Mongolia aims for a brighter banking future - www.euromoney.com July 2014
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July 2014 www.euromoney.com ba br
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M ye
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Mongolia aims
for a brighter
banking future
This special report is for the use of professionals only. It states the position of the market as at the time of going to press and is not a substitute for detailed local knowledge. Euromoney does not endorse any advertising material or editorials for third-party products included in this publication. Care is taken to ensure that advertisers follow advertising codes of practice and are of good standing, but the publisher cannot be held responsible for any errors. Euromoney Trading Ltd Nestor House Playhouse Yard London EC4V 5EX Telephone: +44 20 7779 8888 Facsimile: +44 20 7779 8739 / 8345 Chairman: Richard Ensor Directors: Sir Patrick Sergeant, The Viscount Rothermere, Christopher Fordham (managing director), Neil Osborn, John Botts, Colin Jones, Diane Alfano, Jane Wilkinson, Martin Morgan, David Pritchard, Bashar Al-Rehany, Andrew Ballingal, Tristan Hillgarth Advertising production manager: Amy Poole Journalist: David Wigan Printed in the United Kingdom by: Wyndeham Group © Euromoney Trading Ltd London 2014 Euromoney is registered as a trademark in the United States and the United Kingdom.
Contents
2
Banking system marks its 90th anniversary in good shape
Mongolia’s banking sector has come a long way since its foundation, with Russian help, in 1924.
The industry proved resilient during the financial crisis and competition has stimulated expansion
and innovation, although there are worries about over-dependence on the resource sector
4
A stable base for future growth
As Mongolia moves away from dependence on mineral resources, Bold Sandagdorj,
chief economist and advisor to the Bank of Mongolia, explains the central bank’s role
in creating more sustainable economic growth
5
Building on an old tradition
Bold Magvan is president of the Mongolian Bankers Association and CEO of Tenger Financial Group.
Tenger’s largest subsidiary XacBank is a systemic bank in Mongolia with 10% of market share; the group
also has leasing, insurance and investment advisory arms, and a greenfield microfinance company in China
8
Capital markets struggle to make headway
Hampered by a lack of liquidity and trading activity, capital markets have been slow to
evolve, despite government efforts to create a sympathetic regulatory environment
10
Foreign investors ponder developing potential
Mongolia’s rich mineral resources have attracted considerable foreign capital but the government also now
hopes to attract investment in its efforts to diversify the economy. The long-running dispute over the Oyu
Tolgoi mining project may be dampening interest, however
14 Bringing banking to the steppes
Despite its small and widely dispersed population, Mongolia rates highly in
the financial inclusion stakes
Expansion and consolidation
Even after a series of closures and mergers, Mongolia
probably still has too many banks for its small population 16
Banking system
Banking system marks
its 90th anniversary
in good shape
Mongolia’s banking sector has come a long way since its foundation, with
Russian help, in 1924. The industry proved resilient during the financial
crisis and competition has stimulated expansion and innovation, although
there are worries about over-dependence on the resource sector
MONGOLIA’S BANKING SYSTEM has changed out of all sector had been transformed into a mostly privatized banking
recognition from its humble beginnings in the 1920s, helping to system, with 16 commercial banks regulated by the Bank of
transform the country along the way into the pocket economic Mongolia. In 2006 the Financial Regulatory Commission was
powerhouse it is today. established to supervise the rest of the financial sector including
When the country’s first bank, the Trade and Industry Bank of insurers, securities houses, credit and savings unions, and non-
Mongolia, opened with a single branch in June 1924 it was with banking financial institutions.
the help of its Soviet neighbour and staffed mostly by Russians. In 2007, TDB became the first bank to tap the international
Mongolia also had no national currency, presenting the bank debt market with a $75 million bond issue. It repeated the
with the headache of trying to fulfil financial and monetary exercise in 2010 and 2012, doubling the value of its issuance
policy with the foreign currencies then in circulation. on each occasion. In January, TDB priced Mongolia’s first
The togrog (MNT1,823 = $1) was introduced the following renminbi-denominated bonds. The bank’s so-called ‘dim sum’
year and by 1954 Mongolia had gained sole ownership and bond offering, raising RMB700 million ($115 million), was twice
control of the bank, which was renamed State Bank of Mongolia over-subscribed.
(now the Bank of Mongolia – the central bank).
Resilient in crisis
Transition to market economy The global financial crisis did cause problems with two bank
But the most significant milestone in the sector’s 90-year history failures, two mergers and the formation from the liquidated
came in 1990 with the start of the transition from Soviet-style banks’ assets of a new state-owned bank, State Bank, in
communist rule, with its centrally-planned economy, to a multi- 2009. Overall, the sector proved rather resilient, with growth
party democracy with a market economy. dipping only briefly in the initial stages, helped in part by the
The country’s first commercial bank, Trade and Development introduction of an interim blanket bank deposit guarantee
Bank (TDB), was founded in October of that year, followed scheme in 2008.
by Khan Bank three months later. The 1991 Banking Law That year saw the first foreign banking presence when Dutch
established the central bank and a statutory minimum paid-in bank ING set up a representative office. The UK’s Standard
capital requirement for banks. All banks, however, remained Chartered followed in 2011 and Bank of China in 2013. Japan’s
under state ownership. That year also saw the establishment of number one and two banks – Bank of Tokyo-Mitsubishi and
the Mongolian Stock Exchange in Ulaanbaatar. Sumitomo Mitsui Banking Corporation – opened representative
However, early promise soon evaporated in the face of an offices in 2013. Goldman Sachs took a 4.8% stake in TDB in 2012.
economic crisis resulting from the collapse of the Soviet Union, In 2010, the Banking Law was strengthened, boosting
on which Mongolia had relied for nearly all its trade as well as minimum paid-in capital to MNT8 billion ($4.39 million) and
medicine, fuel, and machinery. limiting a bank’s exposure to any single borrower. The law also
When reform efforts and private enterprise eventually fed prohibits a single investor from ‘significant influence’ in more
through in the mid-1990s, economic growth resumed but than one bank, requires banks to notify the regulator of major
banks over-extended credit. This left them poorly positioned to changes in the shareholder structure, and prioritizes prudential
weather the Asian financial crisis that followed in the second compliance over dividends. The minimum paid-in capital
half of the decade and a number of banks closed. requirement was doubled again last year to MNT16 billion as part
With Golomt Bank leading the way, by the early 2000s the of counter-cyclical measures being pursued by the central bank.
