ECONOMIC REVIEW OF 2015: News on Oyutolgoi has been the most waited one

USD 4.4 BILLION FOR OYUTOLGOI UNDERGROUND DEVELOPMENT SECURED

Oyu Tolgoi LLC signed a $4.4 billion project finance facility, one of the largest in the mining industry. Hence, there are no calculations or analysis made on the multiplier effect of this investment, which equals 35 percent of the total Mongolian economy. But it has been announced that the first deposit will be transferred in the first half of 2017 and the construction will start then leading to the about 3,000 permanent jobs and domestic suppliers can be part of the development. There is expectation that this event will be a good point for Mongolia to up the credibility, increase investments and have a positive effect on currency stabilization.     

SUPPORT TO FINANCE USD 1.5 BILLION FIFTH POWER STATION

IMMOVABLE PROPERTY IS NOT VALID COLLATERAL FOR BANK LOAN

Commercial banks have stopped issuing of the 8 percent APR mortgage loans at the same time as a result of the Constitutional Court decision. While Constitutional Court says that their decision has nothing to do with 8 percent mortgage loan, the decision was regarding the three clauses of the Law on Immovable Property Collateral. Commercial banks view that the decision affects their ability to control property under collateral and causing risk and are not issueing any loans other than salary loans. Many have questioned whether commercial banks have the right to do so. Then in the Housing Mortgage Financing Rule clause 5.6 states: “Commercial banks are entitled to make independent decision on the mortgage loans… ”

This entitles commercial banks to decide whether to issue the mortgage loans or not. Mortgage loans has been halted not entirely due to the decision made by the Constitutional Court. The situation has worsened even before that and the statistics show decrease of 13 percent compared to previous month and 14.9 percent decrease compared to the previous year.

While the financial conditions of the construction companies with loans from banks have worsened, banks are trying to shoot two rabbits with one stone by suggesting the apartments of the debtor construction companies.  The decline of the mortgage loans through the commercial banks led the citizens to contract directly with the construction companies.

FAIR COMPETITION AND CONSUMER PROTECTION AGENCY PETITIONED AGAINST THE COMMERCIAL BANKS…

Another issue related to commercial banks this year has been the petition against them from the Fair Competition and Consumer Protection Agency on the grounds that banks are charging illegally 1 percent from the amount of the processed loan. While the above issue is mostly viewed as having the political grounds, this issue was different, as the petition was submitted by O.Magnai previous head of the agency and continued by current head A.Ayursaikhan. Unfortunately, the case was returned to the primary court and has ruled out in favor of the commercial banks. Supreme Court judge was said to have conflict of interest as the judge was previously working as the Legal Department Head of the Trade and Development Bank.

Primary court has ruled out that commercial banks haven’t violated the rights of their customers in accordance with Law on Consumer Rights Protection and Law on Competition. 

MNT 1 TRILLION DEFICIT FOR 2016 BUDGET

Below is the table on balance of State Budget (million tugrugs)

State Great Khural does the budget adjustment at least once a year, which means it does the same job twice. But this year Parliament managed to do the budget adjustments twice, which in turn is reasoned by the changes in the market price of the minerals that contribute to the majority of the state budget, rather than their poor planning skills.  

State Great Khural approved the balanced budget income for the next years to be MNT 7.1 trillion, which equals to 25 percent of the GDP. While the expenditures are set to be MNT 7.8 trillion, which leads to another budget deficit of MNT 940 billion, a 3 percent of the total GDP. Ministry of Finance has announced that while working on budget it has decreased the salary expenses of the public officers by 10 percent and reduced the costs of work trips abroad.

But the events lined up for the next year surely dictate the override of the budget expenditures, such as parliamentary elections, Summer Olympics, ASEM. Although Bank of Mongolia had warned the MPs to be careful with the state budget it helped none, therefore leading to decision to keep the policy rates as it is.   

JAPANESE PM PROMISES LOAN OF USD 200 MILLION AND RESEARCH ON THE TAVAN TOLGOI RAILROAD

Japanese Prime Minister Shinzo Abe has paid an official visit to Mongolia for the second time. This may count as the historic event as the Prime Minister of Japan has paid two official visits in a single term and can be viewed as how actually Japan sees Mongolia. Although the visit lasted only for four hours, it has left Mongolians with huge deals.

Mongolia has established EPA with Japan for the first time and is to be valid starting the 2016 and is viewed as the potential leverage of the foreign investment flow into Mongolia. Implementation of the EPA with Japan will enable 8100 products of Mongolia to enter the Japanese market with discounted prices, while it also enables 5900 products of Japan to enter Mongolian market with discounted prices.

Here we also need to emphasize that Shinzo Abe has signed the MOU between the Governments of two countries on cooperation of the railroal construction and its related infrastructure development. The idea of this MOU was submitted by Mongolian side.

Moreover, Japanese PM announced to grant the loan equal to USD 200 million, which is around MNT 398 billion and equals one third of the budget deficit.

Japan is to host the 2020 Tokyo Olympics and in view of this Japanese side proposed to use the work force of Mongolian construction workers in the development of the infrastructure.
 

