A.Bilguun: I wouldn't say that Mongolians are against the mining sector

Journalist B.Erdenechimeg

2018-02-27 12:47 GMT+8

We interviewed with A.Bilguun, a young and energetic economist, director of MIBG LLC. We touched issues on capital market of Mongolia, IPO of Lend.mn and gold royalty.

-First of all, can you please tell our readers a little bit about yourself?  About your background, which university did you graduate and your work experience?
-My name is Bilguun, I have graduated from the Saint Mary's University in Halifax, NS, Canada. I have become interested in capital markets since a number of Mongolia focused exploration companies started to emerge on the Toronto Stock Exchange (TSX) in early 2000's so I decided to study finance.

Upon graduation in 2007, I started to work as an investment banking associate for a Toronto based boutique investment bank called Toll Cross Securities. Decided to return to Mongolia in 2009 because I saw more opportunity in my home country as it was obvious that Mongolia would become an investment destination for many foreign businesses and investors.

Mongolia's financial sector features high interest rate so investors should expect at least 20% return from Mongolian equities.

-When you studied in Canada did you receive any scholarships?
-Canada has developed an extensive social welfare system therefore higher education is less costly compared to the US or UK. That made it possible for me to go to school there. I relied on my family and close friends' support.

-What would you say about Canadian higher education system, and how does it compare with that of US, UK and Germany? 
-One key advantage I have observed in Canada is that it is very multicultural, so Canadians are very respectful of other cultures and their values. This will be a key characteristic of any society that is aspiring to play a leading role in the world. In terms of the quality of education, I don't think I can compare those educational systems. However I would say it is as good as the students' willingness to learn and develop themselves. We live in the internet age where people could basically learn about anything they want to learn.

-Last year, you received a "Friends of Canada" honorary title and you are the very second person who have been acknowledged with this title.   
-I am honored to have received such a distinguished award, I don't think this award is meant to reflect on my accomplishments which is minimal, but rather an expectation on what the two countries expect of me in the future on promoting social and commercial cooperation between the two countries. I think Canada played a significant role in shaping today's Mongolia, especially in the mining sector. But now I observe that Canadians are looking to assist us in implementing development programs especially on improving resource governance and gender equality areas. 

-Canadian Embassy in Mongolia started implementing two different projects in Mongolia, which are financed by Government of Canada. Can you please elaborate on them?
-Both of the projects are designed to help Mongolia to benefit more from our extractive sectors. SESMIM (Strengthening Extractive Sector Management in Mongolia) is a Canadian Government funded technical assistance project that is designed to promote stable resource governance in Mongolia. However MERIT is a project that is designed to enhance public sector management of the extractive sector.

"Team 2030" invited P Ochirbat as a guest

-You belong to «Team 2030». What is the goal of «Team 2030»?
-Team 2030 was founded by a group of friends who share a common goal. That goal is to look at various public issues from a researcher's perspective. Especially in this day and age of social media and fake news, we felt that the public needed an angle that looked at a public issue from various sides. In terms of the team, it consists of young professionals who come from various sectors in Mongolia such as the public services, state owned entities, banking, and mining.

OUR EQUITIES AND BONDS MARKET NEEDS TO BECOME EVEN BIGGER

-Since 2009, you have been working in the investment sector. Which countries attracted more investment in the capital market in the last year?
-The US companies were always known for their ability to access capital markets and raise billions of dollars, but recently the rise of the HKEx as the IPO destination is an interesting phenomenon. This means many mainland Chinese businesses are accessing the capital markets easily.

-What are some of the main factors that have been negativily affecting foriegn investments in Mongolia, discouraging foreign investors decision to take part in Mongolian?
-The main reason why someone would invest in Mongolia is the potential for high yield return. We have to keep in mind that Mongolia's financial sector features high interest rate so investors should expect at least 20% return from Mongolian equities. Right now there are only few Mongolian sectors that could offer this return and those are mining, financial services, and foreign trade. On the other hand the risk for investors are high as well. Political instability is the utmost concern for investors, also fluctuations of Mongolian Tugrik makes it hard for investors as well.

Mining is truly the industry that we must rely on and develop in the near term and while the commodities price is still strong.