2 SPECIAL REPORT : MONGOLIA · July 2014 www.euromoney.com
The Development Bank of Mongolia was established in 2011 trillion, with loans up 51.5% to MNT11.69 trillion, BOM data
to extend medium- to long-term financing to strategically shows. Total togrog deposits were up 46% year on year in April
important sectors – loans for infrastructure and industrial to MNT6.97 trillion, with personal savers accounting for almost
and energy developments – to be funded through bond sales. two-thirds, but failed to keep pace with loans pushing up the
The bank’s first issue of debt – government backed – in 2012 loan-to-deposit ratio from 117% to 122%. The loan-to-GDP ratio
raised $580 million and was 10 times oversubscribed, followed stood at around 60% at the end of 2013.
last December by a Samurai bond issue. The $290 million TDB’s Koppa says that the headline figures are slightly
of yen-denominated debt was guaranteed by Japan Bank for overstated due the distorting effect of a weakening togrog,
International Cooperation. which depreciated by around 25% against the dollar in the same
In January last year parliament passed the Deposit Insurance period. “Expressed in dollars, the asset growth in the banking
Law, replacing the earlier temporary measure that expired at the sector was about 46% in 2013 which is significant but the figure
end of 2012. The industry-funded scheme guarantees deposits up was 28% in 2012, 35 % in 2011, and 62% in 2010, so asset
to MNT20 million in the event of the failure of a member bank. growth has been quite strong in the past.
In July 2013, Savings Bank, the fifth largest lender, failed – “Much of the growth last year was because of temporary BOM
pulled down by the non-performing loans of its affiliates and its programmes to stimulate financing of small apartments through
insolvent parent company – and was taken over by State Bank. lending to banks to increase their mortgages and other funding
to stimulate development of construction materials companies,
Dynamic sector and exports of cashmere and other sectors.
This evolution over many decades means that, today, Mongolia “This dedicated funding showed up as increased assets in the
has a dynamic banking sector comprising 13 banks ranging from banking sector but as the economy continues to expand at a
dominant players like TDB, Khan and Golomt to community double-digit rate, the percentage increase each year will have to
development and microfinance providers such as XacBank. come down so instead of 28% we would be looking at 15-20%,
“Seeing the development of the banking system over the last then down to 15% annually.’’
decade, although there have been problems all they’ve done Koppa says the elevated loan-to-GDP ratio is partly a
is helped highlight and weed out the weaker players,’’ says consequence of the lack of capital markets, which means
TDB president Randolph Koppa. “So we’re getting, I feel, an the funding load for business growth falls almost entirely to
increasingly stronger system that’s providing a broader array the banking sector, with domestic banks responsible for a
of financial services to Mongolians in general than it was nine significant proportion.
years ago when I arrived here.’’ “The loan-to-GDP ratio will have to continue to increase so
Competition has spurred banks to expand, particularly their that means that banks will continue to grow a little bit faster
retail businesses, and created a strong innovation pipeline than the rate of GDP growth in real terms for the next three
producing advances in payment systems and branchless banking years, at which point I think the loan-to-GDP ratio will stabilize
that have made Mongolia a leader in financial inclusion. at around 75-80%. We should then see bank growth pretty much
But the banking system faces risks from Mongolia’s growing in line with GDP growth.’’
dependence on mining, resources exports and government
stimulus which, while producing double-digit GDP growth, is Short-term headwinds
also driving rapid loan growth of more than 50% a year. The sector does face some headwinds in the short term from
“One of the central bank’s roles is to ensure the stability of rapid credit growth and imbalances injected by inflation above
the financial system and we have worked to make sure banks 12% and a substantial current account deficit combined with
are sufficiently capitalized and work to international prudential togrog depreciation. The foreign currency loan-to-deposit ratio
standards,’’ says Sandagdorj Bold, adviser to the governor jumped to a record high of 120% at the end of last year with
of the Bank of Mongolia. “The average core tier 1 ratio of foreign currency deposits accounting for more than a quarter
Mongolian banks is 17% at the present time, against a minimum of total loans.
requirement of 12%. The average liquidity ratio is 41%, against Ratings agencies are concerned that, even through most
a minimum of 25% and non-performing loans are stable at a FX lending is to corporations with hedged positions, the
moderate 5%.’’ banking system faces credit risks given the degree of togrog
But fund managers have doubts. Sturgeon Capital’s founder and depreciation. They also cite wider macro risks from the
CEO Clemente Cappello warns that while Mongolia is undergoing deteriorating environment for resources, the country’s key
a transition for the good, over-investment in recent years will export, and that banks and the BOM may be underestimating
cause problems in future: “The only thing they’ve done outside the true extent of NPLs.
natural resources has been real estate, and I think there’s been However, with the deficit set to fall, a weakening inflation
some over-investment there, certainly some capital misallocation. trend, Mongolians’ fondness for saving and sustained economic
That is going to be linked to some volatility in the banking sector expansion over the medium to long term, should ensure the sector
because real NPLs are increasing. The banks are limited in size and prevails. GDP growth is forecast to spike to almost 13% this year
they just went through a huge boom and now, when capital is according to the IMF, before slowing in 2015. However, growth is
not there, I think they will face some troubles.’’ expected to stay well above 7.5% for the remainder of the decade,
Total assets were up 59% year on year in April to MNT21.21 making it one of the world’s fastest-growing economies.
www.euromoney.com SPECIAL REPORT : MONGOLIA · July 2014 3
Central Bank interview
A stable base for
future growth
As Mongolia moves away from dependence on mineral resources, Bold
Sandagdorj, chief economist and advisor to the Bank of Mongolia, explains
the central bank’s role in creating more sustainable economic growth
THE BANK OF Mongolia (BOM) was established in 1924 and has current account. Since the beginning of 2014, exports have been
played a key role in maintaining macroeconomic and financial growing slightly while imports have been declining. We expect
stability. Although its primary objective is similar to that of other further decreases in current account deficits and, once exports are
central banks, it promotes balanced economic growth by ensuring significantly increased, the trade balance is expected to have a
financial stability thanks to regulatory changes under the new sustainable surplus.
