BANK OF MONGOLIA

New macro economic balance A shift from consumption to saving

MUNKHBAYAR Tedevsuren

Head of the Coordination and Analytic Unit

under Financial Stability Council

Advisor to the Governor

2015.11.11

Ulaanbaatar

I. Previously in this Forum Nov 27, 2015: Macro economic out look, se lect ion of the pol icy

External environment: In deficit, due to reduced

funding

-207 -1,048 -1,451 -1,608 -1,120 -334

-7%

-22%

-25% -26%

-20%

-6%

-30%

-25%

-20%

-15%

-10%

-5%

0%

-1,800

-1,600

-1,400

-1,200

-1,000

-800

-600

-400

-200

0

2010 H1 2011 H1 2012 H1 2013 H1 2014 H1 2015 H1

Mill

ion

US

D

Deficit of the Current Balance (first half)

Current Account Balance (CAB), Left CAB/GDP ratio, Right

621

2,402 2,486

1,244

363 44

21%

50%

43%

20%

7%

1% 0%

10%

20%

30%

40%

50%

60%

0

500

1,000

1,500

2,000

2,500

3,000

2010 H1 2011 H1 2012 H1 2013 H1 2014 H1 2015 H1M

illio

n U

SD

Foreign Direct Investment (first half)

FDI, right FDI/GDP

Government budget: No change in fiscal policy

42

-391

-1,076

-250

-886 -913

-1,200

-1,000

-800

-600

-400

-200

0

200

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2010 2011 2012 2013 2014 2015 (1-10)

Fiscal performance, Actual (yearly basis)

Balance Income Expense

18.7

13.1

7

9

11

13

15

17

19

21

23

2009

01 05 09

2010

01 05 09

2011

01 05 09

2012

01 05 09

2013

01 05 09

2014

01 05 09

2015

01 05 09

Interest rate

Loan rate

Savings rate

Policy rate

Slide #4:

Under current circumstance, where there is no positive shift in fiscal policy, continued current account deficit and lagging foreign direct investment, central bank has no choice but tighten monetary policy.

II. Current situation Chal lenges and oppor tuni t ies of the current macro economic pol icy

-233

1 705

-1 867

-471

125

-3,000

-2,000

-1,000

0

1,000

2,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (1-8 сар)

57

-228

-710

-229-379

-1747

-2354-2082

538705

-3000

-2500

-2000

-1500

-1000

-500

0

500

1000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (1-8

сар)

6%9%

15%12%

23%

44%

36%

17%

2% 1% 0%

10%

20%

30%

40%

50%

0

1000

2000

3000

4000

5000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (1-6 сард)

ГШХО, цэвэр дүнгээр (Зүүн тэнхлэгт) ГШХО/ДНБ (%)

The trade balance is in the positive zone

Source: Mongolbank, General Customs Office, National Statistical Office

Trade balance (Million USD)

-334

-6.1%

-30%

-20%

-10%

0%

10%

20%

-4 000

-3 000

-2 000

-1 000

0

1 000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (1-

6 сард)

Төлбөрийн урсгал тэнцэл Урсгал тэнцэл/ДНБ, Баруун тэнхлэгт

Balance of Payment (Million USD)

Current account balance (Million USD) Foreign Direct Investment (Million USD)

Since 1990, over the past 25 years, only in few years, namely 1994-1995, 2006, 2014-2015

our trade balance was in surplus.

FDI, Net basis (Left) FDI/GDP, %

Balance of Payment Current Balance / GDP (Right)

Stable currency exchange rate

17%

8%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2010 2011 2012 2013 2014 2015M9

Coal export of Australia and Mongolia, Change of exchange rate (nominal)

Australia: Change in nominal exchange rate /right/

Mongolia: Change in nominal exchange rate /right/

Australia: Coal export as a percentage of total export

Mongolia, Coal export as a percentage of total export

40%

27%

26%

19%

18%

17%

16%

13%

13%

12%

11%

11%

10%

8%

6%

0% 10% 20% 30% 40%

Russia

Brazil

Columbia

Algeria

Nigeria

Australia

Mexico

Canada

South Africa

Chile

Indonesia

Argentina

Peru

Kazakhstan

Mongolia

Change in exchange rate Against US Dollar /as of Oct 2015/

Inflation is at target level: 4.9% (Sep 2015)

