3 9 Net FDI, in current prices as % of GDP (%) 35.8 17.9 15.4 10 Net FDI, in current prices (€ million) 1,066 542 480 11 Gross domestic savings as % of GDP (%) -6.2 -6.7 -4.7 12 Gross national savings as % of GDP (%) -3.1 -3.6 -2.5 Source: Montenegro Ministry of Finance, CBME, MONSTAT, IMF, EUROSTAT, Pytheas Emerging Markets Research 2010 = Estima2011 = Projections July 2011 The Economy – General (continued) ■ Huge vulnerabilities were accumulated during the boom when the authorities did not take the opportunity to sufficiently strengthen policy buffers. With policy space exhausted at the beginning of the crisis, the authorities were forced to adopt unconventional policies to mitigate its effects. ■ During the boom the Central Bank of Montenegro raised the cost of credit through higher reserve requirements and tightened supervisory and prudential standards, but credit growth was hardly dented. In the Fall of 2008, banks suffered from a simultaneous run on deposits, loss of access to financing, and deterioration in asset quality. ■ The early surpluses largely reflected temporarily buoyant tax collections from high imports. Initially, they were placed in the domestic banking system, thereby enabling further credit extension. Then at the peak of the boom period, the fiscal stance relaxed (through tax cuts and public sector wage increases), leading to a structural fiscal deficit of some 6% of GDP in 2008. ■ The remaining fiscal buffers were quickly exhausted in the crisis, while large loan guarantees to the aluminum and steel companies created The Economy – General (continued) substantial new contingent liabilities. By 2009 public and publicly guaranteed debt had risen to nearly 55% of GDP. ■ Excessively restrictive employment protections and an unduly rigid centralized collective bargaining system remained in place contributing to fast wage growth, limiting the flexibility of the corporate sector, and stifling new hiring, thus raising unemployment. ■ Privatization occurred later than elsewhere in Eastern Europe, and in consequence the interest of bidders was more limited. Katun Gudţaljine on Bjelasica mountain The Economy – General (continued) ■ Privatization – The responsible body to manage, control and supply the privatization process implementation as well as to propose and coordinate all activities necessary for the capital projects application in Montenegro is the Montenegro Privatization and Capital Investment Council. Progress in large-scale privatization has been so far mixed: The tender for the sale of a 54% stake and a 30-year concession in the port operator, Marina Bar, was concluded successfully in early 2010. A tender for acquiring a long-term concession on the Bijela port infrastructure and the area surrounding the Bijela shipyard was launched in June 2010. The government has also issued a tender for the privatization of the Railways Cargo Company (MonteCargo). However, the tender for the sale of the majority stake in the port operator, Kontejnerski Terminal, failed. Furthermore, the partial re-nationalization of the aluminum conglomerate KAP became effective in November 2009 with the state acquiring a 29% stake in the plant and a 31% stake in the related Nikšić Bauxite mine in exchange for a guarantee worth €135 million. July 2011 The Economy – General (continued) HTP “Budvanska Riviera“ AD Budva, In September 2009 the Government transferred an 18.3% stake in EPCG, the state-owned vertically integrated power utility, to Italy’s AZA. The Government also signed a €720 million agreement for the construction of an undersea power transmission line with Italy. The project, which is expected to make Montenegro an important node in the regional power market, will be implemented jointly by the Italian company Terna and the recently unbundled Montenegrin transmission system operator, Prenos. The concession agreement to construct the Bar-Boljare motorway, signed in 2009, has not yet closed and construction has been severely delayed, mainly attributed to the failure of the first-ranked bidder to provide all the required documents and the length of the negotiations. ■ As per the relevant Government plan, the following companies are to be privatized within 2011: “Montepranzo“ Boka – Produkt AD Tivat, “Montenegro Airlines” AD Podgorica, and “Institute Dr. Simo Milošević” AD Igalo . July 2011 The Economy – General (continued) ■ Additional tenders (date has not yet been defined) shall be also published for: Railway Transport of Montenegro AD Podgorica, Railway infrastructure of Montenegro AD Podgorica, Adriatic Shipyard AD Bijela, Port of Bar AD Bar, “Pobjeda“ AD, “Zora” AD Berane, HTP “Ulcinjska Riviera” AD Ulcinj, Ferrous Metallurgy Institute AD Nikšić, “Barska plovidba” AD Bar, and Montenegrobonus LLC Cetinje. ■ Also within the privatization process through Public Private Partnership, investors shall be selected for the following tourism and hospitality projects: (a) Ada Bojana, (b) Velika Plaţa, (c) Njivice, (d) Utjeha, (e) Buljarica, and (f) Jaz. The same with the real property belonged to the military: (a) “Mediteran” Zabljak, (b) “Bigovo – Traste” Kotor, (c) Mamula, (d) Rakite, and (e) Kumbor. July 2011 The Economy – General (continued) ■ The large industrial sector legacy enterprises were sold to smaller investors who lost access to new financing during the global crisis, forcing the government to retake a significant equity stake in the aluminum plant in exchange for extending loan guarantees. ■ In addition to the deposit run, the sudden stop in capital inflows also dried up financing for corporates just as the prices of their key export products began to fall sharply. With the very large contractions in industry, the decline in GDP (6%) would have been even worse but for the The old town of Budva ability of the tourism sector to mostly withstand the downturn. The Economy – General (continued) ■ A tentative recovery is taking hold, following the global crisis that exerted heavy blows upon the economy. In 2010, a good tourism season was followed by resumed metal production, while heavy rains in the region boosted electricity production and exports. After contracting for almost two years, industry began to grow again in the second half of 2010. Nevertheless, industrial production at end-2010 was still considerably below its pre-crisis peak. Expected large-scale infrastructure foreign direct investment has so far not materialized and construction activity remains depressed. Overall 2010 GDP growth is estimated at 1.1%, keeping output below its 2008 level. ■ The needed rebalancing of the economy has begun. Inflation and wage growth decelerated sharply and the current account deficit halved to around 26% of GDP in 2010. While most of the improvement was due to a weather related boost in electricity exports and rebounding metals production, the nascent adjustment in costs has also improved competitiveness. The improved fundamentals have also contributed to the September 2010 debut Eurobond issuance of €200 million, subsequent spread tightening, and a further €180 million issuance in April 2011. The Economy – General (continued) ■ Fiscal consolidation has commenced. Reflecting mainly significant capital expenditure cuts, the 2010 fiscal deficit is estimated to have declined by 1.5% of GDP to 3.9%, though, loan guarantees of 3.6% were extended to industrial companies. Going forward, the authorities aim at balancing the budget in 2012 and achieving a sizeable surplus thereafter in order to bolster sustainability, lower financing risk, and boost the economy’s resilience to shocks. A durable fiscal adjustment should encompass both revenue and expenditure measures, especially steps to curb the public sector wage bill. An early implementation of pension reform would also strengthen the public finances, as would further efforts to avoid expenditure arrears and direct budget support to private companies. ■ In the banking sector, confidence has begun to return, as evidenced by increasing deposits, though they are still below their levels in the third quarter of 2007. However, non-performing loans have not yet leveled off – stagnant lending at the current juncture primarily reflects the dearth of creditworthy projects. The Economy – General (continued) ■ In an effort to prevent and mitigate systemic risks in the financial system in the future and to ensure its preservation, improvement, control and stability but also for better promotion of coordination and exchange of information between authorities in the financial sector, amongst other, the Montenegrin Government established the