Source: APM Page 1

APM visits Mongolia

Mongolia Visit - The Country of Chinggis Khaan

Christoph Eckart, fund manager of APM´s two microfinance funds, travelled to

Mongolia in September 2014 to observe the microfinance sector and to meet with

investee microfinance institutions and their micro clients. Below is one of

Christoph’s reports on his visit to the region of Ulaanbaatar, the capital of

Mongolia and Darkhan in the North of the Central Asian country.

September 2014

Portfolio Manager Microfinance

Mag. Christoph Eckart

Absolute Portfolio Management GmbH (APM)

Absolute Portfolio Management GmbH | Schottenfeldgasse 20 | 1070 Vienna | Phone: +43 1 533 59 76 | www.absolutepm.at | info@absolutepm.at

With an area of 1,6mil square kilometres Mongolia ranks as high as number 19 by country size, but with a population of only 3mil it

also ranks number 140 by population – on average there are 2 Mongolians on one square kilometre of Mongolian land. To put this

into relation, there are about 100 Austrians on one square kilometre in Austria. The main exports of this Central Asian economy

are copper, coal, crude oil, cashmere, iron ore and gold, which are mainly bought by China, the UK and Russia. Its mineral wealth

and geographical location make Mongolia an important partner for China and Russia, which was underlined by the state visits of Xi

Jinping and Vladimir Putin in August and September respectively. The GDP of Mongolia grew by 12% in 2013 as well as in 2012

and by a staggering 18% in 2011. So far in 2014, GDP slowed to below double digit numbers. This is mainly due to sluggish devel-

opments of mining projects, which delay foreign direct investment and consequently also weigh on the currency. An example

would be the uncertainties surrounding the further exploration of the Oyu Tolgoi gold and copper mine in the Gobi desert. From a

demographic perspective GDP growth should remain substantial as the average age of Mongolians is as young as 27 years.

The two Vision Microfinance Funds (“Dual Return Fund – Vision Microfinance” and

“Dual Return Fund – Vision Microfinance Local Currency”) managed by Absolute

Portfolio Management offer investors access to impact investments such as

microfinance.

The funds have a double bottom line strategy: On one hand maximizing its risk return

profile for the benefit of the investor, and on the other hand maximizing the social

outreach in breadth and depth to micro, small and medium enterprises in emerging and

least developed economies.

Through an investment in the Vision Microfinance Funds, loans to carefully selected

microfinance institutions (MFIs) are financed, the MFI‘s in turn lend in the form of small

credits (microcredits) to poor but economically active people locally. To date over 338

m USD have been handed out in the form of 353 promissory notes to 157 different

MFIs in 41 countries.

This meaningful and sustainable help for self-help permits families access to food,

medical care and education for their children. Until today the lives of approximately one

million people have been transformed with the help of the Vision Microfinance Funds.

Source: APM Page 2

From the 15th to the 23rd of September 2014 Absolute Portfolio Management (APM) and

Symbiotics visited existing investee MFIs and new investment opportunities in Mongolia in

the course of the annual country due diligence. Symbiotics was represented by the regional

manager for Asia, APM by the fund manager Christoph Eckart. Overall, a due diligence was

performed on 9 different institutions ranging from full-fledged banks to small non-bank finan-

cial institutions (NBFIs) with a balance sheet of less than 3mil USD.

The banking and microfinance sector in Mongolia is supervised by the Central Bank of Mon-

golia and the institutions report to the local credit bureau. Currently financial institutions have

to pay 20% on foreign interest payments, but this tax will be reduced to 10% in the coming

year 2015, which will facilitate the cooperation between local financial institutions and for-

eign lenders. An part of the Mongolian Microfinance and Banking institutions balance sheet

is dedicated to housing loans, which are subsidized by the Mongolian Government at a rate

of 8% in Mongolian Togrog. This is a result of the harsh climatic conditions prevailing during

the winter months, where temperatures occasionally reach -40 °C, in combination with many

Mongolians still living in yurts or ‘gers’ as this form of tents is called locally. People heat

As of September 2014 Transcapital’s total assets stand at 7mil USD with a gross loan portfolio of 6mil USD and lending mostly to

women with an average loan balance per client of 2280 USD in the state’s capital of Ulan Bator. Since its creation in 2001