Basel framework, prudential policies and risk-based supervision. One of the central bank’s roles is to ensure the stability of the
The monetary policy committee of the central bank consists financial system. The overall banking sector has been sound and
of 14 members, comprising seven bank officials and seven stable. The systemic average capital adequacy ratio is almost
independent representatives from academia, the public sector 17% at present, which is five percentage points higher than the
and private institutions. In the past 18 months, the committee minimum requirement of the BOM. The liquidity ratio is around
has faced challenges caused by global and regional economic 40% against a minimum requirement of 25% and the non-
slowdown, weaker growth, falling commodity prices, continuous performing loan ratio has been stable at a moderate level of 5%.
deterioration of the terms of trade, a decline in capital inflows and Mongolia is shifting from a mineral-dependent, consumption-
pressure on the balance of payments. based economy to more of a savings-based economy through
macroeconomic policy reforms, which intend to move the econ-
Responding to challenges omy away from its reliance on commodities. The mining sector
The bank has responded well to the challenges it has faced with is an intermediate industry, but not the ultimate destiny of the
conventional and unconventional monetary policy measures to Mongolian economy. Mongolia aims to maintain more sustain-
control inflation, protect the real incomes of low- and middle- able economic growth and diversify its economy by developing
income households, safeguard the financial sector, support the more competitive, technologically advanced and sustainable
banking sector through countercyclical policies that aim to non-mineral sectors, including agriculture.
prevent a potential credit crunch, stabilize monetary and credit To encourage a savings-based economy, the central bank
growth, and increase middle-class savings through a sustainable has launched a new and sustainable mortgage financing
mortgage financing programme. programme to promote middle-class savings. Over the past
As a result, the share of supply-driven and cost-push 20 years, the mortgage-to-GDP ratio never exceeded 6%, but
inflationary pressure in consumer price inflation has significantly in the past year it has grown to 14%, and we aim for it to
declined, the increase in net domestic assets has offset the decline reach at least 30% to 40%. By encouraging people to save
in net foreign assets, and the economy expanded by 11.7% in real more, we believe that they will consume in a more disciplined
terms in 2013, producing double-digit real growth for the third manner, rather than spending money on imported goods and
consecutive year. Indeed, over 70% of the real GDP growth in unnecessary consumption.
2013 was contributed by unconventional monetary injections in The measures have also encouraged banks to move away from
the real sector by the BOM within the framework of its economic short-term borrowing and towards long-term financing and we
stabilization measures. expect further development of a local currency securities market
Due to balance of payments pressure, the nominal effective thanks to securitization of mortgage loan portfolios by the
exchange rate of the Mongolian currency, the tugrug, depreciated issuance of mortgage-backed securities (MBS) by the Mongolian
by 15.5% and in real terms by 7.2% last year. Although the Mortgage Corporation. The MBS will be traded in both the
depreciation was typical of exchange rate trends in emerging primary and secondary markets, and will be more attractive to
markets and commodity-driven economies, the daily average foreign investors than local currency-denominated government
volatility of the tugrug was just 0.23%, much less than other bills and bonds.
currencies. The Bank of Mongolia has been fully committed Thanks to high and sustainable economic growth, medium
to its flexible exchange rate policy and the positive impact of and long term policy commitment, greater opportunities for
that flexibility was absorption of external shocks and necessary business and investments, we expect more economic prosperity
adjustments and normalization on foreign trade as well as the in Mongolia.
4 SPECIAL REPORT : MONGOLIA · July 2014 www.euromoney.com
MBA interview
Building on an old tradition
Bold Magvan is president of the Mongolian Bankers Association and CEO of
Tenger Financial Group. Tenger’s largest subsidiary XacBank is a systemic
bank in Mongolia with 10% of market share; the group also has leasing,
insurance and investment advisory arms, and a greenfield microfinance
company in China
THIS YEAR MARKS the 90th anniversary of the modern formed out of former departments of the central bank.
Mongolian banking system, but it is worth remembering that The larger commercial banks were state owned until 1998, when
the 20th century saw not the first banking system in Mongolia, a process of privatization was initiated. In the meantime a number
but instead the revival of a much older industry. of small private commercial banks were established, encouraged
Centuries ago, Mongolia operated one of the world’s first by low minimum capital requirements. Nowadays some 90% of
banking systems, under the auspices of the Mongolian empire. Mongolian banking system assets are held in private banks.
As early as the 13th century, Mongolia established trade links
between Asia and Europe and a system of finance to support trade A professional industry
between continents. Archaeologists have found traces in coinage In recent years international investors have taken stakes in
and later, as the Chinese provinces were united under the Mongol Mongolia banks, and the industry has become increasingly
banner, in ancient printing machines for paper money, recorded in professionalized. Now the five largest banks have a 90% market
tablets of wood and bronze. The currency was issued by Khubulai share, and all Mongolian banks subscribe to international
Khan, the grandson of Genghis Khan, and versions of the original accounting standards and are audited by the top accountancy
printing machines are still kept in archives in China and Japan. firms. Total assets are around 120% of GDP, which is a relatively
As the Mongolian empire expanded so did its monetary strong penetration of the banking system in the economy.
system, and examples of 800-year-old silver Mongolian coins Banks are working hard to comply with the international
have been found as far away as Crimea and Ukraine. At its Basel II and Basel III capital and prudential standards, and with
height the empire traded with the majority of countries in credit rating agency backing have started to issue bonds and
eastern Europe and Asia. However, after the collapse of the senior and syndicated loans in the international capital markets.
empire, Mongolian trade reverted to the barter system, with tea, At the same time we have launched an exciting initiative in
sheep and commodities being the main currencies of exchange. sustainable finance, with banks trying to lead sustainable growth
In recent centuries foreign coinage began to be used and we while providing financial services and working with clients to
have found examples of Chinese currencies, US dollars, British protect the environment and well-being of communities.
pounds and even the Mexican peso – an enduring mystery as Fortunately, Mongolia banks were not exposed to the complex
nobody is sure how those coins came to be in Mongolia. derivative products that were associated with the financial crisis,
and retail business remains one of the most important segments.
