Executive Director of Mongolian Investment Banking Group A.Bilguun talks about the current economic situation. He is an experienced specialist who graduated in finance from Saint Mary’s University, Canada, and worked at the Toronto Stock Exchange.
When economic policies are intensified in September, how do you envision changes in the current economic crisis?
We need to review our economic structure. Mongolia exports natural minerals to build up the majority of the state budget. Direct foreign investments are the biggest doors for bringing in funds to Mongolia. It’s beneficial for us to have foreign companies invest in major domestic projects, meaning that they’ll be responsible for financial risks. In the current economic situation, it’s impossible for Mongolia to monitor and regulate prices in international markets. Therefore, we must attract foreign investors, find funding for our own businesses, and export risks. In order to increase investments, at least the issues related to the 106 mining licenses, the Law on Minerals, and Oyu Tolgoi’s (OT) investment should be resolved. Although the Mineral Law was approved, its regulations haven’t been established. As for OT, financial issues regarding the underground mines are still unclear and creating more and more problems with each passing day. This also means that investments in Mongolia are moving further away.
The main reason for stocks dropping is the announcement by the General Department of Taxation stating that OT has tax debts on the project. The feasibility study and financial issues of the underground mines, which are to be defined in September, may be delayed. This situation weakens international investors’ trust and confidence in Mongolia. The two sides, investors and the Mongolian government, keep on bringing up twenty-something questions, and instead of resolving them, they accuse one another and add more issues. This not only makes investors who wanted to invest in OT lose interest, but also degrades Mongolia’s reputation in international markets. This problem must be resolved urgently and put to one side.
You mentioned that the feasibility study and financial issues of OT, the only hope for getting USD into the economy, may be decided in September. However, the investors’ side and the Mongolian government aren’t able to resolve the issue and are instead increasing the number of issues. Can you elaborate on this?
The Mongolian government and investor, Turquoise Hill Resources, should define the issue specifically and openly announce them to the public, as well as investors. If not, the two sides will have tons of issues in front of them and continue the dispute into next year. Investors and banking and finance companies in other countries are assuming that all of this is the Mongolian government’s fault.
In order to fix and correct the economic crisis, the government is taking measures such as giving concessional loans and tax exemptions in specific sectors. In reality, the experts are saying that it’s worsening. As a representative of the private sector, in order to calm the economic crisis, what countermeasures should the government take within a short period of time?
The attempts of the government to overcome the economic crisis are failing and making the situation even worse. They issued a huge amount of loans and cash to the construction sector, which increased deficit loan amounts in the banking sector, increased financial risks, and raised apartment prices. Furthermore, under the program to stabilize prices, a large sum of cash was supplied to the economy and became the main aspect of rising inflation. Now, the government should stop this work to supply cash, privatize large, corrupted state-owned companies which are working inefficiently through the domestic stock exchange, and then, prepare them for IPOs in international markets.
The World Bank highlighted in their economic outlook that the high index of balance of payment deficit indicates future major economic difficulty. How can the balance of payment deficit be reduced?
The Central Bank needs to implement a hard money policy. In simple terms, the balance of payment deficit is the money which comes in and goes out of Mongolia. People who come to live and work in Mongolia from overseas carry a considerable amount of risk in coming to Mongolia, and so they get higher salaries. The same applies to investors. Investors have interests in making a lot of profit in exchange for taking up a significant amount of risk when providing funds. During this period of slow economic growth in Mongolia, opportunities to make a profit are decreasing. Businesses and investors are taking this into account and taking actions accordingly. People considering starting a business in the country will only think of saving and protecting their own money in this high risk environment. A certain amount of money has left Mongolia in this manner. It’s required for the Central Bank to increase policy development.
Since the Mongolian economy has degraded so much, it’s impossible to hold soft policies. Only when the economy has fallen to a certain degree, can it be stabilized with soft policies. However, the current situation is really at a level where soft policies will not work.
The currency savings deposit takes up a considerable percentage of the Mongolian savings deposit. Experts say that there are many people who aren’t putting their money in circulation due to fear. In order to get them to put it into circulation, what must be done?
Money will be put into circulation only if the MNT is strengthened. Since 2012, everything was done forcefully. There haven’t been any results. Instead of doing things forcefully, we should resolve the problem through negotiation. The Central Bank should think of implementing policies to strengthen the MNT.
Mongolia used to use direct foreign investments to close off the balance of payment deficit. Now that investments have decreased, we’re starting to approach foreign exchange (FX) reserves. Through this, FX reserves were reduced by some 50 percent and the USD exchange rate became just over 1,800 MNT. What kind of real risks will this pose to the Mongolian economy?
According to a June 16 report by Morgan Stanley, a multinational financial services corporation, “Mongolia’s FX reserves reached 1.7 billion USD by the end of April. However, Mongolia’s FX reserves were at nearly 2.2 billion USD at the end of February, according to Mongol Bank. If the FX reserves stay in decline for a few more months, Mongolia will come closer to the two-month import cover, the same point where Mongolia received International Monetary Fund assistance in 2009.”
This report was made after comparing FX reserves with GDP. The USD exchange rate may get intense again, since during the summer exploration work and the amount of exportation products increases and brings in the most USD into Mongolia. However, the USD exchange rate isn’t dropping from 1,800 MNT. It’s certain that the exchange rate will become even tighter in September and October, when students go back to school.
Mongolia announced it will increase its GDP by 70, later by 90 percent. Also, it will build up funds from international markets and then get loans. Objectively, is this possible? Is there any other way Mongolia can accumulate funds?
There are other ways. Getting a loan isn’t a difficult decision. There are many gateways. For instance, decrease inefficient spending and the huge structure of state-owned organizations, where 50 percent of total resources produced in Mongolia are spent. If the structure becomes compact, a lot of money can be saved. Before anything, we must cut down on spending. We could also put up stocks of state-owned companies in the domestic stock exchange. There may be foreign companies willing to carry these risks and invest. It’s crucial to find and utilize these opportunities. For Mongolia, where revenue is inconsistent and dependent on the price of minerals, getting loans and debts isn’t a wise choice. There are countries like Japan and the USA which have more debt than its GDP. These countries are able to produce and manufacture final products within the country and export them. Their future profit is definite so their credit rating is high. For Mongolia, with the current economy, getting a loan is the worst possible option; a dead-end option.
Mongolia wants to put up its companies on domestic and foreign stock markets. Do the Mongolian Stock Exchange and companies have the capacity for it?
Actually, Mongolian stock market structure isn’t that bad, but since there aren’t any investors in the stock exchange, products are spoiling. Now we should select two to three state-owned companies announce them internationally and apply for an IPO. It’s a much wiser step than getting a loan. When companies get an IPO, they’ll get funds and supervision as well as transparency in governance, which will reduce deficits and assist them in working efficiently.
Source: Undesnii Shuudan
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