Special report: Mongolia: A stable base for future growth

David Wigan
Published on:

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 played a key role in maintaining macroeconomic and financial stability. Although its primary objective is similar to that of other central banks, it promotes balanced economic growth by ensuring financial stability thanks to regulatory changes under the new Basel framework, prudential policies and risk-based supervision.

The monetary policy committee of the central bank consists of 14 members, comprising seven bank officials and seven independent representatives from academia, the public sector and private institutions. In the past 18 months, the committee has faced challenges caused by global and regional economic slowdown, weaker growth, falling commodity prices, continuous deterioration of the terms of trade, a decline in capital inflows and pressure on the balance of payments.

Responding to challenges

The bank has responded well to the challenges it has faced with conventional and unconventional monetary policy measures to control inflation, protect the real incomes of low- and middle-income households, safeguard the financial sector, support the banking sector through countercyclical policies that aim to prevent a potential credit crunch, stabilize monetary and credit growth, and increase middle-class savings through a sustainable mortgage financing programme.

As a result, the share of supply-driven and cost-push inflationary pressure in consumer price inflation has significantly declined, the increase in net domestic assets has offset the decline in net foreign assets, and the economy expanded by 11.7% in real terms in 2013, producing double-digit real growth for the third consecutive year. Indeed, over 70% of the real GDP growth in 2013 was contributed by unconventional monetary injections in the real sector by the BOM within the framework of its economic stabilization measures.

Due to balance of payments pressure, the nominal effective exchange rate of the Mongolian currency, the tugrug, depreciated by 15.5% and in real terms by 7.2% last year. Although the depreciation was typical of exchange rate trends in emerging markets and commodity-driven economies, the daily average volatility of the tugrug was just 0.23%, much less than other currencies. The Bank of Mongolia has been fully committed to its flexible exchange rate policy and the positive impact of that flexibility was absorption of external shocks and necessary adjustments and normalization on foreign trade as well as the current account. Since the beginning of 2014, exports have been growing slightly while imports have been declining. We expect further decreases in current account deficits and, once exports are significantly increased, the trade balance is expected to have a sustainable surplus.

One of the central bank’s roles is to ensure the stability of the financial system. The overall banking sector has been sound and stable. The systemic average capital adequacy ratio is almost 17% at present, which is five percentage points higher than the minimum requirement of the BOM. The liquidity ratio is around 40% against a minimum requirement of 25% and the non-performing loan ratio has been stable at a moderate level of 5%.

Mongolia is shifting from a mineral-dependent, consumption-based economy to more of a savings-based economy through macroeconomic policy reforms, which intend to move the economy away from its reliance on commodities. The mining sector is an intermediate industry, but not the ultimate destiny of the Mongolian economy. Mongolia aims to maintain more sustainable economic growth and diversify its economy by developing more competitive, technologically advanced and sustainable non-mineral sectors, including agriculture.

To encourage a savings-based economy, the central bank has launched a new and sustainable mortgage financing programme to promote middle-class savings. Over the past 20 years, the mortgage-to-GDP ratio never exceeded 6%, but in the past year it has grown to 14%, and we aim for it to reach at least 30% to 40%. By encouraging people to save more, we believe that they will consume in a more disciplined manner, rather than spending money on imported goods and unnecessary consumption.

The measures have also encouraged banks to move away from short-term borrowing and towards long-term financing and we expect further development of a local currency securities market thanks to securitization of mortgage loan portfolios by the issuance of mortgage-backed securities (MBS) by the Mongolian Mortgage Corporation. The MBS will be traded in both the primary and secondary markets, and will be more attractive to foreign investors than local currency-denominated government bills and bonds.

Thanks to high and sustainable economic growth, medium and long term policy commitment, greater opportunities for business and investments, we expect more economic prosperity in Mongolia.