20th century banking Mongolian banks are focused on reaching out to the population,
The system of barter dominated until around 1921, when nearly 50% of which still lives in rural areas. Technology plays
Mongolia decided to partner with the Soviet Union. Three years an increasing role, and even herders can use mobile banking
later, with Russian assistance, a commercial bank was established apps to make payments and transfer money.
in Ulaanbaatar, or Urgoo, as it was known at the time. The bank Some of the large mining projects in Mongolia require vast
was more or less a 20th century financial institution, though resources of capital, and Mongolian banks are focused on
adapted for a planned economy. In the following years the starting to work with international partners to attract funding
bank played the role of commercial and central bank, setting resources and distribute capital. At the same time banks work
monetary policy and providing commercial banking services, directly with numerous companies in the supply chain.
taking deposits from individuals around the country and The Mongolian banking system has an exciting future,
channelling funds to state companies. and is growing fast. In terms of total assets it grew 75% last
There were no private companies in Mongolia until 1990, year, so things are changing very quickly. We are also seeing
but after the fall of the Berlin Wall there was a huge change a lot of young people come into banking, and the average
and the nation started to transit to a market-orientated age of bankers is 29 or 30 years. We are a young and growing
economy. The first purely commercial Mongolia bank, the population and as Mongolia embraces the challenges of the
Industrial Bank of Mongolia, was established in 1990, followed 21st century, the banking fraternity looks forward to an era of
by the Trade and Development Bank and the Agricultural Bank, global cooperation and partnership.
www.euromoney.com SPECIAL REPORT : MONGOLIA · July 2014 5
A Euromoney Magazine sponsored statement
Khan Bank: partner of choice
Investment in technology and an extensive branch network has helped Khan Bank consolidate
its position as Mongolia’s biggest retail bank and build new business and product offerings
Khan Bank is the biggest retail bank One example of our commitment transportation regionally and a national campaign against
in Mongolia, providing exceptional is the scale of investment in internationally, often working cancer. The campaign was run
financial services to more than our branch network, with with partner banks to make sure in eight provinces with higher
three-quarters of domestic many branches last year given a exporters control risks through cancer levels in 2013, helping
households, alongside a growing makeover to ensure they keep the trade life-cycle. The service some 15,000 people.
range of corporate solutions. pace with customers’ expectations. is backed by AAA-rated trade
The bank’s dominant position Our work to respond to facilitation programmes and Looking outwards
is built on an extensive domestic customer needs has been insurance coverage from export Khan Bank is active in the capital
branch network across 530 rewarded with new customers credit agencies and development markets and in 2013 borrowed
locations, an unrivalled 340 ATMs and more business. Total customer banks. $111 million through a syndicated
and a commitment to innovation deposits increased by 34% in 2013 Khan Bank is a member of Visa loan facility, the first of its kind
evidenced by a comprehensive to MNT2.8 trillion, while loans International and China Union Pay for a Mongolian bank. It also
range of mobile banking services. grew 42% to MNT2.5 trillion. Our and accepts Visa and CUP cards secured $35 million of long
Our aim is to ensure our loan business has quadrupled of all types through some 1,700 term funding from the European
customers have access to Khan over the past five years, and we merchants. Last year, Khan Bank Bank for Reconstruction and
Bank solutions wherever and are constantly seeking to expand introduced the Bancassurance Development, with the aim of
whenever they need them. our product offering across loans, service in all of its branches, improving credit to small and
As the consumer technology deposits and foreign exchange. offering six insurance types medium-sized businesses and
revolution has taken hold, Khan through our partners. building relationships with public
Bank has pioneered internet Corporate coverage and private entities.
banking in Mongolia, and was first In the corporate space, the Social responsibility Khan Bank and the
to offer mobile and SMS text bank is a major provider of As the leading Mongolian bank, International Investment Bank
services. Our multichannel strategy payment services, domestically we seek not only to be an (Moscow) last year agreed a
has reaped rewards, and the bank’s and internationally, leveraging our excellent commercial partner strategic partnership to increase
Smart Phone Banking solution is technology resources to make but also a responsible member collaboration in loans, trade
ranked first in Mongolia among sure our customers can operate of the community, playing finance, inter-bank lending and
banking and finance applications. seamlessly across the payments a leading role in promoting foreign exchange. We have
value chain. corporate social responsibility. also signed a memorandum of
Investing in innovation The bank also runs credit and The bank supports numerous understanding with Sumitomo
The bank’s success in developing debit card schemes, alongside projects in education, health and Mitsui Banking Corporation, part
innovative digital services is the payment card schemes for environmental protection and of our commitment to expanding
result of a long-term commitment salaries and pensions, and recently works to support disadvantaged our international network.
to investment across the retail and introduced contactless payments, groups in society. The bank’s financial
corporate segments. We were following investment in near-field Established in 2007, the Khan performance has been on an
proud last year to open a 24-hour communication technology. As Bank Foundation administers upward trajectory. Net profit after
Express Banking Centre in Ulan competition in the payment sphere funding support to programmes tax was MNT96.7 billion in 2013,
Bator city centre. The centre is a increases we aim to develop aimed at educational and an increase of 35% from 2012. It
state-of-the-art one-stop shop, mobile and card-based solutions cultural advancement, assisting has also built on solid foundations
offering banking services across that keep Khan Bank ahead of our disadvantaged groups and to increase its capital base: total
a menu of channels, alongside banking and technology rivals. supporting community capital rose 41% to MNT471.2
advisory and information resources. We provide tailored, low- development and environmental billion in 2013, while total assets
A key driver of Khan Bank’s cost solutions for companies, protection. increased 72% to MNT4.8 trillion,
strategy is a belief in continuous including commodity firms and In one example, Khan Bank putting us in a strong position to
improvement that has helped consumer goods suppliers. For collaborated with the National remain the Mongolian people’s
make us the most trusted and example, the bank offers trading Cancer Centre and Mongolian partner of choice in the exciting
accessible bank in the country. firms management of transit and National Broadcaster to conduct years ahead.
