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GOVERNOR OF BANK OF MONGOLIA: REAL ECONOMIC OVERHEATING, HIGH INFLATON, APPRECIATION OF REAL EXCHANGE RATE OF MNT, INCREASING STATE, DUTCH DISEASE

According to Bank of Mongolia on 11/3/2011, Governor of Bank of Mongolia L. Purevdorj has said in a speech in Parliament session

  • Economic growth in first 3 quarters of 2011 is record 16.7%
  • Foundation for this growth is rigorous growth of total demand. Capital inflow into Mongolia has increased by start of major mining projects.  Funding for banks has increased dramatically, loans are rapidly increasing and feeding growth of the private sector
  • Although of course there is influence of budget expansion, on the other hand there is rapid increase in personal consumption and imports, there is more demand than the supply and this incites inflation. Credit growth is influencing consumer prices. Price of capital is increasing too.
  • In order to combat inflation which is caused by continuously increasing demand, Bank of Mongolia has been tightening its monetary policy. Also there was additional reason stemming from rise of certain products with state regulation and fuel in May-June and rise in price of other goods through increasing transportation costs
  • Bank of Mongolia’s monetary policy is aimed at having economic growth sustainable and stable in medium and long term. This is expressed by a requirement not to have current short term ultra-high economic growth as a premise for medium term depression. Significance of such policy is even more amplified in 2012.
  • Limiting inflation at single digits  is a maximum limit for economy to grow in stable manner, sustain investment , keep confidence in MNT and not to lose confidence of foreign investors
  • When inflation goes above 10 per cent it creates uncertainty in making consumption, investment, loan and savings decisions. Even at 10 percent it is clear that it would be significant challenge to keep living standards of the citizens and reduce poverty
  • On the other hand, such level of inflation has become a main obstacle to reducing loan interest
  • Therefore, keeping inflation at single digit is maximum allowable high limit
  • In another words, it is proper to make aim that total impact of budget and monetary policy on consumer price growth  should be within single digits.
  • Although nominal exchange rate of of tugrug has been stable YTD, imports with consumer features are rising fast, deficit of balance of payments has dramatically increased, and almost total dependence of export from mining revenues is further weakening immunity of the economy from the external shocks
  • Risk of economic crisis is not declining that in case of negative changes such as decline in commodity prices, slowdown in foreign exchange inflows or increase in outflows
  • World economic uncertainty is prolonging. IMF and World Bank are warning that world economy is going to next economic crisis
  • Growth has stagnated in developed economies , depression has started and growth in China might decline
  • As a negative result of this, there is a risk of decline  our exports revenues especially copper, increase in foreign trade deficit and loss in budget revenues in a short time
  • Therefore probability is rising of repeat of economic crisis of 2008-2009
  • That’s why measures to overcome possible external shocks  should be installed in the budget and monetary policy as wide as possible
  • Our country that has high capital inflow and rapid economic expansion has no choice but to urgently implement proper countercyclical macro policy of reducing vulnerability to economic difficulties and capacity to overcome challenges
  • main criteria of proper macro policy is not fixing negative effects of wrong policy with another policy but in having integrated policy aimed at creating condition for sustainable and stable development
  • there is no choice but to admit that it is improper that in recent years our country is implementing  pro-cyclical policy
  • budget is expanding too fast, we are faced with real economic overheating, state participation is increasing in composition of GDP which is becoming main channel for spread of Dutch disease. Because of high inflation and tugrug appreciation, real exchange rate for tugrug is appreciating.
  • state is increasing and pushing away private sector growth
  • on top of this, high salaries are entering mining sector and sudden hike in salaries of public servants is causing weakening of competitiveness of our private sector and non-mining sectors
  • although the economy is growing, growth of sustainable and stable income of citizens is insufficient
  • we are faced with a necessity to make more wider distribution of growth, increase in productivity and jobs, priority development for private sector including processing industries
  • Bank of Mongolia is enforcing on regular updated basis prudential ratios of the banks in countercyclical manner and this work will be intensified in correlation with future developments
  • Capital funding for banking sector has increased and capacity to sustain private sector investment and development has dramatically increased. In Q3 2011 YTD, banking assets have increased by 26.7% to 8.1 trillion MNT, loans have increased 48.2% and reached 4.9 trillion MNT.
  • State policy should be aimed at as full as possible exploitation of increasing capacity of finance sector. Above all, macro condition will play decisive role in this. Specifically, starting from 2013 by latest it would be critical to keep budget expansion at proper level, stabilize inflation at low level and soften monetary policy. Without this it is impossible to support growth of private sector, create stable and sustainable source for income and jobs and substantially reduce poverty
  • If banks don’t increase their equity and improve management and operations there would be an internal risk of not exploiting fully funding source that is accumulating in the sector
  • Equity of banks has grown by 27.7% to 820B MNT and ratio of equity to assets on risk weighted basis declined by 1.5 points to 14.3 per cent. In another words, growth of equity of banks is lagging behind growth of banks’ assets.
  • Bank of Mongolia is taking and will further intensify measures to update and determine minimum bank equity, improve competitiveness and ability to overcome risk by increasing equity of banks with systemic significance, heighten responsibility of banks.
  • As of Q3 2011 MNT lending rate of banks has declined 3.3% yoy and foreign exchange lending rate of banks has declined 2% yoy. Work plan has been approved for Program to create proper economic condition for interest rate to decline. Quality implementation of this program is one of key directions of increasing efficiency of the total economy
  • Effect of the law on providing guarantees for savings in the banks is finishing on November , 2012. We are faced with a need to have Parliament discuss and approve bill on insurance of citizens savings and introduce limited savings insurance system.

For further inquiries please contact:

Chief Investment Strategist

Dale Choi

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