MONGOL BANK DIRECTOR DELVES INTO SIGNIFICANCE OF MONGOLIA’S FOREIGN EXCHANGE RESERVES RISING TO 2.9 BILLION USD

D.Bayanzul, the director of the Department of Fnancial Markets at the Reserve Management Financial Markets Department of Mongol Bank delves into how the government was able to strengthen its foreign reserves and the significance of the reserve increasing to 2.9 billion USD.

In the past year, the foreign exchange reserve of Mongolia was well below its optimum range and the fact that investment had stalled did not help matters. Now, the reserve has exceeded over two billion USD. Would you say that the reserve has surpassed its optimum range?

Before we discuss the optimum amount of the foreign exchange reserve, I want to give readers more information on why accumulating a foreign exchange reserve is important. Regardless of which currency a nation employs, it is important to maintain the value of a national currency in order to help sustain a stable financial sector and macro economy.

In addition, in times of crisis, the reserves are the main mechanism to ensure liquidity. The reserves also help maintain investor confidence, service any foreign debt, and ultimately acts to ensure national security.

In terms of the ideal amount, countries vary in their calculation as it depends largely on the economic structure and the potential risks on the balance of payments.

Generally, the traditional ratio indicators are the reserves over imports, reserves over short-term external debt, and reserves over money supply. For a country with a small economy like ours, there is a precedent that the minimum ideal amount for the reserves must cover three months of imports.

At the beginning of 2017, the foreign exchange reserve was enough to cover only 3.1 months’ imports, just barely above the minimum ideal amount. As of December 2017, this figure has risen to 6.1 months’ imports.

In 2016, the net reserve of the central bank was a negative 400 million USD and now the net reserve is at 520 million USD. By the current trajectory, we will likely reach the ideal amount for the net reserves soon.

The governor of Mongol Bank gave an interview saying that the bank is aiming to increase the foreign exchange reserves by an additional 200 million USD by the end of 2017. Can the central bank meet this aim?

The extended fund facility is probably the biggest factor for the positive changes. Outside of this though, the gold purchasing of Mongol Bank reached a record high. What percentage did gold contribute to the overall reserve?

The gold purchasing of Mongol Bank reached 19.1 tons as of November 2017. Outside of the increases in the volume of gold sales, the market price of gold on the global market rose 10 percent, contributing to increases in the reserve. In the first 11 months, gold contributed 625.5 million USD or 62.9 percent of the increases in the reserves.

As the reserve increases, the opportunity to maintain a stable exchange rate improves. What other policy measures were taken to ensure the stability of the tugrug?

As the inflow of cash among the external economic factors of Mongolia has been favorable and the reserve increases, the expectation amongst market participants is that the tugrug’s exchange rate to the dollar is stable. Specifically, in the first 10 months of 2017, Mongolia’s balance of payments rose by 561 million USD, resulting in a 283 million USD surplus. The surplus of trade increased to 1.8 billion USD, a 49 percent improvement since 2016. The money flow into Mongolia had a surplus of 312 million USD, a 352 million USD increase compared to the year before.

In order to decrease sudden fluctuations in the exchange rate of the tugrug, Mongol Bank regularly organizes foreign currency auctions and intervenes in the domestic market if necessary. This year, 613.8 million USD and 114 million RMB was sold to the market by the central bank and conversely 575.9 million USD was purchased by Mongol Bank. In April 2017, we implemented a new forex electronic platform for commercial banks.

In the past, the system of currency trading between banks was done by telephone. It was a tedious and time consuming process that also carried a lot of risk. Due to this, currency trading between banks did not develop very well. By using the trading platform, all banks will be able to receive the same information about the market at the same time. Allowing individuals, businesses, and non-banking financial institutions to participate in the system through a commercial bank ensures the transparency and reach of the platform.

Even though forex trading between banks only accounts for a small amount of currency trading, publically announcing the exchange rate of their trades sets a price that is used by businesses and individuals.

Mongol Bank, the Finance Ministry, and the Financial Regulatory Committee have formed a working group to create a large, encompassing platform that will allow individuals, businesses, and non-banking financial institutions to directly participate in trading without having to go through a bank.

Can you please elaborate on the potential sources which could increase the foreign exchange reserve?

