Economy is expected to correct itself staring Q2 2015
While dollar exchange rate was at MNT1,850 at the beginning of November it has reached MNT1,879 just in a few days. U.Ganzorig, President of Capital Market Association, discusses the reasons and rationale behind such sudden increase.
Although dollar rate has been stable at MNT1,850, it started to go up recently.
Economic factors have changed, as foreign trade deficit started to decline, implying evident surplus. With this in mind, I see it as dollar rate is being deliberately inflated. Mass is not being informed on these movements timely, leading to the fear among them that dollar rate might go up to MNT2,000. Before, there were fundamental economic factors to affect the exchange rate. Now the situation has changed. We need to distribute correct information.
If one buys dollar to pay for tuition fee, then it is demand based. But today is not September. If one buys dollar thinking that rate will go up, then one has motives to cash up on rate differences. In other words, it is speculative increase.
We are not living in western country. People chose higher interest rates, over stable and secure commercial banks, and became victims of savings and loan cooperatives. It goes same with exchange rates. In fear of exchange rates to jump up people quickly switched their savings into dollar savings.
Was it that much evident?
As dollar exchange rate started to settle amount of tugrug savings started to grow. Back in 2008-2009 everyone was talking about possible dollarization risk. With exchange rate increase people quickly switch to dollar savings. This is absolutely not necessary, unless one has to do purchases with dollar. It was almost at the point where dollar rate started to stabilize around 1,600-1,700, but here we go and adding oil to the fire, and it went up to 1,750. Fear of more rate increase drove it higher over 1,800. There is wariness for this trend to continue. If it is economy based increase we can do nothing about it.
How do you assess Mongol Bank participation?
Mongol Bank has announced to be flexible. Probably only participation they have is to intervene when exchange rate starts sudden movements. Mongol Bank also participates when the rates go down as well, which we have witnessed in 2010 and 2011. At that time dollar inflow was at it’s highest. If Mongol Bank stayed out, dollar exchange rate could have plunged to 1,000. But Mongol Bank started buying dollar to increase their currency reserves. I was criticizing that. But then when I think of it now, it could have been way more disastrous if dollar went up from 1,000 to 1,800. This is the difficulty of small economy like ours. It may lead to greater dangers if central bank intervenes every time.
Lately there is notion to relate the increasing dollar rate with reduced currency reserve of Mongol Bank.
As of October, currency reserve at Mongol Bank was at USD1.5 billion. This equals to several months’ of financing for foreign trade deficit. Unless it drops to USD300-400 million, it is early to worry. Currency reserve plunged to its historical minimum in 2009, when it dropped to USD500 million. Economy faces currency deficit at times when there is increased dollar demand or import surpasses export, meaning the dollar outflow.
Currency reserves are used to deal with sudden changes in exchange rates. Reserve amount was USD4.5 billion and dropped to USD1.5 billion. USD3 billion was directed at financing the trade deficit. Deficit itself had two sources.
Consumption of diesel fuel used only in mining sector surpassed fuel consumption of other vehicles altogether.
First, import has increased enormously. As economy started to expand the consumer demand followed the trend. For instance, people started buying cars, which can be witnessed at our roads today, with traffic jams we experience. We are not producer nation. We even consume imported milk. It is natural for consumer demand to go up when there is cash to spend.
Second, increase in the imports surpassed the consumption. This relates to the purchase of heavy mining machinery and oil to fuel them. Consumption of diesel fuel used only in mining sector surpassed fuel consumption of other vehicles altogether. Balancing export should have appeared simultaneously, but 90 percent of all the export is mining product. Mining sector’s cost-recovery takes up longer periods of time. Mining equipment imported back in 2011 started generating revenues only now in 2014, when export output increased by 30 percent. This was the side where our policy makers have miscalculated.
Moreover, we could not utilize what we have on hand, such as meat, milk, leather and it is same with tourism. We only talk, but no action has been seen so far. Every day on Bloomberg or CNN I see advertisements saying come and experience this magnificent Malaysia, India or Indonesia. Mongolia is nowhere to be seen.
Ahead is a huge holiday season. Consumption goes up during this time of the year. People fear that exchange rates are to be inflated.
