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Bank of Mongolia: wrong expectations are influencing MNT appreciation

According to Bank of Mongolia on April 9, 2012 Director of Financial Markets Section of Department of Foreign Exchange and Economy of Bank of Mongolia J.Bataa clarified to major Mongolian daily “Udriin Sonin” in relation to MNT starting to appreciate again after depreciating in the beginning of the year:

Why recently MNT is appreciating?

  • Official exchange rate has appreciated YTD 6.5% and 1.2% in last 5 days. Taking into consideration macroeconomic fundamentals, Mongolia still has external trade deficit and rate of growth of imports is still 2 times higher than that of exports, total external trade deficit YTD is 409.4 million USD. FX inflow is less than outflow and therefore net FX flow is negative and imports consumption is growing.  Those factors in short term are influencing MNT to depreciate.
  • Yet because of supply and demand on FX market and exchange rate expectations there is an occurrence of MNT appreciation. There are several factors to explain this.
  • First of all, in connection with start of spring season, there is expectation that MNT will appreciate because of cashmere and wool revenues. Public has this expectation even though cashmere exports revenues occupy very little share of external trade due to increase of mining exports.
  • Secondly,  successful sale of DBM’s 580 million USD bonds and MMC’s 600 million USD bonds on international markets have influenced for rise of expectations of MNT appreciation among public.  However, because Bank of Mongolia will increase foreign exchange reserves in the amount of sold bonds there will be no exchange rate excessive volatility and proceeds from these bonds will be spent on projects such building rail and automobile roads, Power Plant No 5 and Sainshand Industrial Hub. Therefore, majority of the proceeds will be spent on the equipment and raw materials for those projects and by a way of payment for imports will go back abroad.
  • Last influence comes from discussion by certain banks on bonds issuance and this is influencing market expectation. However, Bank of Mongolia instituted requirements for banks to ensure prudential FX ratios.  In another words, FX position of the banks cannot go above 40% of a banks’ own equity and this ensures that foreign exchange coming in from bonds issuance will be kept from conversion.

What position does Bank of Mongolia has on MNT appreciation?

At any given time, Bank of Mongolia adheres to position that foreign exchange rate will determined flexibly based on macroeconomic fundamental indicators and market supply and demand. During FX rate excessive volatility , Bank of Mongolia participates in FX market by intervention. For example,  in this week’s first auction Bank of Mongolia participated and  satisfied 94.7% of proposal of banks to sell USD and by second auction satisfied it 100%.

Therefore, because of abovementioned  reasons and wrong expectations, tendency for MNT to appreciate has been observed.  Bank of Mongolia will continue do when necessary related regulation in connection with macroeconomic fundamental indicators and exchange rate fluctuation