The following is an interview with economist Ch.Khashchuluun, highlighting many crucial issues regarding Mongolia’s current economic conditions.
Only ten days are left until the 100 day plan to intensify the economy ends but macro economic statistics continue to decline. The program was supposed to bring positive
effects and yet, just recently, international credit rating agencies downgraded Mongolia’s government bond ratings. Can you comment on this?
Mongolian credit rating rose in the last few years but declined last year. The decline is connected to the inadequate bond sales in foreign markets as well as ineffective monetary policy. Bond repayment will be paid from budget revenue. My assessment for Mongolian credit rating downgrade is that due to increasing deficit of state budget revenue and inconsistency, all investors were informed that Mongolia couldn’t make repayments for the sovereign bonds released on foreign markets. This can be understood as an assessment for state budget revenue, deficit and payment balance.
MNT exchange rate continues to fall because of the balance of payment deficit. Will MNT exchange rate continue to drop further?
Exchange rate depreciation is explained correspondent to foreign investment decrease. This is true but foreign investment decrease is only one side of the reality. The other side isn’t mentioned at all. MNT is supplied in high quantity in markets. The Central Bank issued a lot of loans in MNT, which gave off extreme supply of MNT and is causing long term negative impact in macro economy. If the Central Bank had implemented a policy to de-escalate MNT supply, despite less USD inflow, circumstances wouldn’t have been so dire. This method was used in 2009 to moderate the escalation [of USD exchange rate]. The opposite was implemented this time by increasing MNT supply and issuing tons of loans to entities. Even at this moment, they’re not considering a policy to de-escalate MNT supply.
Recently, Mongol Bank increased the policy rate interest by 1.5 percent. Will this not affect the weakening MNT exchange rate?
Interest rate the policy loan isn’t affected directly from monetary supply. In other words, it will not affect the essential money supply. Increasing policy interest rate will only cause difficulties to people taking out loans. Although it is a classic method, it’s hard to measure how much research the Central bank did on its effectiveness at our current economic conditions.
Obviously, bank loan interests will increase along with policy interest rate and induce negative effects on entrepreneurs. However, experts see that it’ll be beneficial for stabilizing the macro economy. While non-performing loans (NPL) continues to upsurge, is increasing policy interest rate truly the best method?
NPLs have been constantly increasing and reached to a high level which Mongolia hasn’t seen in some 20 years. It’s been increasing intensively since last autumn. If policy interest rate is raised at this point, NPLs will increase further. This can’t be minimized back with policy interest rate. Loan takers previously faced difficulty repaying the original interest amount, now, they’ll be forced into a situation where they’re incapable of repaying. Basically, interest rate will increase, people will not be able to pay on time, and full repayment period will be prolonged. The good side is that monetary supply will weaken and new loans will not be issued so much. However, this will not revive the current economy.
Overall, this monetary policy decision was made behind the time. Exchange rates began to upsurge around this time last year. This measure should’ve been taken at that time. If loans in MNT had been wrapped up to a certain limit, would Mongolia have reached current conditions? Even if the Central Bank begins a policy change, it’ll require a minimum of two years to eliminate today’s economic crisis and get positive feedback.
The global practice is showing us that issuing large amounts of loans to construction and real estate markets is wrong. Vivid examples are Japan, Thailand, and Kazakhstan. These countries loaned to constructions and real estates in considerable quantity, which turned to long-term NPLs. Banks that issued loans, people and entities that got loans, and companies which implemented construction work all faced losses.
Are you indicating that to overcome the economic crisis, loans for construction and real estate should be reduced?
Exactly. Construction and real estate markets should hit off strongly to give off results to the economy.
Mongolia is attempting to overcome the economic crisis by generating capital from foreign markets, instead of changing the policy. Is there any opportunity to revive the economy through policy change?
If capital is generated when credit rating is down, interests will become high, meaning the most expensive loans will given. Most importantly, we don’t know what to do after getting loans. People say they’re building debts to develop the nation’s economy but the development project or what sorts of aftermath the project will give is indefinite. The loans are spent on whatever comes to their minds. For instance, pedestrian roads were fixed with bond funds.
