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

The UB Post - - FRONT PAGE - By B.CHINTUSHIG

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.

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