INDIAN PM VISITED WITH USD 1 BILLION AND REMINDED OF THE TIES OF TWO COUNTRIES

OPENING OF THE MONPOLIMET CEMENT FACTORY

As Mongolia has limited water resources to be used in any of the processing factory the main choice of the technology lies on the dry one, which uses the least amount of water.

Moncement Plant has become the second dry technology cement processing factory in Mongolia which opened its doors officially in summer. On top of using very less water the technology allows to recycle the 90 percent of grey water in its processing. This is the one of the newest technology factories to be built in Mongolia, equipment of which is capable to operate in the range of -40C up to +40C conditions. The project has become viable with the support of EBRD.  

The cement factory has the capacity to produce 1 million tons of cement annually and is located in Urgun soum of Dornogobi aimag. The product will be fully meeting the European standards, which in turn means to be ecologically friendly. 

MSE TRADED THE 100 PERCENT INSURED COMPANY BONDS

First ever 100 percent insured company bonds were registered and traded on MSE in August of 2015. 

This is the first time ever MSE introduces this financial tool on the market. Golomt Bank and Golomt Securities acted as the underwriter for his Erchim Bonds, while Soyombo Insurance insured the bonds. 

FIFTH POWER PLANT DEVELOPMENT TO START NEXT YEAR

Fifth Power Plant is considered as one of the first PPPs in the energy sector in Mongolia and one of the first power and thermal plant projects since 1984. 

July of 2015 was significant as the Concession Agreement has been signed between Consortium member and Government of Mongolia. Consortium consists of:

• Engie (formerly knows as GDF Suez-30 percent owner),    
• Sojitz Corp (30 percent owner)
• Posco Energy (30 percent owner)
• Newcom Group (10 percent owner).

Above companies and State Entities such as National Dispatching Center and National Power Transmission Grid have signed an agreement, which in turn obliges the State entities to purchase the power produced at the Fifth Power Plant. As the agreement is signed, the consortium is now responsible for the financing of the project, which is USD 1.5 billion. While the consortium is in charge of the development of the plant the Government of Mongolia is in charge of the development of the railroad and infrastructure needed to support the plant. 

VERTICAL AXIS ROAD OF WESTERN REGION COMMENCED

Seven years ago in 2008 resolution to construct vertical axis road in western region has been approved. In 2009 the bids for the contractor were held and the works have started back in 20110.

As Mongolia has horizontal location it is crucial for the economy to construct vertical axis roads to connect our northern and southern neighbours. The majority of the western region vertical axis road has been commenced in July of 2015 and is to connect Russia and China through Mongolia.

Most of the financing for the road construction has been provided by ADB soft loan of 32 years with APR of 1.5 percent, while the rest was provided by the Government of Mongolia, leading to relatively low cost, which is on average MNT 550 million per kilometer. If the construction will be in accordance with plan the construction works will be done by the end of 2017.  

PRIVATIZATION STARTED

Government has decided to start the privatization of the major state entities in order to increase state budget income and economic liberization. State Property Committee has started the bids with the biggest power plants. The privatization work is led by the Ministry of Finance and includes other state entities such as:

• Mongolian Stock Exchange

• Mongolian Securities Clearing House and Central Depository 

• Development Bank

• Finance Regulatory Committee

• State Property Committee

• Office of the Government

• Erdenes Mongol LLC

The privatization list extends to 10 state owned entities, 5 entities with state participation and total of 15 entities and as a result to collect MNT 150 billion into state budget. The first entity to be privatized is the Mongol Post. 

APPROVAL OF LAW ON ECONOMIC TRANSPARENCY

August 2015 was the month when State Great Khural approved the Law on Economic Transparency, which was initiated by the Government led by former PM N.Altankhuyag, to bring transparency into the hidden economy.

The approval of the law has resulted in:

• Reporting of income of MNT 6.1 trillion which is equal to 27.9 percent of GDP,
• Reporting of taxes of MNT 1.2 trillion which is equal to 18.8 percent of the tax income of 2014,
• Freeing of fines of MNT 362.1 billion.

Moreover, the implementation of the law resulted in accumulation of MNT 378.6 million into Social Security funds and MNT 5.7 million of the state stamp fees into the state budget.

The law will be effective until February 10^th of 2016. According to PM there is a need to make changes into the Taxation laws as huge amount of monies have become evident. But most of the businesses who have been fair since day one are skeptical if the law has really been that effective. As many see the implementation of the law as only as a support to those who have been shady in their reporting.  

MAIN THEME OF THE ECONOMIC FORUM-CREDIBILITY

COAL MONGOLIA 2015: WILL DELIVER COAL TO SOUTH KOREA THROUGH NORTH KOREA

CONSTANT GDP DECLINE SINCE THE BEGINNING OF THE YEAR

According to the statistics of the first nine months the GDP has seen increase of only 2.5 percent, while in first quarter it was 4.0 and first half was at 3.3 percent respectively. The majority of the GDP increase of the first nine months was from the agricultural sector, as mining, construction and retail sector were hit hard by the economic decline.