Seoul Street-25, PO Box-192, Ulaanbaatar-14250, Mongolia
Telephone: +976 11 332333
Email: callcenter@khanbank.com
Web: www.khanbank.comCapital markets
Capital markets struggle
to make headway
Hampered by a lack of liquidity and trading activity, capital markets
have been slow to evolve, despite government efforts to create a
sympathetic regulatory environment
MONGOLIA’S CAPITAL MARKETS are at an embryonic stage high cost to domestic banks of raising capital, at least 10%, is
despite being more than two decades in the making, with only ultimately going to be paid by the customer. If you’re a large
a small number of stocks and corporate and government bonds corporate you can probably access foreign funding, which will
changing hands with any frequency. be very much cheaper, so there is no way of competing against
The country burst on to the global capital markets stage in international banks on the ultra-large loans. What they can do
November 2012 with a whopping $1.5 billion sovereign bond is have high margins on the smaller loans in spaces where they
issue – the equivalent of one-fifth of GDP – but the momentum have a lot of clients. That’s where they can make money.”
from that initial leap forward has since fizzled. Until recently, corporate banking has been the main focus.
Companies listed on the local stock exchange have been denied Investment banking exists, but with domestic IPOs, debt
or are unable to avail themselves of the opportunities to access offerings and private placements few and far between, demand
capital offered by issuing depository receipts or dual listing. is insufficient to spur growth. The basics without which
Analysts say that, together with a lack of domestic investors, institutional investors cannot invest, such as custodian services
this has produced a vicious cycle in which the lack of trading and delivery-versus-payment, are not yet available. Trades are
activity creates low liquidity making investors even less willing pre-funded with settlement and depository functions handled by
to trade – ensuring institutional the state-owned Clearing House
investors stay away. & Central Depository.
The capital-hungry resources “Investment banking as a
sector is almost entirely funded “If you’re a large corporate you can probably sector is really quite small,” says
from overseas through listings TDB president Randolph Koppa.
access foreign funding, which will be very much
on exchanges elsewhere, in “We have a capital markets
North America, Australia cheaper, so there is no way of competing against company, TDB Capital, which
and Hong Kong, syndicated international banks on the ultra-large loans” has a brokerage licence, it has an
loans from global banks and underwriting licence and it can
development bank loans, and Clemente Cappello, Sturgeon Capital do advisory service.
bond sales. “We were joint lead manager
of the government’s sovereign
Size limits bond issue and have advised on
Corporate banking is well developed, with the larger banks syndicated loan arrangements in the capital markets. We’ve
providing most services from lending, trade financing and also had a couple of mandates and probably have a couple of
leasing to cash management, treasury and guarantees. Given potential mandates to underwrite IPOs when the exchange
that the largest bank has assets of only about $2.85 billion, is properly functioning and conditions are more favourable.
corporate loans are small by international standards, restricted But capital markets activity has been pretty modest in the
to around $50 million maximum. The small size of the banking last couple of years. We’re really geared to be the leader in
sector effectively precludes banks’ direct participation in the corporate lending activity.”
resources sector: a single project like Oyu Tolgoi could swallow
more than half of the assets of Mongolia’s entire banking Indirect route
system. According to Fitch Ratings, given the current weakness Institutional investors’ current exposure to Mongolia is
of the mining sector, that is probably a good thing. mostly restricted to indirect portfolio plays on resources
Clemente Cappello, founder and CEO of Sturgeon Capital, companies listed overseas or private equity investments in
says Mongolian banks can gain exposure by targeting lending unlisted Mongolian companies in hopes of an IPO, acquisition,
to suppliers, or suppliers of suppliers, of the large companies merger or recapitalization. The government has redressed the
developing multi-billion-dollar projects. “Unfortunately, the lack of an enabling regulatory and legal framework, blamed
8 SPECIAL REPORT : MONGOLIA · July 2014 www.euromoney.comfor restricting the capital-raising opportunities available to
Mongolian companies – but to little avail.
Analysts warn Mongolia will struggle to make headway while “Certainly they’re moving in the right direction.
doubts persist over whether the government will stay the course
In terms of policies and regulations they’re
with its pro-foreign investment agenda and liquidity levels are
such as to make it almost impossible to exit equity positions. trying to create a more liberal market and to
“They’re trying to create an infrastructure that’s more create liquidity but it really is being held back by
conducive to trading and especially institutional interest but how slow the government moves”
unfortunately there’s just too many other outstanding issues
right now where I don’t really see a strong pick-up in capital Calvin Wong, Quam Asset Management
markets in the near term,’’ says Calvin Wong, analyst at Quam
Asset Management in Hong Kong. “Certainly they’re moving in
the right direction. In terms of policies and regulations they’re
trying to create a more liberal market and to create liquidity The bond market is even slimmer, with zero turnover in
but it really is being held back by how slow the government both government and corporate bonds in the first four months
moves. There’re a lot of issues still outstanding especially with of this year. In 2013 there was just one government bond
the mining sector and licensing. Obviously, Oyu Tolgoi is transaction on the exchange, worth MNT1 billion. In 2012,
still outstanding and there are various macro factors causing the most recent year for which corporate bond trading data
currency weakness, increased risk of overleveraging the is available, 1.8 million bonds worth MNT19.61 billion were
economy and inflation. traded though the exchange.
