Identifier
Created
Classification
Origin
09PODGORICA78
2009-04-01 14:32:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Podgorica
Cable title:  

THE GLOBAL ECONOMIC CRISIS HITS MONTENEGRO

Tags:  ECON EFIN PGOV PREL MW 
pdf how-to read a cable
VZCZCXRO6445
PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHNP RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHPOD #0078/01 0911432
ZNR UUUUU ZZH
P 011432Z APR 09
FM AMEMBASSY PODGORICA
INFO RUEHC/SECSTATE WASHDC PRIORITY 1236
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHPOD/AMEMBASSY PODGORICA 1324
UNCLAS SECTION 01 OF 04 PODGORICA 000078 

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV PREL MW
SUBJECT: THE GLOBAL ECONOMIC CRISIS HITS MONTENEGRO

REF: A: 08 PODGORICA 279; B: 08 PODGORICA 267; C: PODGORICA 17

PODGORICA 00000078 001.2 OF 004


UNCLAS SECTION 01 OF 04 PODGORICA 000078

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV PREL MW
SUBJECT: THE GLOBAL ECONOMIC CRISIS HITS MONTENEGRO

REF: A: 08 PODGORICA 279; B: 08 PODGORICA 267; C: PODGORICA 17

PODGORICA 00000078 001.2 OF 004



1. (SBU) Summary: The global economic crisis is hitting
Montenegro. IMF and other experts are predicting a sharp
deceleration in growth in the near term, with GDP growth likely
to decline to about two percent in 2009-2010. Credit growth is
also likely to continue to decrease, given banks' reduced
appetite for risk and inaccessibility of foreign financing in
the current global environment. The probable reduction in
capital inflows from abroad -- primarily foreign direct
investments, depressed tourism revenues, and inter-bank loans --
will likely require significant additional budget cuts this
year. The GoM has put some stopgap measures into place, but it
is too early to tell whether they will be enough to contain the
damage. The GoM also is talking to the IMF about the
possibility of assistance in financing a possible budget
shortfall. End summary.





IMF Recommendations...

--------------




2. (U) The IMF released its annual assessment of Montenegro's
economy earlier this month, which warned that the global
financial turmoil and recession will likely have a substantial
adverse impact on confidence, credit growth, tourism, and FDI
inflows in the near term. The report -- and local experts agree
-- predicted a rapid deceleration of GDP and credit growth and
recommended Montenegro reconsider its current plan to cut taxes
even further, given that the potential cost of helping the
banking sector cope with the global financial crisis could
create large budget gaps. They noted that a combination of tax
cuts and spending increases could push the budget into deficit
this year, following two consecutive years of budgetary
surpluses. The report stressed that the priority should be on
maintaining financial sector stability and fiscal
sustainability.



...And GoM Plans to Mitigate the Crisis

--------------




3. (SBU) The GoM, in its proposed budget for 2009, has adopted a
package of economic policy measures that aim to preserve
macroeconomic stability, increase productivity, and maintain a
favorable economic environment, primarily by:




-- Strengthening investment in infrastructure: The budget
proposal for 2009 allocates 217 million Euros for capital
expenditures (compared to 85 million Euros in 2008). For the
public sector (including municipalities),capital investment in
2009 is estimated to be 9.84 percent of GDP.



-- Reducing spending: This is intended to free up money for
increased investment in infrastructure by curbing the growth of
current expenditures to below the level of GDP growth and the
relative reduction of the current public spending from 41.5
percent of GDP in 2008 to 39.22 percent of GDP in 2009. It also
involves the (temporary) freezing of ten percent of expenditures
for materials and services in the first half of 2009. (The
estimated savings for the first 6 months of 2009 on this basis
is 6.5 million Euros.)



-- Cutting government costs: The GoM has already begun to cut
government spending because of a measurable decrease in
receivables. DPM Igor Luksic announced recently that the GoM
will freeze capital expenditures, e.g. for vehicles and IT
equipment, as well as hiring expert consultants and reduce
official travel.



-- Ensuring additional liquidity for citizens and businesses:
For example, income taxes were cut from 15 percent to 12 percent
as of January 1, 2009, and the price of electricity for SMEs
will be reduced by 10 percent. Also the GoM is aiming to
preserve long-term credit lines from international financial

PODGORICA 00000078 002.2 OF 004


institutions (EIB, KfW, etc) for small and medium-sized
enterprises.