Holiday season stopped having drastic impact on the economy. Before it sure was the main reason for inflated prices and rates. But we should remember that size of our economy was not as much as it is now. In last five years Mongolian economy tripled. If earlier Mongolians spent around USD40-50 million for holiday season, nowadays this number is around USD60-70 million, which is not much compared to the big picture. This number won’t go up in coming few years as well, because population is not increasing rapidly.
On the other hand, higher exchange rates lead to decline in imports. Suppose I exchange my tugrug into dollar, buy smart tv from abroad and try to sell it here. No one is willing to buy it. Nominal rate for dollar have increased by 50 percent since 2011, which translates as if I bought my cell phone for MNT100,000, today its pricetag is at MNT 150,000. Simple as this, import rates dropped by 16 percent in past one year, while exports grew by 30 percent, which is a significant increase. Net trade deficit stands at USD24 million as of Sep 2014. This number was at USD730 million a year ago. This clearly shows that basic economic situation has changed, which might imply it would be a wrong decision to switch tugrug savings into dollar savings.
Foreign trade balance is comprised of two categories: commodity and service. Foreign commodity trade balance surplus is at USD336 million, which is first. This is the outcome of 30 percent increase in exports.
However, economy is not good yet.
Indeed. This year we have seen improvements in foreign trade balance. Economy is expected to correct itself staring Q2 2015, if we can direct foreign investments to us and make improvements with RioTinto on OT.
Mongol Bank explained the surplus in foreign trade balance as a result of decline in luxury product consumption. Decline in luxury consumption may also lead to a negative outcome as well. We are not producer nation.
True. Exchange rate is main factor in imports. Personally I think economy is to improve when exchange rates are at MNT1,600. Statistics show import on cars dropped by USD100 million, which is a huge drop. Same trend was observed in mining equipment and its fuel imports. GDP growth currently is at 7.5% and main contributors were mining and construction sector.
Mongol Bank and cabinet repeatedly said that exchange rate increase is a good chance for domestic producers. Do you agree with this statement?
Not at all. This is one of the most irresponsible statements one could ever make. Our consumption is hugely dependent on imports. It is government responsibility to ensure quality goods at lower prices.
For instance, let’s suppose Erdenet yearly revenue is USD1 billion and if we convert into tugrug it was MNT1.2 trillion, but today it will be MNT1.8 trillion. The difference of MNT600 billion will be accounted as profit. This might look as if exchange rate is profitable. Don’t be fooled, it is not the real profit; it is only accounting profit. It won’t do anything good if government takes it as tax and distributes to people. We are not living in communist regime anymore.
Are there countries where currency depreciation literally translated into profit?
There are only 2-3 cases. One is Japan. It is profitable for them when yen depreciates. They are exporters of end-user products such as electronic devices and equipment. End-user products have advantage of price competition. End-user decides whether to buy Japan made or Korean made TV. Suppose yen rate drops, this leads to cheaper prices for Japan made TVs. I will buy Japan made TV as end-user. This is not going to work for Mongolia. Mongolia end-user product exports are only cashmere garments. Most of our export is raw minerals. It doesn’t matter for producers whether mineral ore is of Mongolian or Chinese origin, because it is same, whereas, consumer has options based on design, technical specifics and other features available when shopping for end-user products.
Economy books indeed state that producers might advantage from currency depreciation and that’s why most of our western educated leaders tend to use this logic. Currency depreciation that we are experiencing is hitting hard on every one. When exchange rates were lower businesses took dollar loans, which offered lower interest rates. Real estate developers are not dropping their prices at all, even if market is not doing well. This is because they have procured construction materials with foreign currency. It clearly shows that currency depreciation cannot be a good thing. Not in 15 years at least.
When we seek answers for what do we do now in this recession, many say to buy domestic produced products.
Personally, I would advise to keep tugrug savings. Do not switch to dollar savings. This way one will be contributing a lot to economy. Exchange rate is to be stable from now on, as there are no more economic factors leading to further increase. What is there for consumer that domestic producers offer? Should I buy felt slippers instead of Chinese slippers? From economist perspective, I’d say there is not much value in doing so. There is no significant domestic production.
Only SMEs?
Very small ones. SMEs usually prosper when there is big corporation. Let’s take Toyota, huge corporation and there are many hundreds of suppliers, which supply only one part for car. This model is nowhere to be seen in Mongolia, only if we count some of the beverage producers.
