Mongolia is living through interesting times. August alone featured, in this order: the revelation of a vast and unexpected deficit, the collapse of the currency, a 4.5 percentage point hike in interest rates in a single hit, a sovereign downgrade, and the subsequent downgrade of almost the entire national banking sector.
Banks and foreign investors alike are trying to make sense of a swiftly drawn new environment.
It hasn’t been the easiest of starts for the new Mongolian People’s Party government, elected in June, and its finance minister, Choijilsuren Battogtokh, who on August 9 roiled markets by talking about “a deep state of economic crisis”.
He disclosed that the government’s fiscal deficit was likely to be 21.1% of GDP, rather than the 3.4% that had previously been expected.
Thanks to the end of the commodities boom, the currency had already been falling steadily, and after hitting a new low following 23 consecutive days of weakening – to half its 2008 level – Mongolia implemented one of the biggest one-day rate hikes ever seen, from 10.5 to 15%.
Downgrades to B-/B3 followed, with Moody’s blaming “the sharp deterioration in fiscal metrics, which Moody’s does not expect will reverse materially in the next few years,” compounded by weak growth and low foreign exchange buffers.
By August 29 the fallout had hit the banks, with Moody’s taking negative rating actions on eight Mongolian institutions, including Khan Bank, XacBank, Trade and Development Bank of Mongolia, Golomt Bank and State Bank, all of which were downgraded from B2 to B3.
Moody’s analyst Hyun Hee Park said the decision was “based on the consideration that the creditworthiness of the Mongolian banking system is highly correlated to that of the sovereign”.
As is common when a declining sovereign rating pulls banks down with it, some banks are crying foul – though crying rather quietly in view of a new government and uncertain national picture. Two senior executives at Mongolian institutions spoke to Euromoney on condition that they were not named, and neither is happy.
“Our downgrade is a little unfortunate,” says one. “Some banks have a significant portion of their assets exposed to the sovereign, but the situation is different at each one.”
Another adds: “I have been having calls with investors and lenders two or three times a day for the last two weeks trying to explain honestly what’s happened in the market and how it’s going to impact our financials.” Some feel that their shareholder base, particularly if it involves foreign institutions, should be considered.
Both executives acknowledge that credit risk is climbing in Mongolia – NPLs for the sector as a whole stand at around 8.6%, though the picture varies considerably from one bank to another – but also argue that with the central bank now offering 15% on deposits, it is much easier for banks to improve their return simply by putting money there.
“The main movement has been an increase in savings across all banks following an increase in interest rates by the central bank,” says Lee Cashell, CEO of Asia Pacific Investment Partners, Mongolia’s largest real estate firm. “Cash accumulating in the economy is positive for growth.”
Nevertheless, given the wide variety of NPL numbers and leverage in Mongolian banking, some casualties are likely. Further ahead, the vital Oyu Tolgoi mining project is set to proceed to its second phase, which should lead to the addition of $3 billion of exports a year into an $11 billion economy.
“The long-term perspective for the country is very bright,” says one executive. But sometimes the long term can seem very far away.