-Last year, HEINEKEN has entered into an agreement to merge its businesses in Mongolia with APU JSC. Some experts expect the consolidation will happen in the coming 5 years in Mongolian business environment. Do you agree this matter.
-Consolidation in every sector is unavoidable. As Mongolia's economy evolves and matures our companies will need to become more competitive. Competition should not be limited to domestically but Mongolian companies need to become competitive on global stage. In order for this to happen, there must be consolidation.

We need to keep in mind consolidation brings synergies for companies and it eliminates inefficient operations. Honestly speaking, Mongolian state owned companies are very inefficient with their resources and if the markets were the only factor these SOEs should be subjected to restructuring activities.      

-MIBG acted as a syndicate underwriter for LendMN. How do you evaluate the future of Fintech companies in Mongolia?
-Our team was responsible for financial analysis of this exciting business.

The way technology could transform an industry is amazing. LendMN's potential impact on Mongolian micro loans market and consumer behavior could be huge. LendMN could help the fight against street level loan sharking activities and could even impact the pick-pocketing crime in Mongolia. It was a great experience to have worked with such an energetic and driven team whose vision was clear from the very beginning.

-Private banks are offering credit cards and there are too many pawnshops in Ulaanbaatar, almost every street have more than one pawnshop. Also mobile operators have a loaning service via sms. I mean there are so many rivals in the market?
-And there will be even more competitors in the future. This is the nature of free markets- competition. The end result should be a better product for consumers and competitive Mongolian companies that could compete in international markets.

Actually consumer loans will likely increase. Because as economy strengthens, employees- who are also consumers- will likely feel more confident in their future income, therefore they will likely start to spend on durable goods, on the other hand, as economy expands and the outlook is strong, foreign investors will want to invest more money into the country, which will play a role in decreasing the interest rate.

What can we produce cheaper or better than Russian or Chinese companies? For now, the only product is minerals and this is not a bad thing.

-Parliament approved Law on private banks in January. According this law, private banks are not allowed to work in the capital market. Law makers point out that a new law will ensure fair competition. What is your opinion concerning this matter?   
-The bank owned securities brokers and dealers will likely go through a restructuring to comply with this legislation. I don't think there will be a great deal of change in the capital markets competition.  

-Market capitalization reached MNT 2.4 trillions and increased 65 percent just in one year. What are the main factors for this growth?
-Mongolia is going through an economic growth recovery period. This is backed by the IMF's Extended Funds Facility program and further magnified by strong commodities prices.

-Parliament approved an amendment on Tax law to collect 10 percent savings interest taxation last year. Have this new law been affective?
-The savings interest taxation is nothing new. I believe interest income should be taxed as any other income.

-Finance Minister, Ch Khurelbaatar, refused to issue Government of Mongolia`s bonds because of its high cost. For this reason I expect that market capitalization cannot keep the high increase as previous year in 2018?
-Last year's growth was attributable to the equities market. Actually there are two different markets on the MSE. First there is the equities market which accounts for all the stocks, and second there is the fixed income market which accounts to all Government and publicly listed bonds.

The Government of Mongolia's bonds have played a significant role on the financial markets over the past few years because it acts as the benchmark rate. In other words, the GoM bond should be the least risky asset that investors could buy on the MSE, therefore the yield rate on the GoM bonds acts as the floor rate on every other financial assets.

I hope this important product continues to be utilized by the Government, because the existence of the those bonds have nothing to do with its interest rate, actually an increased demand for GoM bonds could even drive the interest rate lower.

-We received USD 473 million FDI last year and 79 percent of FDI belongs to mining. You are considered a mining expert. In your opinion how long will this situaion continue?   
-As previously mentioned, the most competitive sectors will attract the most investment. Mining is truly the industry that we must rely on and develop in the near term and while the commodities price is still strong. In my opinion, as a country and as a society we need to build up enough economic reserves to invest and strengthen the other sectors.

How are we going to build that economic reserves is the question to answer. In a pragmatists' eye the mining sector is the obvious advantage Mongolia enjoys over other economies, however this sector is hindered by unstable policies and legislations.

Any pragmatic investor will look at the export potential of their project. Our economy is only 11-12 billion USD and has only over 3 million consumers. However just across the border to the South there is a 12.4 trillion USD economy and 1.3 billion consumers, and to the North there is a 1.5 trillion USD economy and over 140 million consumers.