Transcapital has operated solely in Ulan Bator until it recently opened a branch in the villages of Erdenet and Darkhan. To date

the organization has expanded its operation with 11 branches and further branch openings in rural areas are planned for the fu-

ture. In the past 10 years, the organization has been working efficiently and performed improvements in its operations and con-

tinually developed staff skills. On Wednesday the 17th of September the NBFI Transcapital was visited at its headquarters in

Ulaanbaatar and meetings were held with the CEO of the NBFI, the Business Development Division, the CCO, the CFO, internal

Audit and the MIS Manager. During this due diligence the countryside branch in Darkhan was visited on Monday the 22nd of Sep-

tember.

Microfinance Institution - Transcapital

Absolute Portfolio Management GmbH | Schottenfeldgasse 20 | 1070 Vienna | Phone: +43 1 533 59 76 | www.absolutepm.at | info@absolutepm.at

APM visits Mongolia

Source: APM Page 3

With around 70.000 citizens Darkhan is the third-largest city in Mongolia and was found-

ed by the former Soviet Union in 1961 to process copper and iron ore, which is mined in

the surrounding area. The nearby Erdenet Mine is currently the 4th largest copper mine

in the world. Darkhan consists of industrialized buildings a.k.a. plattenbau with many ger

areas throughout the city. The picture below shows a typical Darkhan scenery with a ger

in the front. Close to the busy main street, which connects Darkhan with Ulan Bator and

eventually leads to Russia, the regional market is located. The way to the market is lined

with vendors selling vegetables, clothes and curiously (at least for Non-Mongolians) also

coal. Loads of the heating fuel are delivered by pickup trucks and dumped on parking

lots, from where the coal is sold in small quantities to customers. When entering the

market the surrounding gets more quiet and the visitor can stroll through alleys filled with

dried tea, cereals, spices, clothes and Mongolians playing cards.

In the City of Darkhan

In one of the alleys is the small market stand of Ms. Bayarmaar, who is a client of the

microfinance institution Transcapital. As there are around 250 sunny days per year in

Mongolia, almost everyone walking outside wears some kind of head covering as a pro-

tection against the strong sun. This climatic nature gave Ms. Bayarmaar the idea to also

sell caps and hats at her stand besides handmade embroideries, which she artistically

stiches constantly. Ms. Bayarmaar is already in her second loan cycle with Transcapital.

During her first loan cycle in 2013 she borrowed 1mil Togrog or approx. 400 Euros from

Transcapital for working capital purposes. Now, during her second loan cycle she bor-

rows 1,5mil Togrog for 12 months. In order to get the latest headwear fashion Ms.

Bayarmaar takes the Transmongolian Railway to the border with China in the south of

Mongolia. There she meets vendors from all over China and selects her merchandise,

which is then sent to her in the following days. This trading business generates a steady

income of around 300 Euros per month for her and her two children at the age of 11 and

18. Ms. Bayarmaar’s older daughter is already quite independent although she still ap-

preciates her mother’s help during her education to become a kindergarten teacher. As

the average GDP per person and month in Mongolia is around 200 Euros Ms.

Bayarmaar is happy about her business idea and she can still stich and also sell her

custom made embroideries to add some more disposable income.

Client Story

Absolute Portfolio Management GmbH | Schottenfeldgasse 20 | 1070 Vienna | Phone: +43 1 533 59 76 | www.absolutepm.at | info@absolutepm.at

APM visits Mongolia

Source: APM Page 4

One of Khan Bank’s clients in the city of Darkhan is Ms.

Bayartsetseg, who is a mother of two children. Her husband is a

designer and whenever he brought friends home they talked

about the business potential of opening the first printing shop in

Darkhan. While the men only talked about the shop, Ms.

Bayartsetseg decided to take the initiative and applied at Khan

Bank for a loan. The application was successful and Ms.

