Montenegro's country risk keeps interest rates on corporate loans high.

By bne IntelliNews January 9, 2013
The two-digit interest rates at which the Montenegrin banks lend money to the economy are a result of the market uncertainty and the risk of making business in the country, economist Ljubomir Madzar told "If interest rates in Montenegro were unreasonably high, believe me there would have been crowds of domestic and foreign banks in Montenegro, wishing to make good earnings on such high rates," Madzar said. Yet, no new lenders come to the country, which means the risk is an essential factor in calculating interest rates, he added. The Montenegrin central bank has capped interest rates on corporate loans to 14% and the first results of this measure are expected at end-January, the report said. Latest available central bank data showed that the average annual effective interest rate on new corporate loans fell to 10.46% in November from 10.54% in October when it was at a 12-month high. According to Madzar, Montenegro is a small country and the economies of small countries cannot stay alive with small exports. The problem with Montenegro is that its exports as a percentage of GDP continue to be small and stagnate. Prior to the global crisis, the country saw higher foreign currency inflow from the sale of real estates and from privatisation, which used to compensate for the small exports. Yet, property prices shrank and there is a limit to the sale of state assets, therefore the country needs to boost exports via raising its competitiveness. One way to this is to raise the economy's productivity and another to cut wages, Madzar said. Montenegro's exports totalled only EUR 454mn in 2011, or 14% of GDP, even though they were 38% higher compared to 2010. In the first eleven months of 2012, exports shrank 20% y/y to EUR 334mn, according to latest available data.
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