Source: National Statistical Office, Mongolbank

Imported

goods

Other domestic

goods

Government regulated goods

and services

Goods and services

included in price

stabilization program

Source: Mongolbank

39.3%

20%

25%

30%

35%

40%

45%

1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7

2012 2013 2014 2015

ТТГЧ ТТГЧ-ын зохистой харьцаа

Stable funding ratio Liquidity ratio Capital Adequacy

8%

10%

12%

14%

16%

18%

20%

1 7 1 7 1 7 1 7

2012 2013 2014 2015

1-р зэрэглэлийн өөрийн хөрөнгийн

хүрэлцээ

Өөрийн хөрөнгийн хүрэлцээ

16.7

12.2

Stability of the Banking industry is maintained

First tier capital adequacy

Overall capital adequacy Ratio Regulatory requirement

BUT: Growth of assets and liabilities has been decelerating …

Эх сурвалж: Монголбанк

-10%

10%

30%

50%

70%

90%

1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7

2 012 2 013 2 014 2 015

Зээлийн өсөлт Активын өсөлт

-10%

10%

30%

50%

70%

90%

1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7

2 012 2 013 2 014 2 015

Харилцах, хадгаламжийн өсөлт Пассивын өсөлтLoan growth Asset growth Current & Saving accounts Total Liabilities

Non-performing loan is on the rise

Эх сурвалж: Монголбанк

7.3%

5.4%

0%

3%

6%

9%

12%

15%

18%

21%

2008

2009

2010

2011

2012

2013

2014

2015

Чанаргүй зээл / Нийт зээл

Татан буугдсан 3 банкийг хасч тооцсоноор чанаргүй

зээл, нийт зээлийн харьцаа

NPL in Foreign Currency 10.8%

NPL in Local Currency 6.2%

0%

5%

10%

15%

20%

25%

I II III IV I II III IV I II III IV I II

2012 2013 2014 2015

Бөөний/жижиглэн худалдаа Үл хөдлөх хөрөнгийн ү/а

Барилга Уул уурхай, олборлолт

Боловсруулах үйлдвэрлэл Бусад

Нийт зээл

Non-performing loans

(NPL) / Total loan

Non-performing loans

of excluding 3 banks

went bankrupt / Total

loan

Retail sales

Construction

Manufacturing

Total loan

Real Estate

Mining

Other

Fiscal deficit remains …

Performance of income and expenditures

Эх сурвалж: Сангийн яам

Short fall Amount (in

billion) Percent

1. Budget income shortfall 679

1.1 Income tax 72 11%

1.2 Minerals tax 30 4%

1.3 Privatization income 155 23%

1.4 Customs tax on imported goods 46 7%

1.5 VAT on imported goods 235 35%

2. Budget expenditure shortfall 1 226

2.1 Current expenses 335 27%

2.2 Property related expenses

2.2.1 Internal funding 792 65%

2.2.2 External funding 79 6%

42.9% of overall income shortfall was due to

import shrinkage.