On the other hand, it also won’t do any good to always use imported goods.
If it is cheaper, then why not? What is the use for a Mongolian entity with five workers to compete with Chinese manufacturer with 500 workers, with sophisticated management system? Can they produce quality product and will that be cost effective? We have to think how we should deal with global market. Let’s produce domestically products of strategic importance, rest can be directed for exports. Can we compete with others in making purses?
SME with 10 workers can come up with 2 designs. Can it satisfy demand? It is efficient to buy cheap and quality product. My point here is if we are really good at making shoes, we need to go global. Market demands are lower prices and better quality. Many successful manufacture models suggest that it is only profitable when there is mass production, otherwise costs per unit will go up.
What is considered as products of strategic importance?
Food, fuel and energy. If we can secure these, we won’t be bullied by bigger states like Belarus or Ukraine. If we want to be independent, we have to develop our energy sector. Food security is a must.
State budget forecasts exchange rate at MNT1750. What are your thoughts?
Currency reserve at Mongol Bank is not bad. Foreign trade balance is somehow stable. Recent swop deals with China Central bank. If we succeed with OT agreement, I don’t see anything against it. It is important to restore investor confidence.
Will foreign trade balance be positive in coming years? Exploration licenses are to be issued starting next year. If explorations to kick start, import will surpass export.
Import is sure to surpass again. We need to secure foreign investment. I believe our leaders won’t do same mistake twice. We have made mistakes with OT deal. Last two years foreign investment dropped by USD2.8 billion. This amount balances with the USD3 billion shortage at Mongol Bank. Instead of creating favorable environment for investors, Mongolia turned its back.
Namely?
Related with OT. Mongolia made huge mistake by acquiring 34 percent stake of the project. This led to negative outcomes we are currently experiencing with this project; investors are in a waiting mode and just observe what is next. Moreover, we have put too much attention on OT and made others believe that OT is the only project.
There have been enough talks on how we scared investors. But no one names any particular person.
Many refer in this situation to the old investment law. 85 percent is because of OT project. If second phase is agreed to proceed, investments should pick up, but not right away. It might take six months to a year. Delays with OT have drastic effect on our economy.
OT Board Member Ch. Otgochuluu was criticizing owning of 34 percent stake at OT. You seem to agree with it.
Oyu Tolgoi is our property. We have the right to lease it through mining operations. Suppose I own spare apartment, I rent it out. It is up to the tenant what to do in the apartment, but he has to pay monthly rent.
What we have done equals to buying out 34 percent of my own apartment. Constitution clearly states that mineral resource is the property of Mongolians. With 34 percent we can’t even have voting right at the board. This is one of the mistakes we have ever done.
I suppose you have voiced your concerns over it?
Sure enough. At that time civil movements and political parties highly politicized this issue, and they are all silent now, when whole economy is struggling.
Who are they?
Political parties DP and MPP (MPRP at that time) and other civil activist movements.
From top of my head I recall S. Bayartsogt was Finance Minister and Zorigt was Mining Minister.
You are quite wrong here. S. Bayar was the PM. Those three just put on paper what was already discussed publically. They weren’t after 34 percent. Initiative to own OT started back in 2004. Decisions were made based on public sentiment and emotions, instead of economic research. On the other hand, civil activists were in distrust with political parties. Political parties instead of clarifying the whole situation chose the populist approach. It is like feeding more candies when your child’s teeth are decayed. It is wrong to blame specific persons. We should talk about the agreement context and conditions.
Was the agreement then lobby from other party?
Frankly speaking, Rio Tinto knew us very well. They could foresee the current results. Rio Tinto has extensive experience of 40 years dealing with mineral resource rich countries with lack of proper economic development, like us. They could easily assess our small economy and forecast it. They have no urge to proceed with the agreement at this stage. Like any other businesses, it is profit driven.
One more thing we need to be aware of is that owning of 34 percent at OT was before Rio Tinto came into picture. In this regard, I do not blame Rio Tinto. Would any of us listen at that time if any one told us it is wrong to own a stake at OT? We should think. We only get back to our senses when economy is experiencing downturn, after spending more than half of currency reserves to fight currency depreciation and when all the investors left. Price is too high.
Thank you for your time.