Financial Stability Board and the European Systemic Risk Board. Along the same lines the Financial Stability Council Law was adopted. At Rijeka Crnojevića The Economy – General (continued) ■ Although the recovery is gaining momentum, limited policy space and incomplete reforms pose risks to the outlook. Montenegro must step up efforts to reconstitute fiscal, external, and financial buffers and to address rigidities in product and labor markets. ■ Noting the importance of strengthened competitiveness for securing external stability, structural reforms remain a top policy priority. ■ Greater flexibility in wage setting and employment protection would support job creation in the private sector, while addressing unemployment and poverty traps would boost labor participation and market attachment. ■ Improvements in the business environment and investment climate are also part of the unfinished agenda. Banking ■ The banking system comprises of the Central Bank of Montenegro (Centralna Banke Crne Gora), which is the regulatory and supervisory authority for the banking institutions – the banks, and the Micro-Credit Financial Institutions (MFIs). ■ According to the relevant law the main objective of the Central Bank of Montenegro is to establish and maintain a sound banking system and monetary policy, including safe and efficient payment systems. The Millenium Bridge, Podgorica Banking (continued) ■ The Banking sector in Montenegro Banks – Ranking by Total Assets (2009) Montenegro is completely Total # Name Assets % privatized. There are eleven banks operating in the country, 1 Crnogorska Komercijalna Banka840,732 27.8 and all of them are in private 2 NLB Montenegrobanka 515,213 17.0 ownership with the share of 3 Hypo-Alpe Adria Bank 507,189 16.8 foreign capital exceeding 80%; three are locally-owned while the 4 Prva Banka Crne Gora 367,222 12.1 5 Podgorička Banka 240,234 7.9 other eight are part of international banks and other 6 Erste Bank 181,911 6.0 7 Atlas Banka 160,123 5.3 entities, corporate and private. ■ The Montenegrin banking sector 8 Hipotekarna Banka 100,103 3.3 was severely hit by the global 9 Komercijalna Banka 71,799 2.4 financial crisis. As a result non- 10 Invest Banka Montenegro 24,250 0.8 performing loans as a percent of 11 First Financial Bank 16,457 0.5 gross loans increased from 3.2% Total 3,025,233 100.0 at end-2007 to 21% at end-2010. Source: Central Bank of Montenegro, Pytheas Emerging Markets July 2011 Banking (continued) Montenegro Banks – General, Year 2009 (€000) # Name Total Total Net Est. Foreign Ownership Assets Liabilities Profit 1 Atlas Banka 160,123 131,319 1,161 2002 Local (IBM Atlas Group) 2 Crnogorska Komercijalna Banka 840,732 781, 637 -11,834 1997 OTP Bank (Hungary) 3 Erste Bank 181,911 159,074 195 2009 Erste Bank (Austria) 4 First Financial Bank 16,457 11,157 -1,706 2008 Restis Group (Greece) 5 Hipotekarna Banka 100,103 79,257 1,571 1991 Foreign & local entities 6 Hypo-Alpe Adria Bank 507,189 447,970 -18,315 2006 Bayern LB (Germany) 7 Invest Banka Montenegro 24,250 8,758 303 1961 Local (IMB Atlas Group) 8 Komercijalna Banka 71,799 50,642 1,159 2003 Komercijalna Banka (Serbia) 9 NLB Montenegrobanka 515,213 479,104 1,401 1995 NLB Group (Slovenia) 10 Podgorička Banka 240,234 209,525 -1,903 1906 Societe Generale (France) 11 Prva Banka Crne Gora 367,222 335,054 6,339 1901 Local Source: Central Bank of Montenegro, Pytheas Emerging Markets Research July 2011 60 Banking (continued) ■ During the boom the Central Bank of Montenegro raised the MonteneBank Credit by Borrower (%)bution of cost of credit through higher reserve requirements and # Borrower 2007 2008 2009 2010 tightened supervisory and 1 Private companies 60.6 59.2 56.4 54.8 prudential standards, but credit growth was hardly dented. In the 2 Citizens 34.5 35.8 36.6 37.1 Fall of 2008, banks suffered from 3 Government 1.4 1.0 1.3 2.1 a simultaneous run on deposits, 4 State-owned cos 1.0 1.0 1.9 2.7 loss of access to financing, and 5 Funds 0.6 0.4 1.2 0.1 deterioration in asset quality. ■ The authorities implemented 6 Banks 0.2 0.1 0.0 0.0 several measures to stabilize the 7 Financial 0.9 0.8 0.3 0.4 banking system, including a law Institutions 8 Credit cards 0.9 1.3 1.7 2.2 authorizing the government to provide direct support to banks in 9 Other 0.0 0.4 0.6 0.6 the