MONTENEGRO: ECONOMIC DEVELOPMENTS: JUNE 2006

UNCLAS SECTION 01 OF 03 BELGRADE 001147 SIPDIS SIPDIS DEPARTMENT PASS TO OPIC, EXIM, TDA AND USAID USDOC FOR 4232/ITA/MAC/OEERIS/SSAVICH E.O. 12958: N/A TAGS: ECON EFIN KPAO ETRD EINV EAID PGOV MW SUBJECT: MONTENEGRO: ECONOMIC DEVELOPMENTS: JUNE 2006 BELGRADE 00001147 001.3 OF 003 Index: MACROECONOMICS: -- Central European Free Trade Agreement -- Draft Law on Optical Disks Sent to Parliament -- Trade Deficit Declines BUSINESS and TOURISM: -- National Treatment for Investors Promised -- Foreign Currency Flow with Serbia Improves -- KAP: Negotiations Continue on Redundancy -- Steelworks Back on the Block -- Ada Bojana Tender Fails -- More Foreign Tourists Expected -- RyanAir Lands in 2007 -- Coastal Real Estate Prices Rise -- Privatization Income Euros 17 Million -- Greenfield Investment Euros 120 Million -- Serb Company Announces 67 Million Investment -- Customs Corruption Perceived As Lower PUBLIC ECONOMY: -- Unemployment Down -- Real Wages Rise T-BILLS STOCKS MACROECONOMICS: Central European Free Trade Agreement -------------- ¶1. Romania, Bulgaria and Croatia, the current members of the Central European Free Trade Agreement (CEFTA), announced that they expect that Montenegro, together with Albania, Bosnia and Herzegovina, Moldova, Macedonia, and Serbia, will join CEFTA by the end of the year. Draft Law on Optical Disks Sent to Parliament -------------- ¶2. The Government has adopted and sent to Parliament the WTO TRIPS-compliant draft Law on Optical Disks. Trade Deficit Declines -------------- ¶3. The independent Institute for Strategic Studies and Prognoses (ISSP) reports Montenegro's trade deficit declined 7.2 percent in the first quarter, to Euros 100.4 million. Imports were steady, while exports rose 4.4 percent. BUSINESS and TOURISM: National Treatment for Investors Promised -------------- ¶4. The GoM has promised national treatment for foreign investors. Minister for Foreign Economic Relations Gordana Djurovic said the GoM, through 2009, was looking to attract greenfield investments, particularly in the areas of services and tourism. Foreign Currency Flow with Serbia Improves -------------- ¶5. Post-independence, payment clearance procedures for transaction between Serbia and Montenegro have come under international rules. Consequently, money flows can be conducted in Euros or any other currency; previously, Serb end-users receiving money from Montenegro could only collect dinars. The transactions are also more rapid, and now take three to five days. The new rules are also expected to cut down on informal currency flows between Montenegro and Serbia. KAP: Negotiations Continue on Redundancy -------------- ¶6. Negotiations between the new Russian owners of the Kombinat Aluminum Podgorica (KAP) and workers continue, with production affected slightly by a rotating strike. At stake is the amount of redundancy payments to be made as KAP attempts to trim an admittedly bloated workforce. BELGRADE 00001147 002.3 OF 003 Steelworks Back on the Block -------------- ¶7. The Niksic Steelworks will again be offered for sale through tender, with offers due on September 4. Russia- based Midland Resources had bought the works in 2004, but abandoned their purchase late last year. Ada Bojana Tender Fails -------------- ¶8. There were no interested bidders on the long-term lease of the resort area Ada Bojana, near the border with Albania. A new model for privatization will be announced, and the area re-tendered, probably in September. More Foreign Tourists Expected -------------- ¶9. Four hundred thousand foreign tourists are expected this year, up from 270,000 in 2005. The Tax Administration has confirmed that foreigners can receive a VAT refund on purchases of Euros 100 or more, when the goods are taken out of the country. Note: Tourists from Serbia are still counted as domestic. End note. RyanAir Lands in 2007 -------------- ¶10. The Government of Montenegro expects to complete negotiations with low-cost carrier Ryan Air by the end of this year, with flights beginning in 2007. Other low-coast carriers have reportedly also expressed interest. Coastal Real Estate Prices Rise -------------- ¶11. Foreign investors are driving demand for properties in the coastal area of Budva. In 2005, the price for an apartment in Budva, per square meter, was Euros 800 to 900; this year, the same apartment runs about Euros 1,500. Similar increases are reported for pricier Kotor. Reportedly, English buyers are interested in villages, while Russians are buying ocean views. Privatization Income Euros 17 Million -------------- ¶12. Montenegro has realized Euros 16.8 million in privatization income through the first half of the year. The government Privatization Council expects privatizations to realize Euros 120 million throughout 2006. Last year, privatization income was Euros 261 million. Greenfield Investment Euros 120 Million -------------- ¶13. Outstripping foreign direct investment (FDI) through privatization is greenfield investment. In the first five months, Montenegro attracted Euros 120 million in greenfield FDI, according to the Montenegro Investment Promotion Agency (MIPA). Serb Company Announces 67 Million Investment -------------- ¶14. The Serbian company Delta Holding announced that it will invest Euros 67 million in Montenegro, by building supermarkets and trade centers. Delta expects to employ more than 2000 workers in Montenegro, which would make it one of the single largest employers. Customs Corruption Perceived As Lower -------------- ¶15. A World Bank poll of Montenegrin companies, conducted by the local Center for Entrepreneurship and Economic Development (CEED) showed customs corruption as significantly lower than in 2002. Progress was made in all areas -- transparency, equality, standardization of procedures, ability to complain, and frequency of petty payments. On a scale of 1 to 5, corruption was rated at 2.26, with relatively low frequency. The World Bank noted more progress was however still needed. Note: CEED is a graduate from USAID assistance. End note. PUBLIC ECONOMY: BELGRADE 00001147 003.3 OF 003 Unemployment Down -------------- ¶16. The GoM said unemployment declined 1.3 percent to 16.14 percent. Unemployment this time last year was 20.3 percent. Real Wages Rise -------------- ¶17. The average net monthly wage in June was Euros 252, up 2.4 percent from April, with real wages rising 1.5 percent. Retail prices rose 0.9 percent, and the consumer basket for a family of four in May rose 0.9 percent to Euros 270. (MonStat data) T-BILLS ¶18. One auction of Treasury bills, with a total face value of EUR 1.7 million, was held in May (note: data lags by one month). The average weighted annualized interest rate for the auction held in May amounted to 2.96 percent. The lowest accepted interest rate at the auctions held in May was 0.90 percent while the highest accepted interest rate was 5.50 percent. Participants at the auctions included local banks. STOCKS ¶19. The NEX20 index of the Nex Montenegro Stock Exchange ended the month of June up 11.9 percent, at 13,786.02. The Moste index of Montenegroberza rose 20.4 percent to 685.684 in June. The continued sharp rise reflected support from local investors for independence, which they expect will expand economic opportunities and attract further investment. Major components of the NEX20 include the privatized Telekom CG and Jugopetrol; major components of the Moste include aluminum smelter KAP and vineyard Plantaze. Note: The Montenegrin exchanges are still nascent, and the level of capitalization represented is small although rising (NEX capitalization at the end of 2004 was Euros 495 million; at the end of November 2005 it was Euros 1,410 million). MOORE