As mentioned earlier, only this month, 79 million USD was transferred from IMF, 32 billion JPY was transferred from Japan, and 122.7 million USD came from the World Bank. The agreed upon 5.5 billion USD in financing part of the IMF’s program is set to be a big boost to the balance of payments and to the foreign exchange reserve. However, these are only one-time transfers and a temporary short-term increase in the reserve.

We can improve the balance of payments in the long run by diversifying the economy and by supporting businesses aimed at exporting and businesses operating to offer an alternative to import products.

As the macro economy improves steadily, investor confidence will improve, large scale infrastructure projects will be implemented, and foreign direct investment into the private sector will increase. In addition, over the next few years, Mongol Bank will support domestic gold production and construct a laboratory, helping to maintain gold sales to the central bank.

Then, would it be correct to assume that we do not need to worry about potential depreciation of the tugrug in the near-term?

According to the first and second reviews of the extended fund facility, Mongolia is hitting all of its targets faster than expected. The total balance of payments in 2017 was 1.063 billion USD. In 2018, Mongol Bank forecasts that the total balance of payments will have a surplus of 377 million USD. In 2018, the price of commodities on the global market is set to increase incrementally. Based on all of this, it would be correct to assume that the risk of depreciation of the MNT is relatively low.

Moving onto an issue that has caused a lot of uncertainty within the public, the financing of the mortgage program. Mongol Bank has already said that it will stop financing the program in 2018. Will the financing be transferred fully to Cabinet?

To be clear, the mortgage program will continue in 2018. As part of the extended fund facility, Mongol Bank will transfer full authority over the mortgage program to Cabinet. Currently, the central bank is working in cooperation with Cabinet to create a more efficient and cost saving financing scheme.

Even though Mongol Bank is transferring the program to Cabinet, it will continue paying the bond that was backed by the mortgage loans. If Cabinet decides to take the bond, it will be included in the state budget.

What changes are being discussed in the new financing scheme of the mortgage program?

In reforming the funding scheme of apartments, there are several principles that are being followed. First, we are aiming to improve access to the program. In other words, we are looking to maximize the number of citizens receiving funding from the available money. More than half of the households in Ulaanbaatar are in the ger district. There is a pressing need to improve the standard of living for those in ger districts and protect citizens from air pollution.

Second, we are aiming to concentrate funding to the targeted groups. The conditions and the interest rate of the program is very favorable compared to the prices offered on the market and all of this is funded by the state budget or public funds. Therefore, the program must reach the group that most needs it, subject to be determined by the government.

Many have complained that commercial banks have stopped providing mortgage loans. Has Mongol Bank continued its funding?

In light of the economic situation, Mongol Bank began to limit its funding of the mortgage program in October 2016. As a result of this, the number of loans being provided decreased but the program is still continuing. In 2017, Mongol Bank provided 243 billion MNT and Cabinet provided 111 billion MNT to banks for the funding of the mortgage program. Banks provided loans to 5,600 individuals, which means that around 20,000 individuals are now living in apartments.

If someone is not able to receive the loan they were supposed to receive, who can they contact?

The requirements an individual must fulfill, the requirements of the apartment, and the conditions of the program are all stated in the contract. By supposed to receive, my understanding is that you mean someone who has fulfilled all of the mentioned requirements and gotten approval for funding.

It is true that some individuals are waiting a certain amount of time in between the approval and the actual transfer of the loan. However, if a person who has fulfilled all the requirements and gotten approved still has not received their loan, they can contact the internal regulation department of a commercial bank or talk directly to Mongol Bank. Depending on the reason, an individual has the right to take their case up to relevant legal authorities.

...We can improve the balance of payments in the long run by diversifying the economy and by supporting businesses aimed at exporting and businesses operating to offer an alternative to import products...

By November 30, 2017, the reserve had increased by one billion USD since the beginning of 2017. Since the interview given by the governor of Mongol Bank in October, the reserve has increased by 550 million USD. We forecasted that the reserve would rise around 20 percent by the end of 2017 compared to the amount in November. Now it is currently at 2.9 billion USD.

Beginning in the second half of 2016, the central bank took a concerted effort to increase the reserve, implementing many measures. For instance, as a result of the Mongol Alt national campaign, the sale of gold to Mongol Bank increased by 8.2 percent. The Khuraldai and Gerege bonds were issued in cooperation with Cabinet. In addition, the government concluded the review of the IMF extended fund facility, and as a result, funds were transferred to the state treasury, all helping to increase the reserve.