form of credit lines and re- Source: Central Bank of Montenegro, IMF capitalization. July 2011 Banking (continued) ■ The government provided such Montenegro Banking Sector – Distribution of support in two cases: Bank Credit by Economic Sector (%) (a) a loan of €44 million for the # Sector 2007 2008 2009 2010 financially troubled Prva Banka, 1 Households 35.1 36.4 38.3 39.3 and 2 Trade 26.1 22.6 22.8 22.9 (b) a guarantee of €150 million to 3 Construction 9.0 7.2 7.8 8.1 cover KfW Bankgruppe’s and European Investment Bank’s. 4 Services, 8.6 7.7 5.9 7.4 loans to Montenegrin banks used Tourism, etc. Agriculture, for providing finance to small and 5 Hunting, Fishing 1.0 0.6 0.3 0.4 medium-sized enterprises (SMEs). 6 Mining, Energy 1.0 1.6 2.2 2.5 7 Transport, 3.6 3.1 2.6 3.0 ■ A package of laws in the communications 8 Finance 2.8 2.5 2.4 1.7 financial sector was approved in July 2010, including a new law 9 Real Estate 3.6 4.2 4.4 3.0 10 Public services 2.9 2.0 2.6 3.1 on the central bank and a new deposit protection law. 11 Other 6.3 12.1 9.1 9.0 Source: Central Bank of Montenegro, IMF July 2011 Banking (continued) ■ Stress testing results of the banking system sensitivity to crisis showed that four banks needed to provide additional capital. Another two banks performed recapitalization, although the diagnostic assessment findings and stress testing results did not point to the recapitalization need. ■ Total non-performing assets of banks amounted to €509.3 million at end-2010 and made up 17.3% of total assets; showed a year-on-year increase of €164.6 million or 47.7%. Simultaneously, the share of non- performing assets to total assets grew by 5.91%. ■ Liquidity of the banking sector in 2010 was satisfactory which was largely contributed to the conservative lending policy. ■ Banks’ liquid assets amounted to €562.7 million at end-2010; showed an increase in one year period of €101 million or 21.92%. Liquid assets to total assets ratio amounted to 19.11% (15.26% at end-2009). ■ Liquid assets to short-term liabilities grew in 2010; attributed to a significantly faster increase in liquid assets as compared to short-term liabilities of banks. Simultaneously, short-term loans to short-term liabilities ratio declined and it was 48.44% on aggregate level due to decrease in loan portfolio in the previous year. Banking (continued) # Montenegro Banking Sector – Selected Financial Ratios (%) 2007 2008 2009 2010 CAPITAL ADEQUACY 1 Regulatory capital as % of risk-weighted assets 17.1 15.0 15.7 15.9 2 Capital as % of assets 8.0 8.4 11.0 10.6 ASSET QUALITY 3 NPLs in % of gross loans 3.2 7.2 13.5 21.0 4 Provisions, in % of NPLs 73.6 55.6 46.3 30.7 5 Provisions, in % of total loans 2.3 4.0 6.3 6.4 6 NPLs net of provisions, in % of capital 7.9 32.0 52.5 102.8 EARNINGS AND PROFITABILITY 7 Gross profits ROAA 0.8 -0.6 -0.6 -2.7 8 Gross profits ROAE 10.5 -6.6 -6.9 -27.0 9 Net interest margin 3.0 3.8 4.9 4.9 10 Gross income, in % of average assets 7.0 5.1 5.3 5.4 LIQUIDITY 11 Liquid assets, in % of total assets 18.1 11.2 15.3 19.1 12 Liquid assets, in % of short-term liabilities 32.0 20.9 25.8 32.9 13 Deposits, in % of assets 70.3 60.1 60.3 60.8 14 Loans, in % of deposits 107.4 140.5 131.4 122.9 Source: Central Bank of Montenegro, IMF July 2011 Banking (continued) ■ Total MFIs assets and liabilities amounted to €58.7 million in December 2010 – same level as it was at the beginning of 2008; Montenegro Micro-Credit Financial Institutions – General, Year 2009 (€000) annual decline in MFIs assets amounted to 22.1%. # Name Total Total Net Assets LiabilitiProfit ■ At 2010 year-end, total MFI loans amounted to €43.5 million which 1 Agroinvest VFI52,212 40,151 73 represented a year-on-year 2 Alter Modus 16,493 11,487 289 decline of 33.9%. ■ MFI granted loans for start-up of 3 Klikloan 1,745 598 -117 small entrepreneurial programs but under very unfavorable Montenegro conditions – MFI average 4 Investments 3,194 1,908 256 weighted effective interest rates 5 Ozmont 1,786 1,192 143 reached 28.0% in December 2010, while nominal interest rates amounted to 19.2%. Source: Central Bank of Montenegro July 2011 Banking (continued) ■ Useful links (alphabetically): ► Association of Montenegrin Banks ► Chamber of Economy of Montenegro
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