“The best chance of a strong rebound is international equities
of Mongolian companies. The liquidity is better and there Building an infrastructure
are more institutional investors within those companies, and The government has placed strong emphasis on creating an
perhaps on the sidelines looking at these companies, so they infrastructure to foster sustainable development of the country’s
would be more sensitive to certain triggers such as the resolution capital markets with institutional investors clearly in its sights.
of the Oyu Tolgoi dispute.” Wide-ranging new legislation – the Securities Markets Law
and the Investment Fund Law – came into force in January.
Liquidity lacking The changes allow MSE to adopt a new clearing, settlement
The Mongolian Stock Exchange (MSE) was formed in 1991 as and custody environment based around the T+3 global
a means for the government to privatize hundreds of state- standard, paving the way for institutional investors and
owned enterprises it inherited from the socialist era by issuing overseas funds to invest.
shares to all citizens. Secondary trading began only in 1995 Dual listing – both of domestic listed firms overseas and of
but volume and turnover were low and no new companies overseas firms on the MSE – is now permitted and the range
were listed because of the lack of legal, underwriting and of tradable securities that may be issued has been expanded to
regulatory frameworks. Despite moving to electronic trading include options, futures and depository receipts. The minimum
and market capitalization spiking to an all-time high in 2011 proportion of outstanding shares firms are permitted to float has
of MNT2.20 trillion ($2 billion at that time), low liquidity has been raised to 25% and financial statements must now be filed
been a persistent problem plaguing MSE’s efforts to become a in both English and Mongolian.
world-class exchange. However, the dual listings and arrival of global custodian
Trading began to take off in 2005 led by volume which banks and institutional investors have yet to materialize.
peaked in 2008. Equity volume and trading value more than Quam Asset Management’s Wong says that the changes are
doubled between 2010 and 2012 but even at its historical peak all-important because a functioning and free capital market
in 2012, trading value was just MNT144.7 billion ($83 million further down the line will not be possible without them. But he
at the time). Last year, the value of equities traded tumbled to warns this type of market is a considerable period of time away.
MNT97.6 billion, according to data from MSE. Volume slumped “Institutions aren’t going to suddenly say ‘oh now we can trade
from 133.8 million shares in 2012 to 65.8 million for 2013, a options and futures, let’s increase our Mongolian allocation’.
situation not helped by the fact that only around a third of the There are too many things that need to be fixed before it’s a
stocks of the 249 companies listed actually trade. In March this legitimate investment opportunity for institutional investors,
year, trading virtually dried up before rebounding in April when especially larger funds.
11.7 million shares of 79 companies were traded with a value of “Annual turnover on the MSE is the size of one trade for a
MNT3.15 billion. The three most actively traded companies – big fund. Even if you can get into positions over time, getting
property developer Mongolia Development Resources, ready-mix out is a big issue. It’s really not an investable market for a
concrete producer Remicon and logistics firm Bayankhairkhan – lot of people. I wouldn’t buy options on Mongolian equities
accounted for 13% of volume. because there’s no real tangible and predictable return I can
While there was an IPO as recently as April, when local earn. With the regulations on financial reporting and the
construction company Merex raised $1.5 million, there has been current trade participants within the market it’s too hard to
only one other listing since 2008. play as a pure equity investor.”
www.euromoney.com SPECIAL REPORT : MONGOLIA · July 2014 9Foreign direct investment
Foreign investors ponder
developing potential
Mongolia’s rich mineral resources have attracted considerable foreign
capital but the government also now hopes to attract investment in
its efforts to diversify the economy. The long-running dispute over the
Oyu Tolgoi mining project may be dampening interest, however
RESOURCES-RICH MONGOLIA has been attracting long-term of around $800 per head of population – remains one of
foreign investment on an ever-increasing scale since the 1990 highest proportions of any country. The country sits atop some
transition. But net inflows exploded following the financial of the largest untapped deposits of coal, copper, gold and other
crisis, reaching $4.45 billion in 2012 up from just $372.8 million minerals in the world, worth as much as $2 trillion, that have
in 2007, World Bank figures show. barely begun to be exploited. Oyu Tolgoi alone is forecast to
FDI dipped to $2.3 billion in 2013, largely due to the falling boost annual gold and copper production from 8 tons and
price of commodities and completion of phase one of Rio Tinto’s 644,000 tons respectively in 2013 to around 1.2 million tons
$6 billion Oyu Tolgoi gold and copper mining project in the and 32 tons when its $6.3 billion underground phase two
Gobi desert. The joint venture with the Mongolian government comes fully on stream.
was investing around $180 million a month throughout 2011 Mongolia is also an oil exporter and has commercially
and 2012 on everything from a copper concentrator plant and exploitable deposits of a further 80 of the 111 elements on the
power and water supplies to roads and an airport complete with periodic table, from molybdenum and platinum to tungsten and
terminal, as it raced to bring production on line. Work on the fluorspar as well as 25 of the 40 heavy elements.
deep-mine phase two has been halted by disagreement over But, unlike in many of its counterparts, Mongolia’s natural
financing arrangements which the government says can only be bounty is not a source of conflict and division. Mongolia’s
approved by parliament. robust free-market democracy means its policy of developing
State Bank says sweeping legislation restricting foreign its mineral wealth by the most transparent but commercially
investment in sectors of strategic national importance deterred efficient means, while hotly debated, is in the end consensual.
overseas investors and delayed projects. “Our economic Tapping the resources and expertise of global mining companies
analysis reveals that FDI has declined dramatically. By the first has proved beneficial not only to foreign investors, but also in
quarter of this year, FDI inflows were down by almost 60% helping fast-track economic and social development.
year on year,” says State Bank’s director of investment banking, Mongolia ranks 42nd out of 132 countries for opportunity in
Gombosuren Khandtsooj. Social Progress Imperative’s 2014 Social Progress Index, far ahead
“This was due not only to the completion of Oyu Tolgoi but to of China and most other developing countries in the region.
stagnation in the mining sector, especially the coal industry. The Mongolia scored even more highly for private property rights,
passage of the Strategic Entities Foreign Investment Law (Sefil) in freedom of movement, assembly/association and political rights,
May 2012 also pushed FDI out. Parliament responded by updating which are enshrined in law. SPI says Mongolia’s democracy
the legislation and approving the new Investment Law.” is exemplary, pointing to six free and fair parliamentary and
Government figures show coal exports slumped by more than presidential elections since the 1990 transition from one-party
40% to $1.12 billion last year as a slowdown in growth in China, state socialism. Mongolia also bested China on meeting basic
the destination for almost 90% of coal shipments, and disputes human needs and the fundamentals of well-being.
with foreign mining investors, took their toll.
