Mongolia - 6-Financial Sector Mongolia - Financial Sector
Capital Markets and Portfolio Investment
Mongolia is developing the experience and expertise needed to sustain portfolio investments and active capital markets. The GOM has reported that it wants to establish vibrant capital markets, and seeks to use the state-owned Mongolian Stock Exchange as the primary venue for generating capital and portfolio investments. To achieve this goal, Parliament passed the Revised Securities Market Law (RSML), which most investors believe creates a sufficient regulatory apparatus for these activities. However, most foreign investors shy away from investing in the Mongolian Stock Exchange because it lacks the regulatory capacity, accountability, transparency, and liquidity to effect proper capital formation and portfolio investments. GOM imposes few restrictions on the flow of capital into and out of any of its markets.
Money and Banking System
Of the 13 commercial banks currently operating in Mongolia, there are four large banks that are majority owned by both Mongolian and foreign investors. These banks – Golomt, Khas, Trade and Development Bank, and Khan Bank – collectively hold approximately 80 percent of all banking assets or about USD $8 billion as of January 2017. The banks operate branches throughout the country and are regularly audited by one of the big four international accounting firms. Their rates of non-performing loans averaged 9.3 percent in February 2017, a slight rise from February 2016’s 8.8 percent. They generally follow international standards for prudent capital reserve requirements, have conservative lending policies, up-to-date banking technology, seem generally well-managed, and are open to foreigners opening bank accounts under the same terms as Mongolian nationals. In addition, foreign investors, including the International Finance Corporation (IFC) and Goldman Sachs, have equity stakes in several of these four banks. While there are no legal prohibitions, the GOM generally discourages majority foreign control of any local commercial bank or foreign establishment of local branch operations. Mongolia’s commercial banks also face the challenge of maintaining correspondent relations with U.S.-based banks. Local bankers report that correspondent banks are terminating their Mongolian relationships because the revenue generated by the relatively small number of Mongolian transactions is not worth the administrative costs of providing correspondent relationships.
In 2015, to consolidate weaker, less capitalized banks into larger, better funded institutions, the BOM, the central bank, ordered all commercial banks to increase their minimum paid-in-capital from the current minimum of USD $8 million to USD $25 million by December 2017. While the BOM and Mongolia’s financial system have endured insolvencies over time, each failed bank had shown clear signs of distress before the BOM moved to safeguard depositors and the banking system. As with many issues in Mongolia, the problem is not lack of laws or procedures for dealing with troubled banks, but rather, some lack of capacity and an apparent reluctance on the part of BOM banking overseers to enforce regulations related to capital reserve requirements, bank management and corporate governance, and non-performing loans.
Pursuant to the IMF-led program, international auditors will conduct an in-depth asset quality review of Mongolia’s commercial banking sector to be completed in 2018. International accounting firms will conduct comprehensive financial audits on Mongolia’s commercial banks. The audits, a condition for Mongolia’s receiving support under an IMF extended fund facility, will stress test all of Mongolia’s 13 commercial banks. Publicly the BOM and the IMF have stated that the banking assessments are unlikely to measurably affect the commercial banking sector but may result in some consolidation among the smaller, less-well capitalized banks.
Foreign Exchange and Remittances
Foreign Exchange
The Mongolian government employs a liberal regime for controlling foreign exchange. Foreign and domestic businesses report no problems converting or transferring investment funds, profits and revenues, loan repayments, or lease payments into whatever currency they wish aside from occasional, market-driven shortages of foreign reserves. Mongolia’s national currency, the tugrik (denoted as MNT), is fully convertible into a wide array of international currencies with its relative value fluctuating freely (mostly falling in recent years against the USD) in response to economic trends. Mongolia’s central bank, the Bank of Mongolia (BOM), regularly intervenes in currency markets to limit MNT volatility.
The 2009 Currency Law of Mongolia requires all domestic transactions be conducted in MNT unless expressly excepted by the BOM. The central bank’s regulation prohibits the listing in Mongolia of wholesale or retail prices in any fashion (including as an internal accounting practice) that effectively denominates or otherwise indexes those prices to currencies other than the MNT. Given the 50 percent devaluation of the MNT over the past few years, this BOM edict has adversely impacted businesses that pay for imported goods in USD or other hard currency and sell them in MNT. Businesses caught adjusting MNT prices in exact or nearly exact proportion to currency fluctuations can face stiff penalties up to the full market value of the involved goods.
BOM regulation compels lenders to issue written warnings to borrowers seeking dollar-denominated loans that the steady depreciation of the MNT in recent years has translated to very significant increases in the real costs of servicing dollar loans. Hedging forward mechanisms available elsewhere to mitigate exchange risk for many national currencies are generally unavailable in Mongolia given the small size of the market. Letters of credit remain difficult to obtain, and the GOM sometimes resorts to paying for goods and services with promissory notes that cannot be directly exchanged for other currencies.
Remittance Policies
Businesses report no delays in remitting investment returns or receiving in-bound funds. Most transfers are completed within a few days to a week. However, in response to occasional currency shortages, most often of U.S. dollars, commercial banks can temporally limit the amounts they exchange daily, transmit abroad, or allow to be withdrawn. Remittances sent abroad are subject to a ten percent withholding tax to cover any potential profit, income, or value-added tax liabilities.
Sovereign Wealth Funds
In 2008, Parliament established the Human Development Fund (HDF), ostensibly Mongolia’s first sovereign wealth fund (SWF); however, it does not function as a traditional SWF. The HDF is to be funded from the profits, taxes, and royalties generated by the mining industry as a whole. Rather than husband these revenues for later days, the HDF, when it has funds from mining activities, distributes them to the citizens of Mongolia in the form of social benefits: payments for pension and health insurance premiums; mortgage support and other loan guarantees; and payments for health and education services. The GOM has no plans to use the HDF as a conduit for Mongolian investments abroad or for investment into Mongolia. In that sense, there is conflict between the HDF and U.S. investors in Mongolia.
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