GDP growth has escalated to an unprecedented 17.3% in 2011. Unemployment has fallen from 13% to 9% in one year. These are headlines that you might expect from China or India or another of the “BRIC” emerging markets, but, in actuality, these stellar economic results are from Mongolia, one of the fastest growing economies on the planet. Growth, however, does not always occur in a straight line. Consolidation periods are necessary in order for weak points in the entire system to catch up with the overall momentum.
Macroeconomic stability going forward will depend on how well government officials adhere to prudent fiscal policies for the balance of 2012. There is still the possibility of a “hard landing” or an external shock from its trading partners. China and Russia are its major trading partners, each being more dependent on the uncertain global economic environment, which has deteriorated somewhat due to the ongoing debt crisis in Europe. Reduced demand from the West has forced emerging market economies to ratchet back their growth plans for the future. Inflation and credit liquidity are becoming the issues that must be addressed appropriately in the near term.
The Mongolian economy is comprised primarily of agriculture, animal husbandry, and the mining of extensive mineral deposits. The latter activity is more recent in nature and has drawn international attention, capital investments, and widening banking involvement. One of the leading banks in this non-traditional economic activity has been the Trade and Development Bank of Mongolia (“TDB”). Established in 1990, TDB has quickly become one of the leading banking and financial services providers in the country. Their broad array of services include large corporate, SME and retail lending, deposit-taking, trade finance, remittance, cash management, treasury, foreign exchange, and investment banking.
TDB, now one of the three largest banks in Mongolia, holds the largest portfolio of foreign assets, making it the foremost player in the foreign exchange market. The bank was the first Mongolian bank to initiate treasury activities in international foreign exchange and global money markets, and over time it has created direct correspondent relationships with more than 150 foreign banks and financial institutions. The Bank also maintains close relationships with the mining industry, facilitating its needs for credit, providing a forum for gold trading, and supplying necessary international settlement services. Nearly two-thirds of the gold producing companies in Mongolia are customers of TDB.
When small countries grow quickly, however, banks must expand their search for more capital, leading many to search overseas for much needed domestic liquidity reserves. Banks in Mongolia have been suffering from a “liquidity crunch” since November of 2011. Inflation has been in double-digits, and the central bank has had to tighten monetary policy as a consequence. One local banker noted, “The banks are out of money now. Liquidity was very high a year ago but it’s been burned up because there is such high growth and high lending.”
Amid the mounting credit crisis, it came as good news that Goldman Sachs announced that it had purchased a 4.8% interest in TDB, a capital infusion amounting to $50 million. Foreign investment in Mongolia’s burgeoning resources industry is a necessity if pressure is to be relieved on local credit resources. As attention grows in the international investment community, additional capital flows will help maintain a strong national currency and continue positive growth trends for the national economy.
Despite its amazing growth story in 2011, the future for Mongolia will be uncertain as it moves through the critical “consolidation” phase before it. Prospects are bright, but challenges must be prudently addressed.