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 
 
 
¶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