So it becomes the question of what products Mongolia can export and be competitive on those markets, in other words what can we produce cheaper or better than Russian or Chinese companies? For now, the only product is minerals and this is not a bad thing, we just have to maintain our advantage. And as time passes we will build up enough economic resources to develop those other sectors and products.

I wouldn't say that Mongolians are against the mining sector. Most Mongolians understand the importance of this sector. Some environmental groups mistakenly associate micro-miners and the environmental damage that they cause with the whole mining sector. With regards to the common local community issues, the Government must allocate more of the mining taxes to the local communities.   

-What is your next project?
-There are several projects that I am working on. I am allocating more time on Erdene Resource Development Corp's newly emerging gold projects. Also actively planning to organize a Mongolian investment promotion event on the upcoming PDAC conference in Toronto, Canada.

-Let`s imagine that I have a MNT one million and I want to invest in capital market for the first time in my life. What do you recommend?
-It will have to depend on how that person wants to make that money work for him or her. First and foremost we live in Mongolia, which is a high risk environment. The safest investment in Mongolia is rated B3 (Moody's) at the moment so if that person wants that money to keep its value then it is best to invest in foreign markets. But if that person wants to earn higher return there are more options.

-Investors and companies from 23 countries invested in Tavan Tolgoi JSC. What other Mongolian JSCs attracted foriegn investment more?
-APU, Gobi are the usual names that investors prefer over other companies because they are deemed to have better export potential and above average corporate governance practice. Lately there are newer companies that are emerging which is more suitable for Mongolia focused investors, and LendMN is definitely one of those products.

-Erdene is actively researching the possibility to list on the MSE. The company has been in Mongolia for over 14 years now and has developed a strong bond with its local community as well as the general business community in Mongolia. So for anyone, Erdene could be viewed as the natural candidate to break the wind on the MSE but the company is evaluating its options carefully.

-What about “Turquoise Hill resources”, “Zanadu mines”? They have minefields in Mongolia and both listed in foriegn countries.
-Those companies and its executives share our value of ultimately developing Mongolia. I would say they watch the developments in Mongolia very carefully.

-To mobilize capital market, what immediate action is need to be taken by Mongolian Stock Exchange and Financial Regulatory Commission?
-I've seen that both of those organizations are striving to be better. They are more open minded and willing to try new things because their leaders understand that in order to keep pace with global developments, Mongolia's financial sector needs to be efficient. As a participant in Mongolia's capital markets, I think we need to make our trading and clearing system to be better in line with international best practices, we must make it easier for foreign money to flow in and out of the country.

-Last year, total tradings in MSE increased 130 percent, but MSE itself is faced with a deficit. How to decrease a deficit amount?
-Simple, our equities and bonds market needs to become even bigger.

-Kh Altai, director of MSE emphasizes in his every interview about FTSE 100 Index.  (The Financial Times Stock Exchange 100 Index) To involve in this calculation which organization will be in charge?
-This should be an objective of everyone, ultimately the Government of Mongolia- namely the Ministry of Finance should coordinate this effort because it concerns the development of capital market of Mongolia. The potential benefit is tremendous in attracting foreign direct investors.

-Gold royalty will be increased from 2.5 percent to 5 percent since 2019. Will this amendment affect FDI?
-This will have the most adverse effect on micro gold miners who depend on placer mining activities. Those micro-miners have less ability to access equity capital and mostly dependent on high interest loans. The increase in royalty rate could squeeze their margin, forcing many micro-miners out of the business or force them to hide their activities. Gold is a strategic commodity for a country like Mongolia, where our central bank needs increasing levels of hard currency to provide stability for Mongolian Tugrik.

-I would like to ask you one more question before we conclude this interview. Can you please tell the readers about gold price and its near term trends in terms of investing and purchasing?
-There are two major forces that is being applied on gold price. First is the geolpolitical instability and various political events are driving gold price higher.

On the other hand various governments in Europe and North America are tapering their quantitative easing monetary policy therefore the demand for fiat currency might strengthen and apply a downward pressure on gold price. In general I think the political events and equities market turbulence will likely cause gold to remain strong for 2018.

-Тhank you for your time. 

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