N.Zoljargal: When you say “Is Mongolia prepared for the next crisis?” it seems as though a crisis is inevitable. Let’s start the discussion by asking the participants if a crisis is really certain or not.
Ch.Khashchuluun: In my opinion, a major challenge for our domestic economy in 2020 would be the parliamentary election. There’s a risk that the election process, rather than the results, may bring negative consequences. The reason is as the election approaches, many people suddenly come out to criticize both domestic and foreign investors and collect points. Right now, the time is ready for us to review the agreement signed with the IMF. There are some pieces of good news, including the reduction of budget deficits, stabilization of currency rates and the doubling of stock market capitalization. We can only hope that populism does not take too much ground in the next election.
Whether there’s a global crisis, we can look at the US-China trade war. However, it seems China is more acquiescent towards the US with its statements to respect for intellectual property and copyrights. So, it could be alright in the next three years.
M.Boldoo: Global crises have a cycle of 4-10 years on average over the long run. Unfortunately, Mongolia’s cycle occurs every one or two years. This makes running businesses extremely costly and risky.
The banking sector is expecting an economic contraction in the coming three years. Budget deficits have increased enormously, and many tightening measures are being taken through the expanded financing program. This means credit availability will decline. On top of that, the draft laws proposed by politicians on putting a ceiling on loan interest rates, making amendments to the currency regulation law and establishing asset controls only serve to decelerate businesses.
Kh.Bulgantuya: These days, two topics are at the center of attention at every conference and forum organized by major international organizations. The first is that economic difficulties are approaching, and the other one is artificial intelligence. Considering the mining cycle of 4-10 years and the approaching major debt repayment deadlines in the years 2021-2024, the government of Mongolia has already started making commitments to prepare for the crisis.
Currently, the Credit Management Strategy has been submitted to parliament for review alongside the 2020 budget statement.
N.Zoljargal: Regarding part of next year’s state budget development process, can you tell us if budget expenditures have increased or decreased?
Kh. Bulgantuya: There isn’t a major increase in expenditures. We started lowering our expectations.
S.Demberel: We believe there will be a global financial crisis in 2021. Economists from other countries have their own takes. We understand crises in two concepts. The first is a classic concept pertaining to economic contraction for two consecutive quarters. The second is the governance crisis that we are seeing here in Mongolia.
If you asked whether we are prepared, the answer is no, at least not in terms of institutions and governance. If we look at primary indicators, Mongolia’s large business owners and businessmen in general are extremely concerned. They want quality institutional reforms where they can expand and uplift their businesses. The government should notice this signal and carry out the required governance and institutional reforms.
N.Noljargal: The trade war has evolved into a much larger competition between two different economic systems, which may be at the beginning of a very long process. We are witnessing a slowdown in car sales in China for the first time. Within the last two years, the government provided the largest financial support possible to its financial system. Although it undoubtedly provides a concrete support for economic growth, it could also bring other negative effects. It is forecasted that the trade war will bring down Chinese growth by 0.3 percent. The European economy is even approaching zero growth.
On the other hand, we are looking at Mongolia’s economy in a completely different way. While the world struggles with a crisis, are we sure we can reach 5-6 or 7-8 percent growth? What are going to be the obstacles in achieving this? What are our challenges?
Ch.Khashchuluun: There are three important points to focus on in the near future. First, it is true that the global economic situation is becoming unstable. Our main exports are directed to China. However, logistical issues have not improved at all. The government must execute its customs output infrastructure improvement plan as soon as possible. If not, this will be the sole “cause of death” of our mining exports. We can choose either one of the Gashuun Sukhait or Khangi-Mandal ports. Most importantly, we need to solve the most pressing issues immediately.
N.Zoljargal: It seems you are speaking about export revenue stabilization. We saw the bottom of the mining cycle in 2014-2015. When is the next lowest point?
Ch.Khashchuluun: Although the 2014-2015 crisis in terms of coal and iron ore may seem natural on our side, we believe it was intentional from the Chinese side. In order to save its steel industry, the Chinese government took several measures to reduce coking coal and iron ore prices. This struck a blow to us. We are only loosely dependent on global markets.
It is true that worsening US-China relations could negatively impact us. We must understand how massive China’s economy has become. Although our northern neighbor Russia’s economy is formidable, just one Chinese province - Guandong Province – has become bigger comparatively. At this time, China is starting numerous infrastructure projects in order to maintain economic growth. Therefore, our minerals industry may not be negatively affected after all.
N.Zoljargal: That may be the case for exports. Do we have any solutions for the Oyu Tolgoi project?
Ch.Khashchuluun: It would be healthy to attempt to improve business negotiations. We have partnered for 10 years, so there’s no denying that there’s room for improvement. The Dubai Agreement had some fixes and in 2011-2012, and the interests were modified too. There’s nothing wrong with negotiating. However, forcing it is inappropriate.
Oyu Tolgoi is merely a producer. Its investors are 26 major banks registered on Wall Street. They couldn’t care less about how Rio Tinto and the GoM made the agreement. However, if Rio and the GoM succumb to an argument resulting in delays and lower returns on investment, the impression will be “Mongolia cannot manage a 12-billion-dollar investment. In general, it is not worth doing business in this place.”
