EXCHANGE RATE MONGOL BANK: Tugrug remains stable
L.Enkhdelger, officer of public education and information at Mongol Bank gave an interview regarding the exchange rate of the tugrug and its prospects in the short to near term.
What are the main factors causing fluctuations in the exchange right now?
Fluctuations in exchange rates happen for a multitude of reasons and factors. First off, the Mongolian market is too sensitive to expectations. If there is any market expectation that the tugrug will depreciate, people begin to purchase dollars very quickly. They want to purchase dollars before the exchange rate goes up. This creates an artificial demand in the market which drives up the price. On the contrary, if there is expectation that the tugrug will appreciate, demand falls, which leads to the actual appreciation.
Second, exchange rates are also susceptible to seasonal conditions. Tsagaan Sar, Naadam, spring, and business activation in summer for example. These periods signify a time where more people travel abroad or buy goods from abroad. The tugrug usually depreciates at certain periods like this. Thirdly, the Mongolian forex market’s infrastructure is underdeveloped. As a result, if there is suddenly a large influx of foreign currency in the market, the market is vulnerable to fluctuations. In the same vein, if there is a large outflow of foreign currency from the market, it can cause significant fluctuations. In simpler terms, because of the underdeveloped nature of the forex market, it is not able to absorb large short-term changes or shocks. This causes some dramatic fluctuations in exchange rates. When this happens, Mongol Bank intervenes in the market in order to reduce fluctuations.
The central bank has been taking some steps to alleviate some problems with the forex market. In order to develop the forex market infrastructure, Mongol Bank set up a new forex electronic platform between commercial banks in April 2017. Thanks to the new trading platform, sudden shocks in the forex market have decreased greatly. Currently, the official exchange rate between the tugrug and the dollar is 2,455 MNT for one USD, relatively stable. Before Naadam, the exchange rate was 2,420 MNT. During Naadam, the exchange rate increased slightly to 2,460 MNT.
You mentioned that the tugrug depreciated slightly in July. What is the main reason for this?
The depreciation that was witnessed in July is being considered a short-term phenomenon. The reason is that the difference in total value between payments into and out of a country, or balance of payments, is relatively good. As of May, the balance of payments had a surplus of 201.7 million USD. In June, there was a deficit of 130 million USD. This is evidence that the flow of cash out of the country is not that much. Since the extended fund facility program with IMF begun to be implemented in May 2017, the confidence of investors in Mongolia has been improving and the cash flow coming into Mongolia has increased. In conjunction with this, the market price of Mongolia’s main export commodities increased significantly, helping to create a surplus in balance of payments. When the balance of payments is in a surplus, there is not much of a basis for the exchange rate to fluctuate. The depreciation during Naadam was a short-term seasonal change. Mongol Bank took the appropriate measures to address the change at the time.
As you said, when the balance of payments is in a surplus, the tugrug is stable. So then how do we improve the balance of payments?
That is up to Cabinet, who can support and promote export production, increase foreign trade, conduct trade talks, increase the inflow of cash into the country, support local businesses, or issue bonds to help improve the balance of payments.
How much money does the Mongolian foreign exchange reserve hold currently?
The Mongol Bank foreign exchange reserve is announced monthly. As of June 2018, the foreign exchange reserve stands at 2.9 billion USD. Only just a year ago, the reserve had 1.3 billion USD. One of the reasons why the reserve is increasing is because of the IMF program.
In addition, the price of commodities increased on the global market. Export of Mongolian mineral products increased as a result, which helped increase the flow of cash into the country. Efforts by Mongol Bank to increase gold purchases has also had a positive effect. A foreign exchange reserve is a critical factor in the stability of a country’s currency.
What must be done to stabilize the exchange rate fluctuations?
The central bank maintains a flexible floating exchange rate that is interconnected to the fundamental factors of the market. So in line with that policy, Mongol Bank does view gradual fluctuations in the exchange rate as acceptable. If there are any short-term expectation-based market changes, Mongol Bank intervenes in order to alleviate potential shocks. In the future, the competitiveness of Mongolia’s exports, investment, and political stability are all important aspects in maintaining future exchange rate stability. This will not only have the positive effect of stabilizing the tugrug but will also help improve the business environment and make it easier to conduct business, which helps foster economic growth, maintain inflation, and reduce unemployment.