Capital Market Development in Capital Market Development in MontenegroMontenegro

Igor LuksicIgor Luksic

Minister of FinanceMinister of Finance

Economic ReformsEconomic Reforms- Basic elements of concept -- Basic elements of concept -

OpennessOpenness

Accepting a credible currency (EURO)Accepting a credible currency (EURO)

Low level of business regulationLow level of business regulation

Low level of taxationLow level of taxation

Basic Economic FactsBasic Economic Facts

GDP 2004 real growthGDP 2004 real growth 3,7% 3,7%Budgetary deficitBudgetary deficit 2,1% 2,1%Inflation rateInflation rate 4,3% 4,3%External public debtExternal public debt 32,7%32,7%Total public debtTotal public debt 44,8%44,8%Current account deficitCurrent account deficit 9,2% 9,2%UnemploUnemployment rateyment rate 22,6%22,6%Legal tenderLegal tender EuroEuro

The Growth of the GDPThe Growth of the GDPGDPGDP

2002 – 1 2002 – 1 301301 ml mlnn € €

2003 – 1 2003 – 1 433433 m mlnln € €

20042004 – – 1 1 535535 m mlnln € €

2005 – 1 644 mln 2005 – 1 644 mln €€

In 2004 instead of projectedIn 2004 instead of projected

22..7% the real growth reached7% the real growth reached

33..7%7%

The goal for 2005 is 4.1%The goal for 2005 is 4.1% -100

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300

500

700

900

1,100

1,300

1,500

1,700

2002 2003 2004 2005p

The Decrease of the Budgetary DeficitThe Decrease of the Budgetary Deficit

Budgetary deficit has been Budgetary deficit has been falling in line with the IMF falling in line with the IMF programprogram

It is expected to fall to It is expected to fall to 11..6% excluding FFPL6% excluding FFPL

Including FFPLs 2.9% of Including FFPLs 2.9% of the GDPthe GDP

Deficit/suficit 2002-2005 p

-3.29

-2.10

-1.60

-3.50

-3.00

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

2003

2004

2005p

The RPI InflationThe RPI InflationHaving euro as a strong Having euro as a strong and stable currency drove and stable currency drove tthe inflation to single digitshe inflation to single digits

In 2004 instead of In 2004 instead of projected 4.5% inflation projected 4.5% inflation was 4.3%was 4.3%

The goal for 2005 is 3.5%The goal for 2005 is 3.5%

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1999 2002 2003 2004

Public Debt of MontenegroPublic Debt of Montenegro

Total public debt fell from 85.9% in 2002 to 44.8% in 2004 Total public debt fell from 85.9% in 2002 to 44.8% in 2004 thanks to the rescheduled debt to the World Bankthanks to the rescheduled debt to the World Bank, , 51% 51% Paris Club writeParis Club write--offoff and no committments to the London and no committments to the London Club of creditorsClub of creditorsThe external debt is 32.7%The external debt is 32.7%Domestic debt consists of the banking loans, old savings Domestic debt consists of the banking loans, old savings and T-billsand T-billsIn 2004 Montenegro received for the first time in its In 2004 Montenegro received for the first time in its history the S&P credit rating BB for the long term bondshistory the S&P credit rating BB for the long term bondsHuge privatisation receipts will be used to repay internal Huge privatisation receipts will be used to repay internal debt in order to imdebt in order to impprove credit rating and to invest in rove credit rating and to invest in infrastructureinfrastructureReduction in the amount of the T-bills and loans will lead Reduction in the amount of the T-bills and loans will lead to the increase of the money supply and consequently to to the increase of the money supply and consequently to the drop of the interest rates the drop of the interest rates

Privatisation and FDIPrivatisation and FDIAfter slow down in After slow down in 2003 the FDIs 2003 the FDIs increaseincreaseGoal for 2005 Goal for 2005 achieved in the I achieved in the I quarter following quarter following succesful privatisation succesful privatisation of Telecomof Telecom, , KAP, KAP, Podgoricka Bank, Podgoricka Bank, Shipyard, part of the Shipyard, part of the energy sector, hotels energy sector, hotels and so on to be and so on to be privatised this year privatised this year

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Legal Framework and Business BarriersLegal Framework and Business Barriers

BBusiness start-upusiness start-up fee fee::– Entrepreneur (sole proprietorship) – 1 EUREntrepreneur (sole proprietorship) – 1 EUR– Limited Liability Company – 1 EURLimited Liability Company – 1 EUR– Shareholder’s Company – 25 000 EURShareholder’s Company – 25 000 EUR– Bank – 5 000 000 EUR (license from Central bank of Bank – 5 000 000 EUR (license from Central bank of

Montenegro) Montenegro)

National treatment of foreign investorsNational treatment of foreign investors

Free movemnt of capital will be introduced with the new Law on Free movemnt of capital will be introduced with the new Law on Capital transactionsCapital transactions

Free profit repatriationFree profit repatriation

Government trGovernment triies to identify and eliminate various business es to identify and eliminate various business barriersbarriers