Income

Side

Expendit

ure

III. Next step: Aim for the “New balance” 4 pol ic ies: Budget , Structure, Currency Exchange, Monetary

• Cycle of the Mineral price

– Started due to the urbanization and industrialization of

major economies and

– Trend continued for a long term

– Grew, reached the highest point and went down

• Current cycle

– Closely tied to economy growth of the BRIC countries,

especially China

– Topped out during 2011

1894-

1932

1932-

1971

1971-

1999

1999-

Peak year 1917 1951 1973 2011

Price change in rising cycle

in %

50.2% 72.0% 38.9% 81.3%

Price change in falling cycle

in %

-54.6% -43.3% -52.5% -

Number of years continued 38 39 28 -

Years grew 23 19 2 12

Years fell 15 20 26 4

Source: Erten & Ocampo (2012): Super-cycles of commodity prices since the mid-

nineteenth century

The mining super cycle is over

0.00

0.40

0.80

1.20

1.60

2.00

2001

3 12 9 6

2004

3 12 9 6

2007

3 12 9 6

2010

3 12 9 6

2013

3 12 9 6

Export price index of Mongolia from 2001 till 2015

Price index for total export Copper price index Coal price index

•Total export grew 9 times ↑

•Copper price went up 6 times ↑

• Total Export 2.1 ↓

• Copper = 1.5 times ↓

• Coal = 3.4 times ↓

What is the “New balance” ?

External balance – Payment balance without deficit

– Financing of the current balance is stable and less costly

Internal balance – Low and steady inflation

– A realistic and consolidated budget, without pressure to increase domestic debt

Economy during the new balance era – Sound growth (5%-7%)

– Real income per capita is steadily increasing

– Foreign and domestic savings finances the investments

– Төрөлжсөн эдийн засагтай, уул уурхайн бус экспортын хувь өссөн

– With diversified economy, portion of non-mining industries continued to grow

– Based on the competent private sector

- Restructuring

- Diversification of economy and Exports

- Increased investment

- Targeted/narrowed welfare

- Current account>0%

- Trade Balance: +10%

- Balance of services: <-10%

- Foreign debt: 10% FDI: 15%-20%

IN SURPLUS

BALANCED AND STABLE

LOW AND STEADY

- In mid term: 5%-7%

- Supply side=0%

- Demand side

Domestic factors=3%-4%

External factors=2%-3%

IN ALL LEVEL

- Ioncome in foreign currency

Government: Tax

Mongolbank: Currency reserve

- Domestic income:

Government: Funds

Private sector: Mortgage / Export

STABLE REAL INCOME

SUSTAINABLE GROWTH / 5%-7% /

New Balance

NEW BALANCE

In a nutshell New balance is …

- Balance: -7.9% /incl. MSE/

- Same expense with less income

- Domestic debt pressured private sector

- High pressure debt servicing

- Current account: -$359

- Trade Balance: +$950

- Balance of Services: -$568

- FDI < 1%, Foreign Debt

ӨНДӨР АЛДАГДАЛТАЙ ХЭВЭЭР

BALANCED

REDUCED

- 4.9% as of Sep 2015

- Supply side inflation =0%

-Demand side inflation =4.9%

Domestic factors =2.0%

External factors =2.9%

HOUSEHOLDS ONLY

- Income in foreign currency:

Government: Foreign debt

Central Bank: Reduced

- Domestic income:

Government: Domestic debt’s risen

Private sector: Mortgage program is

started

REAL INCOME IS MAINTAINED

Low around 3% , but real

CURRENT SITUATION

Улсын

төсөв

Төлбөрийн

тэнцэл

Инфляци

Хуримтлал

- Тэнцэл: +3.1% < -6.9%

- Хавтгайрсан халамж, нийгмийн бодлого

- Хөгжлийн банк

- Данхар төр, төрийн оролцоо

- Урсгал тэнцэл: +$372 > -$3,362

- Худалдааны алдагдал: +$372 > -$1,553

- Үйлчилгээний тэнцэл: +67 > -$1,100

- ГШХО-аас шууд: +$191 > $4,408

МӨЧЛӨГ ДАГАСАН АЛДАГДАЛ

ӨНДӨР АЛДАГДАЛ

ӨНДӨР ИНФЛЯЦИ

- 12.6% дундаж инфляци

- Нийлүүлэлтийн гаралтай=4.3%

- Эрэлтийн гаралтай=8.3%

Дотоод хүчин зүйл=6.0%

Гадаад хүчин зүйл=2.3%

ЗӨВХӨН ВАЛЮТЫН НӨӨЦ

- Гадаад валютын орлогоо

Засгийн газар: Эхэлсэн/Зарцуулсан

Монголбанк: Нэмэгдүүлсэн

-Дотоодын орлогоо

Засгийн газар: Урсгал зардал/халамж

Хувийн хэвшил: Хэрэглээнд

БОДИТ ОРЛОГО БУУРСАН

ДУНДАЖ=8.9% [-1.3% +17.3%]

