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EXCHANGE RATE HITS 1300 ON RAPID GROWTH OF NET FOREIGN EXCHANGE OUTFLOWS IN FORM OF GOODS IMPORTS, SERVICES PAYMENTS, TRANSFERS OF NET PROFIT RELATED TO EXPANSION OF THE ECONOMY AND ACTIVE BUSINESS OPERATIONS

According to Bank of Mongolia(BOM, mongolbank.mn) on 10/25/2011, Board of Directors of BOM decided to increase policy rate by 0.5 points to 12.25%

  • Speed of inflation is increasing and it is including more and more goods and services, currently it is 10.5% nationwide and 11.9% in UB
  • Factors such as speedy expansion of fiscal expenditures are, cash handouts from Human Development Fund, rapid credit growth are increasing total demand
  • Sudden increase in demand while total supply and real economic factors have not significantly risen is creating pressure to growth of base prices
  • This is proved by YTD increase of 11.3% in prices of non-food items
  • 2011 budget amendment and 2012 draft budget have procyclical features and has a risk increasing significantly total demand and inflation and bringing macro-economic instability
  • Also debt crisis in Europe, stagnation of the USA economy is likely to create unfavorable world economic and financial environment in coming years
  • Therefore Bank of Mongolia is taking measure of raising policy rate in order to reduce speed of inflation, cooling overheating of the economy and protecting macro-economic stability

 

Bank of Mongolia information regarding external sector

 

  • Total foreign exchange flow has increased 1.7 times yoy as of October 21,2011
  • Inflows increased by 57% YTD outflow increased 80% yoy
  • Inbound net foreign exchange flow declined 51% yoy
  • inbound net USD flow increased by 14% yoy and reached 824M USD.
  • rapid growth of foreign exchange outflow in form of goods imports, services payments, transfers of net profit is related to expansion of the economy and active business operations
  • As of 2011 Q3 YTD  Mongolia’s external trade turnover has risen 92% yoy to 8.2B USD, exports by 67% yoy to 3.3B USD, import by 115% yoy to 4.8B USD. Trade deficit has increased 6.2 times to 1.5B USD, trade deficit of goods paid in foreign exchange increased 8 times to 441M USD
  • 73% of total exports are coal, copper concentrate and iron ore
  • 51% of total imports are machinery, equipment, spare parts, transportation vehicles and petroleum products
  • Current balance of Balance of payments of Mongolia has a loss of 1.4 billion in first 8 months of 2011 including deficit of 1.3B USD in foreign trade in goods and services, capital and financial balance of payments has a surplus of 1.9B USD, within that net amount of FDI reached 2.4 billion USD therefore total balance of payments has surplus of 220M USD.
  • Amount of external debt of Mongolia as of H1 2011 is 8.1B USD, from those 67% of loans from abroad by citizens and enterprises and intercompany loans by subsidiaries and head companies,  23% is Government’s, 7% are banks’, 3% is Bank of Mongolia’s from IMF.

 

Conclusion

 

  • Bank of Mongolia USD exchange rate today is 1300.69MNT. Last time exchange rate was 1300 was on 10/20/2010, almost exactly a year ago
  • Foreign exchange outflow is in form of goods imports, services payments, net income deficit also in repayment of loans.
  • Although USD inflow is positive total foreign exchange inflow (USD, RNB, EUR, others) declined 51%
  • This is the factor behind recent depreciation of MNT
  • 1300 is 3% variation of 10 months, generally MNT is still stable
  • Although MNT depreciation is compounding carry-loss to all MNT-denominated losses, particularly negatively affecting foreign investment into MSE equities, this is a normal market volatity
  • current tightening of monetary policy is welcome, but more needs to be done. The central bank should use a variety of tools. The policy interest rate should be further increased. For much of the year it has remained close to the pace of increase of underlying inflation, allowing for a very rapid pace of credit growth
  • Interest rate hikes alone, however, will not be sufficient. In addition, a range of macro-prudential measures should be implemented to help slow the pace of credit growth. These include measures to increase capital adequacy requirements, start to require provisions on new lending, raise reserve requirements, and tighten liquidity ratios. At this stage in the business cycle it is especially important to proactively manage risks and strictly enforce prudential regulations in order to prevent the buildup of future credit quality problems in the banking system