-- Ensuring liquidity of the banking sector: The Government and
the Central Bank have agreed on a model which will enable the
commercial banks to use 20 percent of their mandatory reserves
in order to additionally improve the liquidity of the financial
system.



-- Assisting companies in trouble: DPM Vujica Lazovic announced
that the GoM is preparing assistance measures -- for example,
allowing delayed payment of taxes and customs duties -- for
companies that have been affected by the crisis. Lazovic
emphasized that the government will have strict criteria to
assess eligibility for this assistance, since many companies are
using the crisis as a pretext to seek government aid. The DPM's
office, however, told us that as yet no conditions have been
established. Without any set regulation, there is a real risk
that this measure could be used to allow GoM cronies easy access
to GoM assistance.




4. (SBU) In addition to fiscal policy measures, the GoM is
implementing socio-economic measures to maintain economic
growth, preserve living standards, and encourage
entrepreneurship. One project, entitled "Posao za Vas" ("A Job
for You") -- initiated before the crisis, but whose budget for
2009 has been increased in the wake of the crisis -- aims to
promote employment and viable entrepreneurial projects by
providing concessionary credit to small businesses. For the
implementation of the project, 18.15 million Euros (0.5 percent
of GDP) has been allocated for 2009.




5. (SBU) The GoM's response to the economic downturn drew praise
from IMF, which cited Montenegro's contingency planning for
emergency liquidity situations. The GoM has initiated a
dialogue with parent banks regarding liquidity support, detailed
bank-by-bank contingency plans, increases in banknote inventory
of the central bank, and opening of contingent credit lines. The
IMF also welcomed the government's proposal to reduce spending
further if the economic outlook continues to worsen. DPM Luksic
also told us that the overall GoM stimulus package (including
the tax cuts, "posao za vas" programs, etc) amounted to 10
percent of GDP.




6. (SBU) The GoM also has initiated talks with the IMF about the
possibility of assistance in financing a possible budget
shortfall of roughly three percent of GDP. The Finance Ministry
tells us that for now this is just a backup plan as they have
yet to determine whether another infusion of capital will be
necessary, but that they want to be prepared if it is. Ministry
officials tell us that they will be crunching numbers in the
next week or so and plan to continue discussions with the IMF
when they are in DC later this month for the annual IMF, WB
meetings.





...But Banking Sector Still Weak...

--------------




7. (U) Montenegrins, historically distrustful of the banking
system (reftel A),have been withdrawing deposits rapidly in the
wake of the global crisis. In the last six months, roughly 300
million Euros -- a decrease of 6.5 percent since early 2008 --
in deposits have been withdrawn, putting aditional pressure on
the liquidity of the domestic banking system. In addition to
the Central Bank decision to decrease the level of mandatory
reserves, the GoM also is providing guarantees for credit lines
from international institutions in order to bolster the banking
sector. On March 24, the Ministry of Finance announced a
GoM-guaranteed 50 million Euros loan to the banking sector from
German KfW bank and negotiations will begin this month with the
European Investment Bank for another 100 million. The KfW loan
was granted to Crnogorska Komercijalna Banka (CKB),NLB
Montenegrobanka, and Opportunity Bank, and it will be earmarked
specifically for loans to small and medium-sized
entrepreneurship.

PODGORICA 00000078 003.2 OF 004






8. (SBU) Despite GoM measures to ensure the liquidity of the
banking sector, insiders tell us all the banks are struggling.
For some, chiefly Prva Banka, the global crisis has simply
exacerbated existing problems caused largely by poor management.
While the bank was able to repay a segment of the 44 million
Euros loan they took from the GoM last fall (reftel A),they
have requested an extension of three months to repay the
remaining 33 million Euros, and many banking experts expect that
the bank can only survive long term with a serious influx of
foreign capital. For other banks, though ostensibly in better
shape, the near constant delays of payment over the past few
months -- for everything from public sector wages to GoM bills
for foreign contracts -- lead us and others in the international
community to speculate that liquidity issues are already more
serious than anyone is willing to let on.





...And FDI Already Impacted...

