Bank of Mongolia

Mongolia: Ensuring long-run stability

Zoljargal Naidansuren
Governor Bank of Mongolia

Mongolia Investment Summit 2013 London, UK 16-18 April 2013

Real economic growth: Short-term slowdown, but still in double digits

Real economic growth
20%

No overheating pressure
Output gap
8.0%
17.5%
Blanchard Quah with 2 factors Blanchard Quah with 2 factors, forecast Blanchard Quah with 4 factors Band pass filter Hodrick Prescott filter Kalman Filter

2006-2008 Average: 9.2% 2010-2012 Average: 12.1%

6.0%
15%

4.0%
10.2% 10% 8.9% 6.4% 5% 12.3%

2.0% 0.0% -2.0%

0%

-4.0%
-1.3% -5% Agriculture Services -10% GDP Industry Net taxes on products

Gap is neutral

-6.0%

Forecasts
-8.0%

2011Q1

2006Q1

2006Q3

2007Q1

2007Q3

2008Q1

2008Q3

2009Q1

2009Q3

2010Q1

2010Q3

2011Q3

2012Q1

2012Q3

2013Q1

Source: NSO, Bank of Mongolia

2013Q3
2

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2012

2011

Terms of trade in 2012: Short-term deterioration

8.0 7.0 6.0 5.0 4.0 3.0 2.0 0.5 1.0 0.0
2007/01 05 09 2008/01 05 09 2009/01 05 09 2010/01 05 09 2011/01 05 09 2012/01 05 09 2013/01

Terms of trade (right scale) Export price index Import price index

2.5

100% 80%

YoY change in ToT YoY change in Xp YoY change in Ip

2.0
60%

2013/02: 1.432

1.5

40% 20%

1.0

0% -20% -40%

0.0

-60%
2001/01 09 05 2003/01 09 05 2005/01 09 05 2007/01 09 05 2009/01 09 05 2011/01 09 05 2013/01
Source: Bank of Mongolia
3

BOP and FX international reserves

Gross international reserves

2500 Capital and financial account 2000 1500 Current account Overall BOP

BOP surplus: 1.37 bln. $US

4,500 4,000 3,500

Imports coverage (RHS) Rule of thumb (3 months)

Reserves: 4 billion14 $US 13

12 11 10

1123
Million $US

3,000 2,500 2,000 1,500

1000 500 0 -500 -1000 -1500

I '09 II '09 III '09 IV '09 I '10 II '10 III '10 IV '10 I '11 II '11 III '11 IV '11 I '12 II '12 III '12 IV '12

7 6 5 4 1,000 500 0 3 2 1 0

-225

2007/01 05 09 2008/01 05 09 2009/01 05 09 2010/01 05 09 2011/01 05 09 2012/01 05 09 2013/01

Source: Bank of Mongolia

Months
4

Why slowdown in growth and BOP pressure in 2012?

Real GDP growth slowed down from 17.5% in 2011 to 12.3% in 2012 FDI declined by 17% Why? China effect uncertainty in regional and global investment environment Euro zone risks Legal environment uncertainty
Real GDP 2011 2012 Mongolia Vietnam India Kyrgyzstan Peru Malaysia 17.5% 5.9% 6.8% 5.7% 6.9% 5.1% 12.3% 5.1% 5.4% 1.0% 6.0% 4.4% FDI decline (%) -17% -15% -15% -46% -4% -24%

Global FDI inflows declined by 18% in 2012 (UNCTAC). Total Chinese outward investment in 2012 reached $79.7B, grew by 6.9%, but Chinese outward investment to developing and emerging countries in 2012 declined by 49.7% to $22.6B.
5

Source: UNCTAD, IMF, WB, Central banks statistics

Recent developments
Chinese leadership change is done Less uncertainty Amendment to the Strategic foreign investment law (Parliament floor) - Applicable only for foreign state-owned companies - Not applicable to private foreign companies - No benchmark level on investments for approval - Private & small-scale investments are expected to be encouraged Overall Macroeconomic Stability and Confidence - Monetary policy has been more coherent and proactive Mongolia needs a long-term, stable environment for investments Elbegdorj Tsakhia, President of Mongolia
Source: Official speech for Opening the Spring Session of the Parliament
,
6

More attractive and stable FDI environment

Investment Law (Investment Constitution) will be approved during this spring parliament session (Govt. draft).
- Investments in real sectors, rural vs. urban areas - Export-oriented and High-tech investments - Overall investment stability Investment attraction and stimulation - Legal rights, interests and obligations of investors

National Security Council Guidance:

- Only 1/3 of any (infrastructure and industrial) project investments to be financed by sovereign bond proceeds - Bond proceeds will attract more FDI (at least $3B) into Mongolia

Revision on the Securities Law

To make the law consistent with securities market development and its perspective (new terms vs. new regulations); To better regulate operations of securities market participants (professional investors and their requirements, regulations on IPOs, issuance of stocks, certificates, derivatives); To improve transparency and accountability of securities market operations (reporting obligations); To protect the rights of market participants, including investors (information equality); To improve effectiveness of public authorities supervision (new procedure on financial supervision and more predictability).
Securities market operations will meet international standards; New financial products, services and instruments will be developed; Overall market risks will be mitigated; Investment opportunities will significantly be increased.
,
8

