The recent implementation of monetary tightening measures has seen confidence in the stability of Mongolia’s banking system rise in recent months as credit growth slows. However, exponential growth expected in the economy due to an influx of resource revenues will require the central bank to maintain strict macroeconomic vigilance.
In a September report, the IMF praised Bank of Mongolia (BoM), the central bank, for increasing its policy rate by 225 basis points to 13.25% and its reserve requirements by 700 basis points to 12%, stating that tightening measures have been associated with a considerable slowdown in credit growth.
“The capitalisation and profitability of the banking system have risen, and the outstanding stock of non-performing loans has declined in absolute terms,” the IMF wrote. The fund also praised the BoM for raising the liquidity ratio to 25% from 18% and requiring the five main banks to raise their capital adequacy ratios to 14% from 12%.
In August, the National Statistical Office reported that non-performing loans reached MNT312.3bn ($243.5m), an increase of MNT6.6bn ($5.14m), or 2.1%, compared to the previous month, and a decrease of MNT63.6bn ($49.6m), or 16.9%, compared to same period of 2011.
The progress came ahead of pledges by parliament on macroeconomic policy in 2013, with the governor of the central bank, N Zoljargal, telling reporters in October that the bank would improve the inspection and control system next year to bring it in line with international regulation standards, and that there would be reform of the legal environment of payments to reduce risk.
“The BoM will reform the settlements system in 2013-15, increase the usage of giro-systems and enter an internationally acknowledged system to assess banking services and products to ensure the reliable and permanent operation of settlement systems in Mongolia,” said Zoljargal, adding that the bank will also take action to improve the basic financial knowledge of the public.
The country’s provision of access to banking services was lauded this year, with a World Bank report finding in April that 78% of adults have an account at a formal financial institution and that more than 40% of adults reported having a debit card. In “Measuring Financial Inclusion”, the bank also noted that 8% of the population used their mobiles to access banking services.
However, in May, Moody’s Investors Service downgraded the ratings of four Mongolia banks, including Golomt Bank, Khan Bank, the Trade and Development Bank of Mongolia and XacBank, to B1, saying, “a bank’s rating ultimately cannot be completely insulated from the credit quality of the government’s creditworthiness.”
“Mongolia’s economy is transforming because of the rapid development of its natural resources industries. While this is having a strongly positive effect on the economy’s growth rates, it does create the risk of an overheating of the economy, inflationary pressure, and, ultimately, the risk that boom could be followed by bust,” wrote Moody’s.
Revenues from vast copper and coking coal mines had been estimated to see GDP growth average 14% a year between 2012 and 2016, and GDP per capita to triple by 2016, but revised informal estimates now expect economic growth to be lower. Uncertain minerals demand and prices were part of the reason Standard & Poor’s revised its rating outlook on Mongolia from positive to stable in late October, local media reported.
In October, Fitch Ratings also noted in a report that Mongolian banks’ “increased foreign-currency funding raises [their] risk profiles,” saying that the agency expects lending volumes to pick up again over the next 12-18 months, and that borrowers may struggle to repay foreign currency loans if the Mongolian tugrik were to depreciate sharply.
In its report, the IMF recommended that authorities consider prohibiting foreign currency lending to unhedged borrowers to reduce vulnerability, noting that more than one-third of bank loans and bank deposits are still denominated in US dollars.
While international organisations have praised the progress in Mongolia’s banking sector and BOM appears committed to maintaining macroeconomic stability, ratings agencies are less bullish. To avoid an overheating of the economy, the government will likely need to further tighten credit measures and limit banks’ exposure to interest and exchange rate risks, as well as unhedged foreign currency lending.