In any case, we are in a very difficult situation. If we are summoned to court in autumn, there will no thought of our economy growing at seven percent. It may even plunge to negative growth. Politicians and parliament may apply pressure to change agreements. However, they need to respect business code and ethics in doing so. There is no need to rush to finish things before the election. It can go on for several years.
M.Boldoo: As of today, the banking sector has not issued over MNT four trillion in credits. Therefore, this money, which accounts for around 35 percent of the entire banking sector, is available. In other words, one in three tugrugs isn’t in circulation and is placed as the BoM’s stocks. This is, on one hand, a sign of higher risk and banks being cautious in issuing credits.
Secondly, it means too many banks have placed this large sum of money into financial institutions. Because the assets of Mongolia’s small economy have been placed in many small institutions, including 13 banks, 500 non-banking financial institutions, as well as savings and loan creditors and over 100 broker firms, there’s no capacity to fund major projects. It’s a systemic defect where despite having this much money lying around, we are still looking for loans from outside of the country.
On the other hand, freeing up this MNT four trillion for transactions will weaken the tugrug immensely. The only way to prevent this is to support export production that brings in foreign currencies. At the very least, politicians must refrain from pushing around the mega project of Oyu Tolgoi, which strangles foreign currency inflows into Mongolia.
Talking about major concerns, over MNT three trillion within the banking sector were recategorized as bad, overdue loans.
N.Zoljargal: It seems that the total monetary reserves of banks have doubled in the past three years. 20-25 percent of this is held by the BoM without entering the economy. It appears the budget is filling this gap. Can budget expenditures be efficient and useful for the private sector, or perhaps even prevent the oncoming crisis?
Kh.Bulgantuya: As Dr. Khaschuluun pointed out, the 2020 parliamentary election is seen as a risk. Although 2011 was a good year for the economy, as someone who was working in the private sector at that time, I remember investors saying things along the lines of “We’ll see how your election goes. We’ll keep our eyes open until then.”
There’s a huge fear and risk of what might happen if populist politicians and a populist cabinet are elected in the 2020 election. In the meantime, the BoM has increased official foreign currency reserves up to USD 3.5 billion, and the government has improved its credit rating. If we continue with these opportunities, we can still manage, despite a decline in global commodities prices.
The next big risk is the Anti-Financial Crimes Agency being grey-listed. In spite of some achievements by the combined efforts of government agencies, this still poses a risk.
Good relations with our trading partners Russia and China determine a lot of issues in our situation. If coal shipments of 1,200 trucks exit the border daily, budget revenue is collected consistently on coal. When this number becomes less or when the price of raw materials falls, despite an increase in shipment, budget revenue is destabilized, posing a risk.
Exports have one issue. The National Development Agency formulates key medium and long-term policies, while funding is made by the Development Bank. The Ministry of Foreign Affairs executes the key trade agreements, while all cash flows and accounts are merged at the BoM. This way, foreign trade matters are handled among too many places. Parliament discussed at great length about how we lack a comprehensive policy and a single management structure.
In some countries, the government signs the major agreements and distributes them to companies in quotas. If we do not shift to this practice, our companies are being swallowed up by big ones.
N.Zoljargal: Wouldn’t it create confusion to say that the credit rating is good and that we can re-finance bonds? As foreign demand weakens, our foreign currency revenues decline. This in turn leads to a lowered credit rating. Does the Ministry of Finance expect to pull out after re-financing, or is there an option to pay a certain portion of it?
Kh.Bulgantuya: All options must be open. If the situation is good, we can re-finance without coming close to the deadline. Next year, if our credit rating increases after reviewing our IMF program, the opportunity will be available to re-finance even before the election.
With the deficits in the current budget, collecting enough revenue to make the repayments is very challenging. Specifically, the 2021 debt cannot be repaid in this way.
N.Zoljargal: So, crisis is certain. We have lived under one roof with the IMF for three years. If I heard correctly, the GoM decided to continue this program. Is it true such negotiations are in place?
Kh.Bulgantuya: There is no such negotiation at the moment. We did not make any official request to continue the program. In fact, it is not easy to enter an IMF program. We lose a lot of power of decision-making. However, on the other hand, there is a lack of trust in the next government and parliament to continue or repeat the achievements we’ve had up until now. If a populist cabinet comes in and starts increasing the budget expenditures, our efforts and the money we have saved will be squandered.
There is one benefit of staying in the program. By setting restrictions such as preventing excess cost increases and expanded government staff structures, and regularly reviewing and monitoring the progress every three months, favorable conditions for investors and the private sector will be created. Furthermore, we will be able to make assessments without even having assessment companies come in.
If a populist cabinet comes in and starts increasing the budget expenditures, our efforts and the money we have saved will be squandered
N.Zoljargal: As for myself, I do not have much trust. By the time the 2019 budget was approved, we were already under the IMF program and associated monitoring. However, budget expenditures increased sharply after it was submitted for parliamentary discussion. It is justified if used for the right purposes or for overcoming the crisis. However, did we achieve this? Can we do this with the next budget? I doubt it personally. What can we do in terms of the financial market and investments? What are the biggest obstacles?