Bond expenditure is influencing credit rating decrease. There’s nothing to be surprised about. Mongolia has high risks for generating capital as long as Mongolia doesn’t have development policy and investment plans. Even if it’s generated, it’ll convert to debt if spent without plans. Including interest, some 2.5 billion USD is required to repay bond debt. This is equivalent to Mongolia’s one year budget if estimated at the current exchange rate. Repayment will begin from 2017, meaning Mongolia will not fix any streets, do investments, construct schools, and only repay debts from 2017 to 2024.
Investment environment isn’t reviving even when several laws for attracting investment have been approved. From your perspective, is there a tendency for investments to revive in the near-future?
It’s correct to improve legal environment. Laws passed within the framework of the 100 day plan to intensify the economy do have significances. It’s one of the works that must be done. But the investment environment didn’t improve with the new laws. Investment environment is referred to the mechanism of making decisions. People will invest if the mechanism is easy to understand and substantive.
Even with investments, Mongolia doesn’t have an environment for making decisions. For instance, the Tax Office suddenly issued a penalty of 130 million USD, although they didn’t mention anything before. What was the Tax Office doing in the last five years, instead of resolving this issue?
Investors are given permission to invest and yet, in a year’s time, projects are being terminated. For example, railway construction began in May 2012 and aborted in October. This game-like decision doesn’t have any rules. Investors regard this as a high risk. Not only foreign but also domestic investors are scared by this situation. Investing demands a lot of courage and trust from the investors and there aren’t many with that much courage.
Coal exportation, which composes a majority of Mongolian export revenue, hasn’t reached adequate levels in the last two years. Can this sector revive?
Research body of the Australian Government estimated coal price to recover after 2017. Rio Tinto declined from Mongolian coal and exited the market as well as Coal Mozambique. Simply, I also agree with the sentiment that the coal market will not reviving in the next few years. Mongolia should also be prepared for selling coal at lower prices. To get profit from selling low-priced coals, Mongolian transportation and mining expenses should be low. Railway holds a vital part in this. The government approved to construct the railway with a narrow gauge track to support export products but nothing is being implemented. On top of this, the government agreed to supply coal at a considerably low price of 30 to 40 USD in the last agreement with Chalco (State-owned Chinese company that buys from Mongolia’s state-owned Tavan Tolgoi coal mine). Due to this, Mongolian private coal companies had to reduce their prices. Whether the government is working with a loss may be irrelevant. However, this agreement is affecting private companies negatively. Some big companies working in the sector will face significant losses if this issue isn’t resolved soon.
How do you judge Mongolia’s economic outlook? Is there any chance of getting out of the economic crisis?
I don’t think Mongolia’s reached the lowest level of economic crisis. The main crisis will begin this winter. We thought last year’s winter situations were the worst we’ve ever experienced but this year’s will be even worse. Major development projects were scheduled to start this summer but they didn’t. This year’s budget prolapsed several times. The 2015 state budget will be approved this winter. If next year’s budget is approved without any rationale again, the budget will experience more hiccoughs. Similar to how expenditure of the 2014 budget was trimmed considerably, 2015’s budget will be cut even more. This’ll reduce expense of services and projects implemented with the state budget revenue.
Parliamentary election is also scheduled next year. They’ll be hyped up in keeping promises they made to constituencies. Portion of the state budget investment will become necessary for giving to constituencies and projects financed by the state budget will become jammed. People fear that projects will be seized across the country. At current situations, there isn’t a tendency for improving Mongolian budget and monetary policy. The 2015 state budget will be approved in a controversial situation with high consumption and impossible promises.
In 2017, Mongolia will begin repaying bond debts. Plans on how it will be repaid haven’t been developed. If annual repayment amounts for the bonds are not clarified, majority of investments in 2017 and 2018 will function as repayment. After elections in 2016, development projects will be forced to decrease.
SOURCE: Ub Post