Economy is expected to correct itself staring Q2 2015
While dollar exchange rate was at MNT1,850 at the beginning of November it has reached MNT1,879 just in a few days. U.Ganzorig, President of Capital Market Association, discusses the reasons and rationale behind such sudden increase.
Although dollar rate has been stable at MNT1,850, it started to go up recently.
Economic factors have changed, as foreign trade deficit started to decline, implying evident surplus. With this in mind, I see it as dollar rate is being deliberately inflated. Mass is not being informed on these movements timely, leading to the fear among them that dollar rate might go up to MNT2,000. Before, there were fundamental economic factors to affect the exchange rate. Now the situation has changed. We need to distribute correct information.
If one buys dollar to pay for tuition fee, then it is demand based. But today is not September. If one buys dollar thinking that rate will go up, then one has motives to cash up on rate differences. In other words, it is speculative increase.
We are not living in western country. People chose higher interest rates, over stable and secure commercial banks, and became victims of savings and loan cooperatives. It goes same with exchange rates. In fear of exchange rates to jump up people quickly switched their savings into dollar savings.
Was it that much evident?
As dollar exchange rate started to settle amount of tugrug savings started to grow. Back in 2008-2009 everyone was talking about possible dollarization risk. With exchange rate increase people quickly switch to dollar savings. This is absolutely not necessary, unless one has to do purchases with dollar. It was almost at the point where dollar rate started to stabilize around 1,600-1,700, but here we go and adding oil to the fire, and it went up to 1,750. Fear of more rate increase drove it higher over 1,800. There is wariness for this trend to continue. If it is economy based increase we can do nothing about it.
How do you assess Mongol Bank participation?
Mongol Bank has announced to be flexible. Probably only participation they have is to intervene when exchange rate starts sudden movements. Mongol Bank also participates when the rates go down as well, which we have witnessed in 2010 and 2011. At that time dollar inflow was at it’s highest. If Mongol Bank stayed out, dollar exchange rate could have plunged to 1,000. But Mongol Bank started buying dollar to increase their currency reserves. I was criticizing that. But then when I think of it now, it could have been way more disastrous if dollar went up from 1,000 to 1,800. This is the difficulty of small economy like ours. It may lead to greater dangers if central bank intervenes every time.
Lately there is notion to relate the increasing dollar rate with reduced currency reserve of Mongol Bank.
As of October, currency reserve at Mongol Bank was at USD1.5 billion. This equals to several months’ of financing for foreign trade deficit. Unless it drops to USD300-400 million, it is early to worry. Currency reserve plunged to its historical minimum in 2009, when it dropped to USD500 million. Economy faces currency deficit at times when there is increased dollar demand or import surpasses export, meaning the dollar outflow.
Currency reserves are used to deal with sudden changes in exchange rates. Reserve amount was USD4.5 billion and dropped to USD1.5 billion. USD3 billion was directed at financing the trade deficit. Deficit itself had two sources.
Consumption of diesel fuel used only in mining sector surpassed fuel consumption of other vehicles altogether.
First, import has increased enormously. As economy started to expand the consumer demand followed the trend. For instance, people started buying cars, which can be witnessed at our roads today, with traffic jams we experience. We are not producer nation. We even consume imported milk. It is natural for consumer demand to go up when there is cash to spend.
Second, increase in the imports surpassed the consumption. This relates to the purchase of heavy mining machinery and oil to fuel them. Consumption of diesel fuel used only in mining sector surpassed fuel consumption of other vehicles altogether. Balancing export should have appeared simultaneously, but 90 percent of all the export is mining product. Mining sector’s cost-recovery takes up longer periods of time. Mining equipment imported back in 2011 started generating revenues only now in 2014, when export output increased by 30 percent. This was the side where our policy makers have miscalculated.
Moreover, we could not utilize what we have on hand, such as meat, milk, leather and it is same with tourism. We only talk, but no action has been seen so far. Every day on Bloomberg or CNN I see advertisements saying come and experience this magnificent Malaysia, India or Indonesia. Mongolia is nowhere to be seen.
Ahead is a huge holiday season. Consumption goes up during this time of the year. People fear that exchange rates are to be inflated.