Negotiations with international mining firms over rights to Opportunities ahead
develop the West Tsankhi section of the 6 billion ton Tavan Mongolia’s development is still in its early stages and
Tolgoi coal deposit have been stalled for two years. A $3 billion robust economic growth for the foreseeable future means
Hong Kong-Ulaanbaatar-London listing planned for late 2012 of opportunities for overseas investors in almost every area from
Erdenes Tavan Tolgoi, which is managing development of East transport infrastructure and housing to water security and
Tsankhi, has yet to materialize. air pollution. Surveys and technical assessments are already
under way ahead of the start in 2016 of construction work on
Untapped riches a $1.5 billion mass transit railway system serving the capital,
Even so 2013 FDI, at more than 22% of GDP – the equivalent Ulaanbaatar. The 16.6km line, of which the central 6.6km will
10 SPECIAL REPORT : MONGOLIA · July 2014 www.euromoney.comrun underground, is scheduled to be completed in 2020. Five
transit corridors are also being developed to link landlocked
Mongolia to its export markets including a new railway
network and a new highway connecting the northern border
to the south. There are also plans for both a gas pipeline and
an oil pipeline and a longer-term aspiration to form a bridge
connecting Europe with APEC nations.
The World Bank and IMF designated Mongolia a middle-
income country in 2011 and living standards have risen
dramatically in recent years thanks to per capita GDP growth
that is far outpacing that of regional rivals Indonesia and
Vietnam. Real income per capita more than tripled between
2005 and 2012 and is forecast to reach $7,500 in just four
Oyu Tolgoi mine
years’ time.
Increasing wealth has brought with it more disposable income
for more people and shopping malls have sprung up across force in November replacing the Sefil law of 2012 and the 1993
the capital to meet demand for everything from fashion and Foreign Investment Law. The new Investment Law frees up
cosmetics to watches and consumer electronics. Brand awareness foreign investors from having to secure government permission
is strong. AT Kearney’s 2013 Global Retail Development Index to invest in the mining, banking and telecommunications
ranks Mongolia seventh, up from ninth in 2012, just below industries. The waiver does not apply to foreign state-owned
the UAE and Turkey. The firm groups Mongolia among what it companies, which are still required to seek approval.
calls ‘little gems’ – markets that general retailers should strongly The legislation also introduced tax stabilization certificates
consider as the starting point for regional strategies. For luxury guaranteeing uniform tax treatment for between five and 22 years
retailers, small population, unique countries like Mongolia are covering corporate tax, VAT, mining royalties and import duties.
newfound hubs. In April, prime minister Norov Altankhuyag unveiled a ‘100-
According to Asia Pacific Investment Partners (APIP) more day action plan’ to promote foreign investment through major
than 40 global luxury brands have established presences in construction projects, reissuing mining exploration licences, tax
Ulaanbaatar in the past three-and-a-half years, from Louis incentives for foreign banks and cutting red tape. Projects include
Vuitton and Burberry to Tag Heuer and Bang & Olufsen. a road linking Mongolia to Russia and China, power plants and
APIP says that with consumer and retail spending set to boom two economic free zones. An additional $1 billion worth of
over the coming decade dozens of new brands are planning to concessions in sectors from mining to tourism will be offered.
enter the market, including more mid-range brands, which tend The country is also pinning hopes on its stock exchange and
to do well in Mongolia. High Street brands often perform poorly asset management, passing a new securities markets law that
in Asia relative to luxury brands. came into force in January and an investment fund law in the
second half of 2013.
Diversification efforts The government has also launched a ‘From Big Government
The recent volatility in investment flows has, however, to Smart Government’ drive, paving the way for sweeping
prompted the government to launch efforts to further diversify reforms including separating business from the state, making
the economy to reduce reliance on resources which account officials more accountable and simplified procedures for issuing
for almost a quarter of GDP. Agriculture makes up about licences and approvals.
16%, retail 15%, and transport, real estate and education 8%, John Grogan, chairman of the Mongolian-British Chamber of
6% and 4% respectively. Financial services comprise around Commerce, is not convinced the government’s efforts will achieve
5-6% of GDP. The public sector accounts for the remainder. much until the deadlock over Oyu Tolgoi is resolved. “The failure
The competitiveness of the non-mining sector, particularly to progress in settling the issues over Oyu Tolgoi affects others
manufacturing and tourism, is being boosted by the weaker thinking of investing in Mongolia. It’s definitely having a chilling
togrog, which depreciated by 15% last year. effect. There’s a lot less interest than there was a year or 18
“The positive impact of that move was that it helped absorb months ago. I’m not sure that we’ll see any appreciable pick-up in
external risks and promote exports, while reducing imports,” FDI while this dispute remains unresolved.
says Sandagdorj Bold, adviser to the governor of the central “Mining and the distribution of mining profits is a very
bank. “Last year we had a balance of payments deficit but in sensitive issue where Mongolia quite rightly wants to strike the
the first part of 2014 exports rose by 18% and imports fell by right balance and follow Norway’s example of mineral wealth
12%. Over the past two months the currency markets have development, rather than Nigeria’s.
recognized the progress we have made and the togrog has “It’s determined to get a good deal but now is the time
stabilized.” to strike that deal. One option I know is being discussed is
The government has implemented a number of key reforms convening a grand coalition in the Khural to approve the deal so
and initiatives aimed at removing uncertainty that it is hoped that all parties are signed up to it. That was the way the original
will kick-start renewed FDI flows. New legislation came into Oyu Tolgoi agreement was signed.”
www.euromoney.com SPECIAL REPORT : MONGOLIA · July 2014 11Sponsored chapter
“Golomt bank is set to work closely
with all stakeholders to generate
positive opportunities in the mining
sector and beyond”
Oyun-Erdene Lamjav, VP and director of Golomt bank’s Corporate Banking Division,
spoke to Euromoney about her bank’s efforts to help develop and diversify the economy
investor-friendly laws to encourage
foreign investment and to spur
infrastructure development in the
country. More importantly, the
government is encouraging the
development of other important
sectors of the economy that will
define Mongolia’s future.