--------------




9. (SBU) In the fourth quarter of 2008, FDI already had
decreased significantly -- 21 percent from the same period in
2007 -- and the widespread expectation is that FDI will fall
further in 2009. The world's financial woes also have
decreased the number of investors able to bid on tenders for
greenfield investments (many of which are large-scale projects
in the tourism sector) or in state-owned companies which,
according to the GoM privatization plan, should be launched in

2009. The deadlines for bids on the long-term lease of several
tourist locations (Valdanos, Njivice) have been extended because
none of the companies which submitted letters of interest last
year subsequently purchased the tender documentation. The
situation is little better even for the largest properties
(Velika Plaza, Ada Bojana, Jaz, Buljarica. The GoM just
released tenders to two of the largest -- Velika Plaza and Ada
Bojana -- but experts are skeptical that they will be able to
find a qualified bidder in this market. The success of at least
one of these projects, however, is seen as essential for the
economy to weather the current storm; DPM Lazovic told us that
the GoM was really hoping for a short-term infusion from one of
the large projects to finance the budget shortfall. He suggested
that EPCG was the best shot, since it would involve a rapid
infusion of capital, but should that fail one of the larger
tourism valorization projects, like Velika Plaza, could be the
ticket.




10. Existing investments -- primarily Russian -- also are
facing challenges. As noted reftels, Russian-owned KAP is
nearing collapse amidst low worldwide aluminum prices. We have
been told that investments by Russian tycoons Deripaska and
Polonski are suffering as well (septel). In recent months,
significant interest in Montenegro (especially the tourism and
real estate sectors) has been originating from Egypt, the UAE,
and Qatar.





...Concern Over Tourism Season Rising...

--------------




11. (SBU) The tourism sector is likely to suffer from the global
downturn, as tourists from Western Europe and Russia cut back on
recreational expenditures to cope with their own domestic
economic problems. Ministry of Tourism data shows that the
current number of tourists in Montenegro compared to last year
is already down by seven percent. DPM Luksic told us a GoM
analysis predicts a nine percent decrease in tourist numbers on
average this year. (Comment: We assess the drop will be
greater. Even Tourism Minister Nenezic told us on March 28 that
this figure seemed very optimistic. He predicted significantly
fewer tourists from Russia and Western Europe. End Comment.)






PODGORICA 00000078 004.2 OF 004


...And Politization of the Crisis Already Begun

-------------- --




12. (SBU) The effect of the crisis in Montenegro was felt in the
conduct of election campaigning for the March 29 parliamentary
election. Opposition candidates warned that the GoM was
misleading the public by downplaying the seriousness of the
economic situation. Even DPS-SDP officials -- who by all
accounts had plenty of cash in their campaign coffers -- told us
that they watched their spending lest the opposition or their
constituents resent their splurging while others were starting
to feel the pinch of the financial crisis.




13. (SBU) PM Djukanovic has claimed publicly that Montenegro's
current economic problems are not of its own making but due to
the global financial crisis. The PM has denied allegations --
primarily from opposition parties -- that the crisis simply
exposed the weaknesses in the domestic economy. Opponents of
the government charge that Montenegro's problems are rooted in a
combination of poor decisions made during the recent period of
rapid, almost euphoric, economic growth.





Comment: In the End, Some Crisis Unavoidable

--------------




14. (SBU) After several years of strong economic growth,
Montenegro's small economy is now caught in a growing storm of
negative global trends, particularly in Russia and the countries
of Western Europe, upon which the Montenegrin economy is heavily
reliant for trade, FDI, and tourism revenue. Many of our
interlocutors are optimistic that Montenegro can continue some
economic growth, despite a tough year (or two, as DPM Luksic
estimates) ahead. For example, the recapitalization of the
Electricity Company of Montenegro (EPCG) could bolster the
entire economy. DPM Lazovic (perhaps optimistically) predicts
the GoM would gain 300 to 500 million Euros from the deal, a
huge sum for this small country. The EPCG tender is increasingly
touted in the press as a magic bullet for the country's
impending economic woes, but little else concrete is on the
horizon if the deal fails to materialize.




15. (SBU) There is no denying that the banking sector is weak.
Moreover, the tourism sector, roughly 20 percent of GDP in 2007
and 2008 is vulnerable. Finally, the rising corporate
bankruptcy rate and growing number of unemployed will further
reduce government revenues just as greater demands are placed on
the social welfare system. PM Djukanovic's faith in the
"vitality and flexibility of the Montenegrin economy" may be
overstated, but his government's prudent fiscal planning may
help Montenegro muddle its way through the crisis.
MOORE