Balance

BALANCE DURING SUPER CYCLE

MONETARY POLICY:

- Traditional only

- Cycle dependent

- Hinders demand

FISCAL POLICY:

- Depends on the cycle

- Expends beyond budget

- Right balance of current expense and

investment is not maintained

CONVENTIONAL

MONETARY POLICY:

To curb demand side

inflation

NON-CONVENTIONAL

MONETARY POLICY:

To eliminate supply side

inflation, Mortgage

program

EXCHANGE RATE

POLICY: To absorb

external shocks with

flexible currency polciy

CURRENCY EXCHANGE

POLICY:

- Drastic devaluation

- Low currency reserve

ЭЗ-ийн өсөлт

Ажил эрхлэлт

Budget

Payment

balance

Inflation

Saving

Economic Growth

Employment

- Balance: +3.1% => -6.9%

- Faulty welfare policy

- Development bank

- Government involvement

- Current account: +$372 => -$3,362

- Trade deficit: +$372 => -$1,553

- Balance of services: +67 => -$1,100

-FDI: +$191 => +$4,408

IN DEFICIT

IN DEFICIT

HIGH

- Average inflation 9.9%

- Supply side inflation =5.4%

- Demand side inflation =4.5%

Domestic factors =2.3%

External factors =2.2%

ONLY CURRENCY RESERVE

- Income in foreign currency

Government: Gathered/Spent

Central Bank: Increased

-Domestic income

Goverment: Current expense/Welfare

Private sector: Consumption

REAL INCOME IS INCREASED [Instable]

HIGH=8.9% [-1.3% +17.3%]

Balance

4

policies

By way of fiscal policy

• Follow 3 budget principles:

– Not to increase the domestic debt

– Plan realistically

– Plan united/consolidated

• Policy measures

– Keep the budgetary expenditures at the same level of 2015

– Consistently revise the composition of the income and expenses

• To implement following decrees passed by parliament:

– Decree No. 41 of 2015:

– Comprehensive Macro Adjustment Plan (CMAP)

[1] A proper state budget (Consolidated, realistic, and balanced)

[2] An additional source of the foreign currency and increase of the foreign assets

– Decree No. 34 of 2014:

[1] An improvement for sustainable and proper budget

[2] Integrated approach for sourcing of a funding in foreign currency and increase FDI

[3] Improving of financial stability and risk reduction

[4] Financial industry restructuring to inhibit saving

– Decree No. 69 of 2014

Enforcing an effective implementation of government foreign debt servicing plan

By way of the restructuring policy

• Diversification of the economy overall: – Support investments in non-mining sectors, improve their

competitiveness, to make their export to make up to 30% of total export

– Focus on agriculture, travel industries

– Invest in R&Ds of the key industries

• Revise current social insurance framework

• Create saving and investment mechanism domestically

• Improve the management of the state owned assets

• Continue consistent supply chain of the goods

• Introduce export insurance and other forms of insurance

By way of the maintaining the balanced external

environment

• To start or resume mega projects in mining and other sectors

• Increase the foreign direct investment from 1% of the GDP to 15-

20%, and diversify the structure.

• Improve the government debt management to keep the stability:

– Improve the sovereign credit rating

– Increase the funding of the foreign currency

• Make necessary efforts to intensify research to increase export in

relation to Economic Cooperation Agreement signed with

Government of Japan

By way of the monetary policy

• By balancing the macro economy keep the inflation within 5-7% range from 2016 to 2018

• By balancing the macro economy enable GDP growth of 6-9%, 7.5% in average

• Keep the financial stability, support the development of the financial

markets, and for the purpose of preventing the risk to get

accumulated in the banking or other financial industries, nourish the

secondary market of bad assets and revise relevant regulations.

Thank you for your

attention!