1. Capital Market Development in Montenegro Igor Luksic Minister of Finance

2. Economic Reforms - Basic elements of concept - Openness Openness Accepting a credible currency (EURO) Accepting a credible currency (EURO) Low level of business regulation Low level of business regulation Low level of taxation Low level of taxation

3. Basic Economic Facts GDP 2004 real growth 3,7% Budgetary deficit 2,1% Inflation rate 4,3% External public debt32,7% Total public debt44,8% Current account deficit 9,2% Unemployment rate22,6% Legal tender Euro

4. The Growth of the GDP GDP 2002 – 1 301 mln € 2002 – 1 301 mln € 2003 – 1 433 mln € 2003 – 1 433 mln € 2004 – 1 535 mln € 2004 – 1 535 mln € 2005 – 1 644 mln € 2005 – 1 644 mln € In 2004 instead of projected 2.7% the real growth reached 3.7% The goal for 2005 is 4.1%

5. The Decrease of the Budgetary Deficit Budgetary deficit has been falling in line with the IMF program It is expected to fall to 1.6% excluding FFPL Including FFPLs 2.9% of the GDP

6. The RPI Inflation Having euro as a strong and stable currency drove the inflation to single digits In 2004 instead of projected 4.5% inflation was 4.3% The goal for 2005 is 3.5%

7. Public Debt of Montenegro Total public debt fell from 85.9% in 2002 to 44.8% in 2004 thanks to the rescheduled debt to the World Bank, 51% Paris Club write-off and no committments to the London Club of creditors The external debt is 32.7% Domestic debt consists of the banking loans, old savings and T-bills In 2004 Montenegro received for the first time in its history the S&P credit rating BB for the long term bonds Huge privatisation receipts will be used to repay internal debt in order to improve credit rating and to invest in infrastructure Reduction in the amount of the T-bills and loans will lead to the increase of the money supply and consequently to the drop of the interest rates

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

9. Legal Framework and Business Barriers Business start-up fee: – Entrepreneur (sole proprietorship) – 1 EUR – Limited Liability Company – 1 EUR – Shareholder’s Company – 25 000 EUR – Bank – 5 000 000 EUR (license from Central bank of Montenegro) National treatment of foreign investors Free movemnt of capital will be introduced with the new Law on Capital transactions Free profit repatriation Government tries to identify and eliminate various business barriers

10. Fiscal framework VAT introduced in 2003 – 17% (basic food, books, etc. exempted) In 2004 PIT (now 15, 19 ad 22%) and social contributions cut by 10% In 2004 Corporate Income Tax cut to 9% There are not tax payments in next cases: - if capital profit of selling securities is reinvested in buying new securities in period of 12 months - if capital profit of selling securities is reinvested in buying new securities in period of 12 months - if dividends and profit sharing are used for increasing fixed capital - if dividends and profit sharing are used for increasing fixed capital - 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, continual reduction of the government expenditures and tax burden and compliance with eurozone Mastrichts criterion

11. Basic Legal Framework for CM in Montenegro Adopted: Adopted: Law on Securities, Law on Privatization, Law on Foreign Investments, Business organization law, Law on investments funds, In preparation: In preparation: Law on voluntary pension funds Law on takeover of joint stock companies

12. Achievements It was completely implemented the electronic trading securities system It is almost completed institutional and normative frame for successful functioning of capital market It was completely implemented system of electronic register, clearing and balancing transactions with securities in Central Depositary Agency, which in concept of dematerialization securities shows basic part of security market infrastructure Basic rights each shareholder are regulated by law

14. Achievements From 2001. new investments inflow was over 70 million € In 2004. realized securities turnover was over 62 million €, which is over 4.3% of realized GDP Frozen savings bonds trading has started; average traded price of bond was 62.27%, since the highest price was over 90% nominal value Education of market participants, investors, issuer and government employees is constantly in process

15. Conceptual Framework for Further CM Development Completing of regulatory framework for security market functioning - Regulating issuing and dealing with short term securities - Regulating issuing and dealing with the bill -Implementation of Law on Investment Funds -Legally regulating dealing of Private Pension Funds Upgrading market infrastructure, quality and efficiency of market -Accelerating of implementation “custody” functioning -Issuing securities by real estate -Decreasing expenditures dealing on securities market -Making changes of Law on administrative procedure Market spreading -Trading on stocks markets in Region -International competitiveness securities market in Montenegro

16. THANK YOU