FX net flows and reference exchange rate

600 500 400 300 200 FX net flows Togrog referance rate, RHS 1,600 1,550 1,500 1,450 1,400 1,350 1,300 1,250

Million USD

100 0 -100 -200 -300 -400 -500

Stability since the last crisis (Q4 2008 Q1 2009) Daily average exchange rate volatility: only 0.08% in 2012 BOM: Fully committed to flexible exchange rate Outlook: More FX net inflows and stable FX market
2008/01 03 05 07 09 11 2009/01 03 05 07 09 11 2010/01 03 05 07 09 11 2011/01 03 05 07 09 11 2012/01 03 05 07 09 11 2013/01

1,200 1,150 1,100

Source: Bank of Mongolia

1,000 4,000 5,000 6,000 7,000 8,000

2,000

3,000

Money supply

0 M2 (billion togrog) YoY change (%)

7,238

16%

2008-01 2008-03 2008-05 2008-07 2008-09 2008-11 2009-01 2009-03 2009-05 2009-07 2009-09 2009-11 2010-01 2010-03 2010-05 2010-07 2010-09 2010-11 2011-01 2011-03 2011-05 2011-07 2011-09 2011-11 2012-01 2012-03 2012-05 2012-07 2012-09 2012-11 2013-01
0% 10% 20% 30% 40% 50% 60% 70% 80%
Source: Bank of Mongolia
10

-10%

Banking sector: Assets and outstanding loans

Total loans outstanding (million togrog)
14000 Banking sector total assets (billion togrog) YoY change (%) 70%

8,000
12,215 60% 50%

NPL/Loan ratio (R.Scale) 9% 7,168 8%

12000

7,000 6,000

10000 39% 8000 30% 6000 20% 4000 10% 2000 0% -10%
2007-01 2007-07 2008-01 2008-07 2009-01 2009-07 2010-01 2010-07 2011-01 2011-07 2012-01 2012-07 2013-01

40%

7% 5,000 4,000 3,000 2,000 1,000 0

2006 2007 2008 2009 2010 2011 2012 2013

6% 5% 4% 3% 1.8% 2%

Source: Bank of Mongolia

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Monetary policy guideline - 2013

Long-run Longsustainable growth

Macroeconomic Stability

Inflation targets: 8% end-2013, 57% for 2014-2015 Flexible exchange rate Central bank independence, openness and transparency Financial sector soundness Risk-based supervision Legal environment on collateral assets

Macro Stability Financial Stability

Financial Stability

Monetary policy

Financial infrastructure and institutional development

Deposit insurance system Payments system Financial service accessibility and inclusiveness Securities Law

12

Inflation is under full control

35 30 25 20 15 10 9.4 5 0 -5 I II III IV I II III IV I II III IV I II III IV I 14.2 Other State regulated (administrative) Fuel Meat Foods (excl. meat)

Fiscal Stability Law

Supply Shock Elimination Program with the Govt.

Low inflation

Proactive & Transparent Monetary Policy

Better Policy Coordination

MPC decisions from 2013: Jan: Feb: Apr: Cut the policy interest rate by 0.75 pp Interest rate corridor Cut the policy interest rate by 1.00 pp
Source: NSO, Bank of Mongolia
13

2009

2010

2011

2012

2013

Headline and core inflation: Downward trend

60% 50% 40% 30% 20% 10% 0% -10%
0.5

CPI inflation Food inflation Non-food inflation

3.0

Oct 2011 - Mar 2012 (without PSP) 2.8

2012 Jan-Mar: 7.5% 2013 Jan-Mar: 3.6%

2.5

Oct 2012 - Mar 2013 (with PSP)

2.5 2.2

2.0

2011 Oct-Dec: 4.1% 2012 Oct-Dec: 1.6%

2.0

9.5% 9.4% 9.3%

1.5 1.3 1.0 1.8 0.8 1.0 0.6 0.0 OCT 0.2 NOV DEC JAN FEB MAR
14

-20%

0.8

0.8

2007/01 05 09 2008/01 05 09 2009/01 05 09 2010/01 05 09 2011/01 05 09 2012/01 05 09 2013/01

Source: Bank of Mongolia

Macroeconomic policy
Fiscal policy Countercyclical and disciplined Fiscal Stability Law: Budget rules and Stabilization fund Public investments to abolish supply shocks Targeted social welfare program Monetary policy Countercyclical and proactive Low and stable inflation (from double digit to 6% inflation) Macro stability and sustainable growth Financial stability Flexible exchange rate policy Supply shock elimination program with the Govt. Financial infrastructure and institutional development Legal environment
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Macroeconomic policy
Economic policy Overall economic competitiveness Essential infrastructure investments and development Export promotion: EXIM Industrial clusters: Value-added products Light industry: Ecological food products, cashmere, wool, leather etc. Financial market development: Pension fund reform, Wealth fund, Government bond market, Mortgage financing scheme, Legal environment Increase nationwide savings and investments

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BANK OF MONGOLIA

Thank you for your kind attention

BANK OF MONGOLIA Baga toiruu 3, 15160 Ulaanbaatar 46, Mongolia www.mongolbank.mn