Mongol Bank: Commodity price spike due to coronavirus is temporary

Mongol Bank representatives reported on the current situation and outlook for the Mongolian economic and financial market in 2020 at its monthly meeting with the press, held last Friday.

At end-2019, the annual growth of money supply reached seven percent, or 20.8 trillion MNT, according to the bank. Of this increase, savings held in tugrug attributed to 4.9 percentage points, savings held in foreign currency to 2.4 percentage points, current accounts held in foreign currency to 0.3 percentage point and current accounts held in tugrug made up 0.4 percentage point. Head of Research and Statistics Department B.Batdavaa said that while net domestic assets at the central bank and depository institutions amounted to 17.9 trillion MNT, net external assets reached three trillion MNT.

B.Batdavaa reported that outstanding loan jumped five percent to stand at 17.9 trillion MNT in 2019 compared to 2018. Outstanding individual loans reached 9.3 billion MNT, up by four percent, and outstanding private sector loans became 8.5 billion MNT, up by seven percent.

Mongol Bank officials underlined that the recent USChina trade deal brought positive change to the global economy and that further downfall is unlikely. With the International Monetary Fund’s Extended Fund Facility arrangement coming to an end in May, the central bank summed up that the program has been “fruitful” and discussions will resume through May.

As for the domestic market, Mongol Bank was pleased with the strong economic growth observed in the last three years. Since 2017, growth has been within the range of six percent despite fluctuations between seasons, according to B.Bayardavaa, head of the Monetary Policy Department.

“The main factor ensuring high economic growth is investment demand in a way. Investment has considerably risen over the last three years. It is marking a stable 20 to 30 percent growth. In 2019 too, I expect it to come out at around 20 percent growth rate. In 2020, large investment demands will dwindle and growth will likely fall to around 10 percent,” B.Bayardavaa noted. “From another side, household consumption played a part in the economic growth as well. As wages of public workers is being increased in 2020, the real income increase is expected to positively impact consumption growth. Recent estimation shows the total wage increase of public workers will be around 14 percent. This will support consumption and positively affect household loan burdens.”

Officials stressed the need to pay attention to export volume, especially coal export, and inflation this year. Inflation fell to five percent at the end of 2019, which is much lower than the central bank’s target of eight percent. In the last half of 2019, especially in the third quarter, inflation hit 10 percent but the central bank shunned off monetary policy intervention as it was supply-oriented inflation, explained B.Bayardavaa.

“In relation to the coronavirus, consumers are getting worried and causing commodity prices to spike. However, this is only temporary,” he assured.

The head of the Monetary Policy Department answered some questions from the press at the end of the meeting.

The pension-backed loan forgiveness has been approved. The National Security Council and President Kh.Battulga are planning to finance this through revenue from the Salkhit silver mine. Is this consistent with Mongol Bank’s views?

The National Security Council released a recommendation for a one-time forgiveness for individual pension-backed loans. Based on this recommendation, Cabinet drafted the bill and Parliament enacted it. The bill clearly reflects Mongol Bank’s involvement. Mongol Bank is working to accurately implement the law with minimum adverse impact to the economy and banking sector.

On the other hand, Mongol Bank purchases precious metals from the local market. Erdenes Mongol LLC is planning to sell silver mined from Salkhit mine to Mongol Bank and once the silver is purified, use the earning for government bond repayment. According to the law passed by Parliament, the General Social Insurance Office will deliver statistical information to Erdenes Mongol and the company will release a secured five-year bond through Development Bank. By transferring the bond to banks, pension-backed loans will be repaid.

It was reported that bonds released by companies helped increase accounting profit. Can you provide more information about these bonds?

Accounting profit reached 2.3 billion USD. If we break it down, direct investment reached 2.1 billion USD and investment in the portfolio or the bonds issued by the entities came out with a surplus of 368 million USD. It was mainly driven by a bond released by MIK Holding in the international market in January 2019.

The sixth review of the International Monetary Fund’s program is still not out yet. A working group is planning to visit in March. What will be the main focus of meetings?

The team will focus on economic situation and future trends. This will become the foundation of issues to discuss with the International Monetary Fund afterward. Overall, the program has been successful.

Will the currency swap deal with China continue to be in effect?

The agreement will expire in July 2020. We will extend the contract by three more years in July.