Bayartsetseg started off with making engravings and small

prints on trophies and memorabilia. She constantly expanded

her product range, adding the production of picture frames and

finally in August 2014 she bought her first printing machine,

which can be seen in Figure 7. With the help of this unique

equipment in the area Ms. Bayartsetseg is optimistic, that she

will increase here revenues by 10 to 15 percent and amortize

the printer within the next three years. Ms. Bayartsetseg is very

thankful on how her business develops and has already recei-

ved an honor from Khan Bank for the long cooperation with the

lender. She said, that she will carry on innovating and with her

two children already at university there is also the possibility of

fresh and new know-how entering the business.

Client Story

Absolute Portfolio Management GmbH | Schottenfeldgasse 20 | 1070 Vienna | Phone: +43 1 533 59 76 | www.absolutepm.at | info@absolutepm.at

APM visits Mongolia

Source: APM Page 5

History

At 1,564,116 km², Mongolia is the nineteenth largest, and the

most sparsely populated independent country in the world with

a population of around 2.9 million people. It is also the world's

second-largest land-locked country after Kazakhstan.

The country contains very little arable land, as much of its area

is covered by arid and unproductive steppes, with mountains

to the north and west and the Gobi Desert to the south. Mon-

golia's economy is centered on agriculture and mining.

Mongolia has made significant strides in achieving macroeco-

nomic stability and fundamental structural reforms since its

transition to de-mocracy and a market-based system in 1990.

Mongolia has made substantial progress over the past period

of dem-ocratic restructuring in laying down sustainable macro-

economic foun-dations and creating a private sector-led open

economy. Today, Mon-golia's private sector produces more

than 70 percent of the country's total output. However, the

private sector still needs stronger support of the government in

the form of legal coherence and stability, land re-form, and

secure property rights.

Economic growth has been primarily driven by agriculture and

ser-vices. While boosting the economy, market forces have

increased the disparity between the living standards of rural

and urban populations. There is a widening income gap

between haves and have-nots. An estimated 33 percent of the

population now lives below the poverty line.

The providers of microfinance services in Mongolia range from

individ-ual money lenders to commercial banks. Commercial

banks are by far the largest providers of financial services

(leasing, loans, savings, transfers, and payments) to the poor.

The institutional and financial sustainability of these banks

meet world-class standards of excellence in performance,

transparency, and governance.

Economy (2013)

GDP: $ 17.03 billion

GDP Growth Rate: $ 11.8%

Per Capita GDP PPP: $5,900

Inflation: 8.2%

Natural Resources: oil, coal, copper, molybdenum, tungs-ten, phosphates, tin, nickel, zinc, fluorspar, gold, silver, iron

Agriculture: wheat, barley, vegetables, forage crops; sheep, goats, cattle, camels, horses

Industry: mining (coal, copper, molybdenum, fluor-spar, tin, tungsten, gold); oil; food and beverages; processing of animal products, cashmere and natu-ral fiber manufacturing

Trade (2013)

Exports:

$4.294 billion: copper, apparel, livestock, animal pro-ducts, cashmere, wool, hides, fluor-spar, other nonferrous metals, coal, crude oil

Export Partners: China 89%, Canada 4.1%

Imports: $5.696 billion: machinery and equipment, fuel, cars, food products, industrial consumer goods, chemicals, building materials, cigarettes and tobacco, appliances, soap and deter-gent

Import Partners: US 35.4%, Guatemala 12.7%, Mexi-co 7%, China 5.6%, Germany 4.2%

(Nation

al S

tatistics S

erv

ice o

f M

on

gola

i)

Facts on Mongolia

Capital: Ulan Bator

Surface Area: 1,564,116 sq. km

Official Language Khalkha Mongol

Population 2, 954 million (2013)

Exchange Rate: EUR 1 = 2471,25 MNT (July 2014)

Head of State: Tsakhiagiin Elbegdorj

Head of Government:

Tsakhiagiin Elbegdorj

Ethnic Groups: Khalkh 81.9%, Kazak 3.8%, Dorvod 2.7%, Bayad 2.1% other 9.5%

Religion: Buddhist 53%, Muslim 3%, Christian 2.2%, Shamanist 2.9%, other 0.4%, none 38.6%

Languages Khalkha Mongol, Turkic, Russian

Absolute Portfolio Management GmbH | Schottenfeldgasse 20 | 1070 Vienna | Phone: +43 1 533 59 76 | www.absolutepm.at | info@absolutepm.at

APM visits Mongolia