Holiday season stopped having drastic impact on the economy. Before it sure was the main reason for inflated prices and rates. But we should remember that size of our economy was not as much as it is now. In last five years Mongolian economy tripled. If earlier Mongolians spent around USD40-50 million for holiday season, nowadays this number is around USD60-70 million, which is not much compared to the big picture. This number won’t go up in coming few years as well, because population is not increasing rapidly.
On the other hand, higher exchange rates lead to decline in imports. Suppose I exchange my tugrug into dollar, buy smart tv from abroad and try to sell it here. No one is willing to buy it. Nominal rate for dollar have increased by 50 percent since 2011, which translates as if I bought my cell phone for MNT100,000, today its pricetag is at MNT 150,000. Simple as this, import rates dropped by 16 percent in past one year, while exports grew by 30 percent, which is a significant increase. Net trade deficit stands at USD24 million as of Sep 2014. This number was at USD730 million a year ago. This clearly shows that basic economic situation has changed, which might imply it would be a wrong decision to switch tugrug savings into dollar savings.
Foreign trade balance is comprised of two categories: commodity and service. Foreign commodity trade balance surplus is at USD336 million, which is first. This is the outcome of 30 percent increase in exports.
However, economy is not good yet.
Indeed. This year we have seen improvements in foreign trade balance. Economy is expected to correct itself staring Q2 2015, if we can direct foreign investments to us and make improvements with RioTinto on OT.
Mongol Bank explained the surplus in foreign trade balance as a result of decline in luxury product consumption. Decline in luxury consumption may also lead to a negative outcome as well. We are not producer nation.
True. Exchange rate is main factor in imports. Personally I think economy is to improve when exchange rates are at MNT1,600. Statistics show import on cars dropped by USD100 million, which is a huge drop. Same trend was observed in mining equipment and its fuel imports. GDP growth currently is at 7.5% and main contributors were mining and construction sector.
Mongol Bank and cabinet repeatedly said that exchange rate increase is a good chance for domestic producers. Do you agree with this statement?
Not at all. This is one of the most irresponsible statements one could ever make. Our consumption is hugely dependent on imports. It is government responsibility to ensure quality goods at lower prices.
For instance, let’s suppose Erdenet yearly revenue is USD1 billion and if we convert into tugrug it was MNT1.2 trillion, but today it will be MNT1.8 trillion. The difference of MNT600 billion will be accounted as profit. This might look as if exchange rate is profitable. Don’t be fooled, it is not the real profit; it is only accounting profit. It won’t do anything good if government takes it as tax and distributes to people. We are not living in communist regime anymore.
Are there countries where currency depreciation literally translated into profit?
There are only 2-3 cases. One is Japan. It is profitable for them when yen depreciates. They are exporters of end-user products such as electronic devices and equipment. End-user products have advantage of price competition. End-user decides whether to buy Japan made or Korean made TV. Suppose yen rate drops, this leads to cheaper prices for Japan made TVs. I will buy Japan made TV as end-user. This is not going to work for Mongolia. Mongolia end-user product exports are only cashmere garments. Most of our export is raw minerals. It doesn’t matter for producers whether mineral ore is of Mongolian or Chinese origin, because it is same, whereas, consumer has options based on design, technical specifics and other features available when shopping for end-user products.
Economy books indeed state that producers might advantage from currency depreciation and that’s why most of our western educated leaders tend to use this logic. Currency depreciation that we are experiencing is hitting hard on every one. When exchange rates were lower businesses took dollar loans, which offered lower interest rates. Real estate developers are not dropping their prices at all, even if market is not doing well. This is because they have procured construction materials with foreign currency. It clearly shows that currency depreciation cannot be a good thing. Not in 15 years at least.
When we seek answers for what do we do now in this recession, many say to buy domestic produced products.
Personally, I would advise to keep tugrug savings. Do not switch to dollar savings. This way one will be contributing a lot to economy. Exchange rate is to be stable from now on, as there are no more economic factors leading to further increase. What is there for consumer that domestic producers offer? Should I buy felt slippers instead of Chinese slippers? From economist perspective, I’d say there is not much value in doing so. There is no significant domestic production.
Only SMEs?
Very small ones. SMEs usually prosper when there is big corporation. Let’s take Toyota, huge corporation and there are many hundreds of suppliers, which supply only one part for car. This model is nowhere to be seen in Mongolia, only if we count some of the beverage producers.