GDP has been on decline since 2011 and according to the ADB prognosis in 2016 it will be at 3.0 while Ministry of Finance predicts it to be at 4.1 percent respectively.

Below is the table on GDP growth (by percentage)

ECONOMY WILL SHRINK AS THE INFLATION IS ON DECLINE

Inflation has been on constant decline for the last six years and according to the statistics it is at 2.9 percent as of November. NSO has explained such decline with the shrinking economy.

It is no surprise that inflation is at low as the GDP has seen no significant increase and the money supply was low as well. Prices of meat, vegetables and clothes has been the main drivers of decrease in inflation. While ADB has been warning on possible inflation rates to be at 18 percent the current situation says the opposite with 3 percent.

According to some economists inflation might get back on track, but not as high as previous increase. Bank of Mongolia reported the saving yield increased by 6-7 percent thanks to the low inflation rates. The low inflation is the first sign of the lower policy rates. But the Monetary Council at the Central bank is on waiting mode to see the state budget income before taking any measures to lower the policy rates. 

Below is the table on Inflation rate from the beginning of 2015 (%)

INCREASING DEBT, WAITING FOR DEBT MANAGEMENT…

Total foreign debt of Mongolia reached USD 21.7 billion, which is almost a double from the USD 11.6 billion in 2011. The majority of which is Government debt.

Current value of the Government debt is at MNT 13.7 trillion. Calculations of the debt to be paid in 2016-2018 is to show huge increase:

• 2016 debt of Government and private entities will total to USD 900 million,
• 2017 will be USD 2 billion,
• 2018 will be USD 1.3 billion.

This equals to MNT 8 trillion according to current rates. Coming year will be the year to pay the loan service fees of MNT 962 billion (equals to 37 percent of the total state budget), of which the opposition has announced the day before approving the budget. The reason is just the lack of debt management.

While Bank of Mongolia has warned of having and implementing debt management and Ministry of Finance has come up with plan on how to do the debt management, nothing was approved as of today. 

RELATIVELY STABLE CURRENCY RATE OF USD

Sell rate for USD in January of 2015 was at MNT 1927, while some decline occurred in June 2015 at MNT 1898 and then seen the increase and is currently at MNT 2000. This can be regarded as relatively being stable compared to previous years.

The main reason for such USD rates is the shrinking of the mining market, known as the major source of the foreign currency inflow. Bank of Mongolia faced tough task to keep the rates at MNT 2000 by using the currency sources and lending CNY from the Bank of China

Many have had a slight relief with the news of securing the USD 4.4 billion financing for the OT underground mining development, while others are warning to be prepared to have the currency rates be high as there are lots of foreign debt to be repaid nex year. It is true that USD 4.4 billion won’t come in one big transaction and the amount is to be used for the development of the underground phase of OT.

Anyways predictions of some economists of USD jumping to MNT 2030 haven’t realized. But the increase of the currency rates has been good reminder for the nation.            

AVERAGE SALARY INCREASED BY MNT 44,000 AND IS MNT 836,000

As of the first nine months the average salary amount is at MNT 836,000, which is the increase by MNT 44,000 compared with the same period of the previous year.

NSO calculates the average salary based on the social security payment. There are 51,000 citizens with salary above MNT 1.5 million and the employees in mining sector are paid the highest, which is above MNT 2 million per month. 

MEAT PRICE IN DECLINE LEAVING HERDERS IN DIFFICULT SITUATION

As of the December 16^th prices per kilogram of:  

• Mutton with bones is MNT 3,900,
• Beef with bones is MNT 5,515,
• Beef is MNT 7,045,
• Horse meat is MNT 4,780,
• Goat meat with bones is MNT 3,280.

It was very recent when beef was MNT 10,000. It is good news for the city dwellers, but leaves herders in a difficult situation. Although the politicians claiming that economic downturn is affecting the herders less, it is obvious that herders are being affected by price decline as well, as their main cash source is the meat and cashmere sales. A year ago the prices per kilogram meat were:

• Mutton with bones MNT 5,825,
• Beef with bones MNT 7,465,
• Beef MNT 9,395,
• Horse meat MNT 5,435,
• Goat meat MNT 4,735 for the comparison.

SUMMARY

Economic downturn continued in 2015 as purchasing power of the citizen’s declines and debt stress of the entities have increased. Many questions are waiting for answer such as will the policy rate go down and mortgage loan deposit will be 10 percent.

This year Mongolia managed to attract USD 70 million as investments, while this number was at USD 385 million the previous year. WB predicts that Mongolia will attract USD 900 million. Mongolia ranks 104 out of 140 countries with 3.8 points of 7.0 points. Although Mongolia managed to improve in five criteria, the decline in three also played role in such ranking. 

But Mongolia managed to avoid crisis and bankruptcy as Jubilee Debt Campaign analysts predicted ranking Mongolia 8th out of 14 countries with likelhood to go face debt crisis. With still positive GDP Mongolia is on safer side and the underground development of the OT in the second quarter of the next year lets us see our situation in a positive light.