What are the sectors to
which the government must
pay attention besides mining?
How can the economy
sustain its growth when
the mining sector doesn’t
perform well?
“The government
The government needs to support decided to support
Golomt bank headquarters, Ulaanbaatar its high-priority sectors, such agricultural sectors...
as agriculture, manufacturing, from Chinggis bond
Mongolia has been one of the resources, which are valued at hospitality, tourism and education. proceeds. This project
fastest-growing economies an estimated $3 trillion, has given Mongolia’s vast land resources
in the world in the past few our country a great advantage, (approximately 1,565,000 square
has great economic
years and the mining sector and the opportunity to grow kilometres) give us great potential significance in creating
has been the driving force and develop faster than most not only to be self-sufficient in jobs, enhancing the
behind this rapid growth. developing economies around the food commodities but also the capacity of domestic
As one of the top three world. That said, the Mongolian possibility of exporting agricultural manufacturers and
banks in Mongolia, how does economy is currently challenged products to our neighbours.
potentially increasing
Golomt bank evaluate this by declining global commodity Production of leather and
scenario, with the country’s prices, due to the slowdown in cashmere and wool industries, export revenues.
development dependent China, the main export destination which are at the beginning of Golomt bank has been
upon a single sector? for Mongolian minerals. Mongolia their development, are supported chosen to be the sole
Mongolia has been one of is a young market economy and by government programmes to provider of this loan.”
the most exciting investment the development of our mining enhance their capacity and allow
opportunities in Asia in the past industry has been challenging, both access to export markets. However,
few years. According to the in terms of capital and human to achieve these ambitious goals,
IMF, the Mongolian economy resources. However, in the past we need to introduce the latest
grew by 11.7% in 2013 and is year the government has taken technology and expertise, and
expected to grow 9.6% in 2014. specific steps to help the country develop these sectors in the most
Recent exploration of mineral move forward, introducing new efficient ways.
Head Office of Golomt bank, Great Chinggis Khaan’s Square 5, P.O.Box 22, Ulaanbaatar 15160, Mongolia
Web: www.golomtbank.com
Email: corporates@golomtbank.com
Tel: +976 7011-1646Sponsored chapter
What role does Golomt bank facilities with more than 20 banks
play in the development of to support export of equipment
these sectors? and technology from other
As our country’s development countries into Mongolia.
accelerates, Golomt bank will
continue to play a major role. We The Mongolian government
provide close to 25% of total bank issued $1.5 billion of Chinggis
loans in the Mongolian market and bonds to the international
our policy is to diversify our loan markets in 2012, and
portfolio across the economy’s major recently decided to finance
sectors. Our role is primarily as a agricultural sectors from
capital provider, but we also advise Chinggis bond proceeds.
our clients, which include some Your bank is chosen as the
of the largest mining, engineering sole commercial bank to
and agricultural companies and issue these loans. Could
manufacturers in Mongolia. you discuss your progress
One of our main goals and the importance of this
is to assist in developing a project in developing the Winter greenhouse opening ceremony
sustainable, green economy and country’s manufacturing
we have participated in clean sector?
energy projects. We have been In 2013, the government decided but also helping the developers to have financed seven hectares of
instrumental in introducing ISO to support agricultural sectors ensure success in their projects. land to implement greenhouse
standards in food production in including cashmere, wool, winter One example is our work in the technologies from the Netherlands
the first flour mill and at meat greenhouses, dairy farming and cashmere industry, one of the most and China.
processing factories. textiles from Chinggis bond valuable sectors of our economy,
To facilitate access to long- proceeds. This project has great which has received $68 million In the next five to 10 years,
term financing, we work with economic significance in creating of financing from Chinggis bond how do you see Mongolia’s
international institutions such as jobs, enhancing the capacity of proceeds. The funding has led to sustained economic growth?
the Asian Development Bank, Japan domestic manufacturers and a 60% rise in the manufacturing The Mongolian government will
International Cooperation Agency potentially increasing export capacity of the cashmere industry focus on developing and diversifying
and KfW and with export credit revenues. while creating over 700 new jobs. the local economy through
agencies and regional development Golomt bank has been chosen Another potential area for growth various investments in the coming
banks including the Eximbanks of to be the sole provider of this loan. is processing of wool, which is almost years, and is encouraging foreign
Taiwan, South Korea, Germany, The bank has conducted significant entirely exported as a raw material. investors to invest in the country.
Hungary, China, Czech Republic research in these sectors so that There is potential to produce wall Mongolia already ranks highly in
and Italy. We have trade finance we are not only acting as lender insulation eco-material from wool protecting investors (#22) and
using Japanese technology and our enforcing contracts (#30), according
bank has financed these companies to the World Bank/IFC Doing
with Chinggis bond proceeds. Business report 2014, which ranks
Another project under consideration 188 countries across the globe.
for development is production of Meanwhile, mining developments, as
wool yarn. well as railway development, logistic
Through Chinngis bond channels and power station projects
proceeds we also financed will continue to come on stream.
numerous other projects with high Our economic and political
growth potential, including dairy relationships with neighbours and
farms, bringing in milking cows and other countries are highly engaged.
equipment from France, Germany With over 60% of the population
and the Netherlands to increase below 35 years old, Mongolia
milk production and to guarantee also has great potential to build
the supply of fresh milk to the professional, well-educated human
citizens of Ulaanbaatar throughout capital. Golomt bank is set to work
the year. We have supported closely with all stakeholders to
Cashmere factory winter greenhouse projects to generate positive opportunities, in
provide fresh vegetables and we the mining sector and beyond.You can also read
