Financial Stability Report No1 20 December 2010 - Banka Qendrore ...

Financial Stability ReportNumber 1Figure 66. Inflation, average consumerprices10.08.06.04.02.00.0-2.02006 2007 2008 2009 2010 projChange in CPI, MontenegroChange in CPI, EurozoneFigura 67. Real growth and budgetbalance, in percent121086420-2-4-6-83.3%8.6%10.7%7.8%7.5%0.5%-2.7% -2.0%-2.4%-6.0%2006 2007 2008 2009 2010 projBudget balance (% of GDP)∆ in real GDPSource: WEO April 2010, IMFSource: WEO April 2010, IMFThe decline in exports during 2010 was also subject to adverse external circumstances(including recent developments in Greece), since Greece is one of the biggest importers ofMontenegro.Figura 68. Current account, in percentof GDP100806040200-20Figura 69. Deposit and loan growth, inpercent200150100500-402006 2007 2008 2009 2010 projExports (% of GDP)Imports (% of GDP)Remittances (% of GDP)Current Account (% of GDP)-502006 2007 2008 2009Loan growth (%) Deposit growth (%)Burimi: Country Report, IMF (2010)Sourcei: Country Report, IMF (2010)Soon after its independence, Montenegro has experienced large inflows of FDI which havecontributed to a robust growth of the economy. Moreover, soon after its independence thelevels of the credit growth to domestic sector were very high. However, during financialcrisis, the economy was hit severely.The current account deficit and private sector debt rose, while the loan quality deterioratedand deposit withdrawals took place. In effect, these developments contracted the economyfrom positive to negative growth. Euroization was useful in anchoring expectations;however Montenegro lacked the tools to control massive credit growth or FDI inflows.Moreover, expansionary monetary policy in the EURO area was not appropriate facingmacroeconomic problems for Montenegro. Fiscal policies, as the only tool left to controlmoney supply and banking sector were already loose. Therefore, considering the impact ofthe shocks, Montenegro economy weakened more than other countries in the region.| 69