Fiscal frameworkFiscal framework

VAT introduced in 2003 – 17% (basic food, booksVAT introduced in 2003 – 17% (basic food, books,, etc etc.. exempted)exempted)In 2004 PIT (now 15, 19 ad 22%) and social contributions In 2004 PIT (now 15, 19 ad 22%) and social contributions cut by 10%cut by 10%In 2004 Corporate Income Tax cut to 9%In 2004 Corporate Income Tax cut to 9%There are not tax payments in next cases:There are not tax payments in next cases:

- if capital profit of selling securities is reinvested in buying new - if capital profit of selling securities is reinvested in buying new securities in period of 12 monthssecurities in period of 12 months

- if dividends and profit sharing are used for increasing fixed - if dividends and profit sharing are used for increasing fixed capitalcapital

- for incomes on dividends and profit sharing in other companies- for incomes on dividends and profit sharing in other companies

Challenges are further simplification of the tax system, Challenges are further simplification of the tax system, continual reduction of the government expenditures and continual reduction of the government expenditures and tax burden and compliance with eurozone Mastrichts tax burden and compliance with eurozone Mastrichts criterioncriterion

Basic Legal Framework for CM in Basic Legal Framework for CM in MontenegroMontenegro

Adopted:Adopted:

Law on SecuritiesLaw on Securities,,Law on PrivatizationLaw on Privatization,,Law on Foreign InvestmentsLaw on Foreign Investments,,Business organization law,Business organization law,Law on investments funds,Law on investments funds,

In preparation:In preparation:

Law on voluntary pension fundsLaw on voluntary pension fundsLaw on takeover of joint stock companiesLaw on takeover of joint stock companies

AchievementsAchievements

It was completely implemented the electronic trading It was completely implemented the electronic trading securities systemsecurities system

It is almost completed institutional and normative frame It is almost completed institutional and normative frame for successful functioning of capital market for successful functioning of capital market

It was completely implemented system of electronic It was completely implemented system of electronic register, clearing and balancing transactions with register, clearing and balancing transactions with securities in Central Depositary Agency, which in concept securities in Central Depositary Agency, which in concept of dematerialization securities shows basic part of security of dematerialization securities shows basic part of security market infrastructure market infrastructure

Basic rights each shareholder are regulated by lawBasic rights each shareholder are regulated by law

HLT Atlas mont Moneta MIG Euro fond

Trend

Fond za razvoj PIO

Zavod za zapošljavanje

Montenegro osiguranje EKOS

Lovćen osiguranje

Euro market banka Hipotekarna banka Komercijalna banka Podgorička banka

Monte adria broker Holder broker CG broker ONYX broker

Deloitte&Touch Mont Rev

KPMG

More than 90% of shares already registered

Montenegroberza Stock exchange NEX Montenegro

Securities Commission of the Republic of Montenegro

Privatization funds

Central bank of Montenegro

Državni fondovi

ZOP

Insurance companies

Central depositary agency (CDA)

Ministry of finance BANKS

Brokerage firms

Private pension funds

Auditing firms

Companies &

Citizens

Institutional framework for Capital Market in Montenegro

AchievementsAchievementsFrom 2001. new investments inflow was over 70 From 2001. new investments inflow was over 70 million €million €

In 2004. realized securities turnover was over 62 In 2004. realized securities turnover was over 62 million €, which is over 4.3% of realized GDPmillion €, which is over 4.3% of realized GDP

Frozen savings bonds trading has started; average Frozen savings bonds trading has started; average traded price of bond was 62.27%, since the highest traded price of bond was 62.27%, since the highest price was over 90% nominal valueprice was over 90% nominal value

Education of market participants, investors, issuer Education of market participants, investors, issuer and government employees is constantly in processand government employees is constantly in process

Conceptual Framework for Further CM Conceptual Framework for Further CM DevelopmentDevelopment

Completing of regulatory framework for Completing of regulatory framework for security market functioningsecurity market functioning

- - Regulating issuing and dealing with short term securitiesRegulating issuing and dealing with short term securities- Regulating issuing and dealing with the bill - Regulating issuing and dealing with the bill - Implementation of Law on Investment FundsImplementation of Law on Investment Funds- Legally regulating dealing of Private Pension FundsLegally regulating dealing of Private Pension Funds

Upgrading market infrastructure, quality Upgrading market infrastructure, quality and efficiency of marketand efficiency of market

- Accelerating of implementation “custody” functioningAccelerating of implementation “custody” functioning- Issuing securities by real estateIssuing securities by real estate- Decreasing expenditures dealing on securities market Decreasing expenditures dealing on securities market - Making changes of Law on administrative procedureMaking changes of Law on administrative procedure

Market spreadingMarket spreading- Trading on stocks markets in RegionTrading on stocks markets in Region- International competitiveness securities market in International competitiveness securities market in

MontenegroMontenegro

THANK YOUTHANK YOU