S.Demberel: In December last year, the BoM began the process of listening to requests from the Top 100 companies. According to this, companies had a positive outlook for this year’s economy and stated that they would increase jobs and salaries. However, my fear is growing populism within the economic sphere. This will put off businesses and investors who will be faced with options such as investing in Mongolia or living in Singapore. We must consider these factors.
As for the financial sector, even though the combined balance of commercial banks increased slightly in the first quarter of 2019, it couldn’t reach the level of previous years. In my opinion, an important task for the next two years will be to quickly manage repayment abilities.
There’s a common misconception behind the Trade War that trade must be balanced. This was basically “destroyed” by the Nobel Prize winning economist William Nordhaus in only 5-6 arguments. In Mongolia, the same populist idea is emerging. This brand of populism is attacking the independence of the Central Bank in full force. For example, there’s talk of putting a ceiling on loans interest rates. Business owners should not harbor a secret hope that this will make things better. On the contrary, it will only bring adverse outcomes. An insidious populism is roaming in Mongolia, urging the Central Bank to tighten the currency rate, increase currency reserves and establish interest ceilings. If this is realized into policy and regulation, the economy will decline by 2019-2020.
In terms of foreign investment, we still haven’t made any progress in the investment environment. Even when an international organization creates the blueprint for investment environment reform for us, why can’t we start implement it?
N.Zoljargal: What positive projections do we have in 2019? What should we pay attention to? If such expectations aren’t met, what should we be worried about? What events are you anticipating? For example, is Erdenet Tavan Tolgoi’s IPO important to us? How should we spend the money that comes with it? What’s the breaking point for the Oyu Tolgoi’s issue?
Ch.Khashchuluun: In my opinion, 2019 will see a high economic growth. We may see the fruits of the plethora of projects implemented by the government. We are trying to actively carry out numerous infrastructure projects. Budget investments have been increased as well. If we manage not to argue with foreign and domestic investors, investments will continue at a normal pace.
However, I will name three risks. I hope customs output and logistics are not left unresolved. It is unclear what measures are being taken in that regard. Moreover, construction of the Tavan Tolgoi power plant is in a bottleneck. Precious time is being wasted trying to replace this project which used to be on a steady path. I fear that hopes for modern tech investments may turn into dust.
Each successive government has dreamed about issuing an IPO for Erdenes Tavan Tolgoi. However, is now the right time? Without improving border crossings and building railroads, can we expect a high-value IPO? But if we look for any investment plans, there weren’t any finalized and detailed plans in sight. It seems we can easily fail on the question of whether the received investments can provide actual benefits in turn.
M.Boldoo: It’s a mistake not to calculate GDP and the GNP at the same time. The majority of all value created on the territory of Mongolia pertains to foreign-owned mining companies. It isn’t appropriate to compare such large numbers related to products we did not produce ourselves to our national budget. If we compare this to the Gross National Product, budget deficits will appear much higher.
Parliament is getting too heavily involved in businesses through passing too many laws and regulations, creating restrictions and increasing budget deficits. If we do not stop this through a constitutional amendment, the vicious cycle will continue.
On the bright side, the biggest lesson would be what we shouldn’t do in the future. Moreover, a younger generation with fresh ideas and good education is rising. We must support them.
Kh.Bulgantuya: We planned to invest CNY 250 million through government grants in two major ports in the southern border, first and foremost. In addition, the Customs General Authority will undergo a technological reform financed by the state budget. This will become a major investment for upgrades and improving the infrastructure. If the Ministry of Foreign Affairs can operate its Foreign Trade Representative Offices efficiently, it would be a big push for non-mining exporters.
Erdenes Tavan Tolgoi’s IPO is creating high expectations. With the growth of two large mines, the economy will grow in double digits. However, this large mess with Oyu Tolgoi will make it problematic for issuing the IPO.
S.Demberel: Every business entity is putting their faith in the government to create a stable investment environment. I will count it as a positive thing, if this expectation is met. Next, if Mongolia hopes to strengthen its budget revenues and currency reserves, it must reveal all forms of export agreements signed regarding Erdenet, Tavan Tolgoi and the Mineral Resources and Petroleum Authority to the public, and create monitoring on their foreign currency flows. In other words, there will be less swindling, misunderstandings and more currency in-flows by establishing partial monitoring on the capital of state-owned enterprises. This will not hurt the private sector at all and will actually become beneficial.
As someone who analyzes national accounting and calculations, I do not think there is a significant difference between the GDP and GNP. The most important point is growth distribution and access. We must observe whether companies and households are satisfied, at a current eight percent economic growth. Personally, I think things will become worse by the end of 2019.
N.Zoljargal: One statistic worries me the most, as someone who was in the middle of the struggle in the previous crisis. That is the trade balance. It is currently at -15 percent. Despite having a record high performance in exports, this deficit is not a good sign. In 2013, when this indicator exceeded -30 percent, everything from currency regulation, financial markets and the state budget was affected. I hope this deficit does not go further. The biggest impact on balance is state budget expenditures.
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