Montenegro without a currency shield from the Chinese loan

At the end of 2014, the loan in the amount of 944 million dollars, with an interest rate of two percent, was contracted by the government of Milo Đukanović for the construction of a section of the 41-kilometer highway that was being built by the Chinese CRBC.

Since 2014, the exchange rate between the dollar and the euro changed, the price of highway construction due to the growth of the dollar was at one point increased by more than 100 million dollars.

The government of Zdravka Krivokapić, which was formed after the removal of Đukanović's government, entered into a hedging arrangement in July 2021, which converted dollar debt into euro debt.

The arrangement was concluded on July 8, 2021, in order to insure Montenegrin public finances from risks due to changes in the euro-dollar exchange rate, which directly affected the amount of debt.

 

Why did the government terminate the contract?

The former finance minister who concluded the hedging arrangement, Milojko Spajić, claims that the current government terminated the arrangement in a technical mandate because there is no money in the state coffers, while the government claims that the arrangement was terminated in a timely manner.

 

Economic analysts Mirza Mulešković and journalist Goran Kapor, on the other hand, claim that such arrangements are risky, and forecasts about the continuation or exit from the arrangements are ungrateful.

 

It's like a form of gambling because it's really hard to know. If someone knew how the exchange rate would move in the next year, two or five, he would probably be a billionaire," Goran Kapor, a journalist from the economic newsroom of Vijesti, told Radio Slobodna Evropa (RSE).

 

And Mulešković believes that no one can say whether it is good or not that the Government has left this arrangement.

 

"Because no one can predict what will happen on a global level. Especially with regard to currency risk. One event can disrupt everything," he comments.

 

What benefits did the hedging arrangement bring to Montenegro?

The conclusion of this arrangement practically meant that Montenegro will repay the loan in euros at an interest rate of 0.88 percent, instead of in dollars with an interest rate of two percent, as agreed in 2014. The repayment period remained the same, 20 years with a grace period of six .

The hedging arrangement was concluded before the payment of the first installment, so Montenegro paid the first four in euros with that lower interest rate, which paid Exim Bank 23 million euros less than if the loan remained tied to the dollar exchange rate.

Montenegro, with the help of the European Union (EU), entered into a hedging arrangement with four banks, Goldman Sachs, Merrill Lynch, Societe Generale and Deutsche Bank for 14 years, with the option to terminate the contract after two years, in July 2023.

As stated by the Ministry of Finance, they decided to use this clause and proposed to the Government to terminate the arrangement:

"The termination of the arrangement was realized in a timely manner. By exiting the hedging, Montenegro earned approximately 64 million dollars, of which the next installment will be paid in July 2023 to Exim Bank in the amount of 40 million dollars."

 

After exiting the hedging arrangement, the rest of the loan of 786.85 million euros, which Montenegro has with the Chinese bank, is again in dollars, with an initial interest rate of 2 percent.

The Ministry of Finance also announced that four installments of the highway loan in the total amount of 157.79 million dollars have been repaid so far.

 

A section of the highway with a length of 41 kilometers was opened on July 13 last year, that is, after three installments were paid to Exim Bank.

 

Minister of Finance: Continuation of the arrangement would be risky

Finance Minister Aleksandar Damjanović told Radio Montenegro that, in the current uncertain environment, the assessment was that the continuation of the hedging arrangement would be risky.

 

"During the hedging arrangement, we got the external instability of the financial markets, the war in Ukraine, which has consequences for Europe, an unstable currency relationship in the world," Damjanović said.

 

He adds that they are open to concluding a new one in case of currency risk disruption.

"Until the situation on the global markets calms down with prices, inflation, the war, the spillover of that war - with the possibility of it flaring up and spilling over to all of us, I think it is irrelevant to talk about making any arrangement," Damjanović said.

He announced that the government came out of that arrangement with an income of about 64 million dollars.

 

Former Minister of Finance Spajić believes that this amount was the reason for the Government's exit from hedging, that is, as he said, "there is no money in the treasury".

 

Mirza Mulešković says that if Spajić's information is correct, Montenegro must devote itself to the consolidation of public finances.

 

"If the information is correct that the hedging was withdrawn due to a lack of funds in the budget, and I must admit that the consumption of the capital budget of only 14 percent in the first five months is also indicative, this could all be one of the signs that we have a problem with public finances." , indicates Mulesković.

 

On the other hand, Goran Kapor believes that Spajić's statements that the hedging has been terminated now because the state coffers are empty are not correct.

 

"Reports from the Ministry of Finance show that for the past four months, the state budget has higher revenues than expenditures. And higher revenues than planned. And the tourist community expects a record number of visitors this summer. So the budget will certainly be fuller than before. So I don't believe that it is the essential reason," he says.

 

He believes that Montenegro was lucky in the past two years that this arrangement turned out to be good for the country, but that all forecasts are uncertain.

 

"It is difficult to assess how the exchange rate will move further and whether it should be continued or interrupted. The current Ministry of Finance has done an analysis and their conclusion is that now is the right time to interrupt it," concluded Kapor.

 

At one time, in 2018, the Center for Global Development from Washington wrote about the danger of Montenegro's debt slavery, citing Montenegro as one of the eight highly endangered countries, due to its debt to China.

In March 2023, the Chinese ambassador to Montenegro, Fan Kun, called the potential debt slavery of Montenegro due to the debt to Exim Bank a prejudice, proposing different models of cooperation such as private-public partnership, concession or combined investments.

The first section of the highway of 41 kilometers was built for almost eight years. Although completion was planned for the end of 2019, the highway was put into traffic in July 2022. Due to the pandemic, the Montenegrin Government tolerated the delay until November 2020.

In April, the Ministry of Capital Investments told RSE that "in accordance with the contract, they have started the procedure for collecting penalties for exceeding the deadline, and it will be completed by the end of the project." They did not answer the repeated question of when and in what amount.

And the criminal charges against CRBC, which were filed by the Network for the Affirmation of the Non-Governmental Sector (MANS) due to the destruction of the bed of the Tara River, whose canyon is under the protection of UNESCO, during the construction of the highway, were dismissed.