2020 | July - August | 029
The Asian Development Bank has forecasted Mongolia’s economy to shrink by 1.9 percent in 2020. The Bank of Mongolia’s estimation stands at -0.9 percent. This is mostly due to the fact that the economy diminished by 10.7 percent in the first quarter. The biggest loss was felt in the mining sector with a seven percent decrease. The industry, which makes up about a quarter of the GDP and over 90 percent of the export, remains vulnerable to the volatility of commodity prices, and the lockdown is becoming a heavy burden.
The lockdown imposed to prevent the spread of COVID-19 that is continuing for the fifth month is affecting not only business incomes but the loan performance of banks as well. It has been four months since the Bank of Mongolia lowered the interest rate to nine percent to improve loan issuance, however, the amount of outstanding loan shrank instead of increasing.
The outstanding loan in the banking sector decreased by MNT 919.5 billion or 5.1 percent to MNT 17.13 trillion since the end of last year. On top of the shrink in outstanding loans, the overdue and non-performing loans are increasing. The number of overdue in the total outstanding loans in the banking sector grew by MNT 323.8 billion or 39.7 percent in the first five months of the year. The total outstanding loans stood at 4.5 percent and the non-performing loans were at 10.1 percent at the end of last year. The overdue now stands at 6.7 percent and non-performing loans increased to 11.5 percent of total outstanding loans.
While private lending comprised 70 percent of total loans in the mining sector at the end of 2019, it fell to 10 percentage points to 60 were private as of May 2020. This is much lower than other sectors including construction and real estate.
In terms of sectors, the bad-performing loans are piling up more in the mining sector than others. The overdue loans in this sector reached MNT 73.8 billion, about nine percent of total outstanding loans in the sector, at the end of last year, and almost doubled to MNT 149.6 billion as of May, making up 13.1 percent of outstanding loans. Also, the non-performing loans of the mining sector remain the highest with 22 percent of the loans in the sector. The list is followed up with the processing industry at 21 percent and construction at 14 percent. The loan statistics show that the mining sector is the hardest-hit sector at the moment.
On this matter, the Bank of Mongolia explained, “The key reason is that the COVID-19 had an impact on the non-performing loans that piled up due to the 2016 downturn of the commodity price drop. Mining companies have a high amount of debt from banks. If it isn’t repaid, it will become non-performing. The economy grew at a faster phase in 2011, boosting foreign direct investment in the mining sector, however, the trend was not able to be maintained so the financing has diminished. Furthermore, it is the result of issuing high amounts of loans to mining firms. On the other hand, the prices of some commodities including copper and iron ore are rising, however, the drop in sales is having its impact. For instance, the foreign trade statistics of May showed that the copper ore exports fell 31 percent, coal - 60 percent, and iron ore - 84 percent, directly diminishing the mining revenue. Since the income is falling, the companies would have to face risks of covering costs and overdue loans.”
Although the Bank of Mongolia reduced the interest rate twice since the beginning of this year from 11 percent to nine percent, the non-performing loans in the mining, processing, and construction industries are mounting. It has to be noted that the bad loans in the mining sector were still on the rise in 2019 when the commodity prices were an upside factor to the economy. The current account deficit and the volatility of commodity prices, and the instability in the foreign exchange rate were the downside factors for the continued increase of non-performing loans since 2013. Therefore, the impact of the rate cut of the Bank of Mongolia to a single-digit interest rate proved to have less impact as shown in the statistics.
The overdue loans with above 90 days are considered a non-performing loan in the banking sector. One out of 10 lenders is in the bad loan category. Real economic growth can be perceived if the mining sector is developed with both local and foreign investment drawn at a sufficient level. Although it seems that only about nine percent of the outstanding loans are in the mining sector, the net amount is higher considering the sum required for development, mounting more risks, and creating more jobs as a result. But the increase in non-performing loans in this sector causes the available financial source from the banking sector to shrink, disrupting the financial intermediation, lagging the economic activation, and diminishing the real sector growth.
The loan statistics in the banking sector shows no growth. Thus, the banks are not interested in injecting cash into the market, demonstrating a lack of confidence and financial sources in businesses. Since banks are reluctant to issue new loans, it can cause a problem in decreasing the non-performing and overdue loans.