On the other hand, it also won’t do any good to always use imported goods.
If it is cheaper, then why not? What is the use for a Mongolian entity with five workers to compete with Chinese manufacturer with 500 workers, with sophisticated management system? Can they produce quality product and will that be cost effective? We have to think how we should deal with global market. Let’s produce domestically products of strategic importance, rest can be directed for exports. Can we compete with others in making purses?
SME with 10 workers can come up with 2 designs. Can it satisfy demand? It is efficient to buy cheap and quality product. My point here is if we are really good at making shoes, we need to go global. Market demands are lower prices and better quality. Many successful manufacture models suggest that it is only profitable when there is mass production, otherwise costs per unit will go up.
What is considered as products of strategic importance?
Food, fuel and energy. If we can secure these, we won’t be bullied by bigger states like Belarus or Ukraine. If we want to be independent, we have to develop our energy sector. Food security is a must.
State budget forecasts exchange rate at MNT1750. What are your thoughts?
Currency reserve at Mongol Bank is not bad. Foreign trade balance is somehow stable. Recent swop deals with China Central bank. If we succeed with OT agreement, I don’t see anything against it. It is important to restore investor confidence.
Will foreign trade balance be positive in coming years? Exploration licenses are to be issued starting next year. If explorations to kick start, import will surpass export.
Import is sure to surpass again. We need to secure foreign investment. I believe our leaders won’t do same mistake twice. We have made mistakes with OT deal. Last two years foreign investment dropped by USD2.8 billion. This amount balances with the USD3 billion shortage at Mongol Bank. Instead of creating favorable environment for investors, Mongolia turned its back.
Namely?
Related with OT. Mongolia made huge mistake by acquiring 34 percent stake of the project. This led to negative outcomes we are currently experiencing with this project; investors are in a waiting mode and just observe what is next. Moreover, we have put too much attention on OT and made others believe that OT is the only project.
There have been enough talks on how we scared investors. But no one names any particular person.
Many refer in this situation to the old investment law. 85 percent is because of OT project. If second phase is agreed to proceed, investments should pick up, but not right away. It might take six months to a year. Delays with OT have drastic effect on our economy.
OT Board Member Ch. Otgochuluu was criticizing owning of 34 percent stake at OT. You seem to agree with it.
Oyu Tolgoi is our property. We have the right to lease it through mining operations. Suppose I own spare apartment, I rent it out. It is up to the tenant what to do in the apartment, but he has to pay monthly rent.
What we have done equals to buying out 34 percent of my own apartment. Constitution clearly states that mineral resource is the property of Mongolians. With 34 percent we can’t even have voting right at the board. This is one of the mistakes we have ever done.
I suppose you have voiced your concerns over it?
Sure enough. At that time civil movements and political parties highly politicized this issue, and they are all silent now, when whole economy is struggling.
Who are they?
Political parties DP and MPP (MPRP at that time) and other civil activist movements.
From top of my head I recall S. Bayartsogt was Finance Minister and Zorigt was Mining Minister.
You are quite wrong here. S. Bayar was the PM. Those three just put on paper what was already discussed publically. They weren’t after 34 percent. Initiative to own OT started back in 2004. Decisions were made based on public sentiment and emotions, instead of economic research. On the other hand, civil activists were in distrust with political parties. Political parties instead of clarifying the whole situation chose the populist approach. It is like feeding more candies when your child’s teeth are decayed. It is wrong to blame specific persons. We should talk about the agreement context and conditions.
Was the agreement then lobby from other party?
Frankly speaking, Rio Tinto knew us very well. They could foresee the current results. Rio Tinto has extensive experience of 40 years dealing with mineral resource rich countries with lack of proper economic development, like us. They could easily assess our small economy and forecast it. They have no urge to proceed with the agreement at this stage. Like any other businesses, it is profit driven.
One more thing we need to be aware of is that owning of 34 percent at OT was before Rio Tinto came into picture. In this regard, I do not blame Rio Tinto. Would any of us listen at that time if any one told us it is wrong to own a stake at OT? We should think. We only get back to our senses when economy is experiencing downturn, after spending more than half of currency reserves to fight currency depreciation and when all the investors left. Price is too high.
Thank you for your time.