/ Mar 30, 2009

The public confidence in the banking sector is still strong

Trade and Development Bank of Mongolia is the one of the Lead Sponsors in Mongolia-Asia investment conference in Hong Kong this march 2009. Would you please explain the importance of the conference to our reader?

The conference draws on international experience in leading independent debates with high level decision-makers. It is a platform for outlining investment and financial climates of Mongolia, in an environment conducive to interacting with key stakeholders including top officials, investors, the media and financiers. TDB has played a principal role in the conference since 2006 through being a Lead Sponsor, hosting an informative workshop and participating actively in the debates. TDB as the leader in the corporate and investment banking market in Mongolia, knows well the local economic and financial situation. We think that it is important to share knowledge and promote a spirit of partnership with government and investors for the welfare of the Mongolian economy. The event helps one understand and identify where the best opportunities are in Mongolia and how best to access these opportunities. It gives TDB a great opportunity to connect with many investors who are interested in doing business in Mongolia. In that way the conference itself is very important for contributing to the country’s economy and public and private sector development.

Randolph Koppa, President of TDB

Foreign direct investment grew each year since 2001. Do you think that this trend will continue in the next years? As an expatriate in Mongolia, what major attractiveness has Mongolia?
I’ve been working in Mongolia since 2004 and have worked in 12 different countries for almost 30 of the last 43 years. I have very much enjoyed working in Mongolia and participating in the rapid development of the financial sector and the growth of TDB. Mongolia has a comparatively stable political situation and a strategic location between the vast emerging markets of Russia and China. Mongolia also disposes extensive and largely untapped natural resources. Statistics shows that foreign direct investments in Mongolia are growing in the last years, mainly in the mining. 67% of foreign direct investment flow into mining and 73.4% of total exports are mineral products. Despite the world financial crises, the Tavan Tolgoi, Oyu Tolgoi, Tumurtei, Asgat, Dornod, and Gurvanbulag-Mardai projects will further stimulate foreign investment in Mongolia.


How do you expect the banking sector to evolve in the coming years? How would you assess the overall outlook of Mongolia's banking system in this financial crisis?

Fortunately, Mongolia’s banking system has not been very integrated with the international capital markets. Mongolian banks are not dependent on funding from the international interbank market. Moreover, Mongolian banks have not invested in the asset backed securities and collateralized debt obligations issued and distributed by investment banks. But, giving the high inflation in 2008 and the recent instability of the tugrug versus US dollars, the Bank of Mongolia tightened the money supply, and an economic slowdown is already being felt. Commodity prices are down in the international market, which means Mongolia’s export values are going down. With the slowing current economic environment of Mongolia, Mongolia’s banking system is being tested. Some recent measures by the government and the multilateral financial institutions should stabilize the country’s reserve position and provide some needed funds into the banking system. The prospect of agreements being reached soon on a couple of the mentioned mining projects will help to reinvigorate the foreign investment flow and provide both funds and stimulus for the banks and businesses.

Regarding the evolution of the banking sector, I would say the competition in the banking sector has spurred innovation and the introduction of new products, such as mobile banking. Despite the credit crunch effect, we are observing more demand for banking services and the public confidence in the banking sector is still strong.

Foreign central banks have decreased down its policy interest rates, even down to zero. But the central bank of Mongolia has recently increased it. What's your opinion about it?

As we know the Central Bank has raised the interest rate to 14 percent from 9.5 percent. Mongolian economic structure is different than other countries. So the BOM has to take its own specific action. The action was taken to stabilize the value of the MNT against foreign currencies. The BOM considers the measure will reduce the conversion of tugrug-denominated savings into US dollars, limit capital outflows from Mongolia which will restore the confidence of savers and entrepreneurs. I think that makes sense. Also I agree with that pouring more money into the market would lead to a further fall of the MNT. But sometimes we have to wait to see the results.

What's your opinion about the Government economic stimulus plan? There were questions about raising some capital in foreign debt market. Is it feasible for Mongolian government?

While the plan shows a need for MNT 1.5 trillion, the Government will not be able to fund all of this itself without going over the 6% of GDP budget deficit recently agreed with the IMF as a condition for the USD 224 million reserves support facility. This means that outside funding is needed. The international donors appear to be able to commit about USD 200 million. Anything more will have to be through commercial arrangements. Raising funds through a domestic bond issue is not feasible as it would further tighten an already tight bank credit market. Mongolia has never tapped the foreign debt market, and while it is feasible conditions would not be very favorable were that approach to be tried now, especially as the country rating is under review. Instead there are a number of bilateral discussions with major neighbors and partners such as China and Russia which will be the more likely route taken to get some funds. In this regard, we can note the USD 300 million financing from Russia aimed at the agricultural sector which was announced last week.

TDB is the only one company that successfully issued bond internationally. Any further offer will be made in the global market? Do your bank rated by any international rating agency? If yes, when was the last rating done and what was the outlook?

Ever since the first issue of USD 75 million made in early 2007, TDB has been looking to tap the international capital market for additional funds. In this regard, the Bank’s original EMTN program was increased to USD 300 million last June. Unfortunately, conditions in the international capital markets are still not attractive for issuers from emerging countries such as Mongolia. We expect that towards year end or in early 2010 the conditions will enable the Bank to proceed with another issue. As for the rating,
TDB was assigned ratings by Moody's Investors Service first time in 2007 and was rated Ba2 for foreign debt. Moody's affirmed as the same ratings last December and February this year. TDB's rating outlook remained as "stable".

What's Trade and Development Bank's loan policy like in the moment of business activities reprises? Is the Bank standing still the largest corporate lender of the economy? Do you think that this market will continue to grow?

With recent tighter money conditions in the local market, TDB has had to be selective in increasing the Bank’s total loan portfolio in order to maintain adequate liquidity. However, we are continuing to work with our corporate client’s to support them with the financing needed to continue their operations. As TDB works with over 360 of Mongolia’s major corporations and has over 25% of the corporate loans outstanding from Mongolian banks, we can say TDB is still the largest corporate lender. The corporate sector has been the Bank’s focus since its beginning and still accounts for about three quarters of the bank’s loans and net interest income. TDB has recently placed strong focus on SMEs, Mongolia’s medium sized business entities, and continues actively to provide small business loans through its branch network, such that TDB has over 18% of the total loans in the banking system. The Bank’s strong earnings record and capital base enable it to continue to attract the largest companies as clients.
In recent months as the economy has slowed, the growth of many companies has also slowed. However, looking ahead, as more mining projects are activated, and as needed infrastructure and housing projects are undertaken, the outlook for corporate, SME, and small business will get brighter and the market for financing these business will grow. Although it may not appear so from the experiences of the past few months, the disposable income of more and more Mongolians has increased significantly in the past four or five years, and their spending has been one of the main drivers of GDP growth, even beyond the contribution of the mining sector. As conditions here stabilize and the global recession eases, we can expect Mongolians spending to again stimulate the business activity here.

You are the Chairman of the Mongolian Mortgage Corporation. Since the credit crunch, how is the progress of your corporation?

Yes. I am also serving as Chairman of the Board of Mongolian Mortgage Corporation (MIK), which was established in 2006 by ten Mongolian banks and the Bank of Mongolia to develop a secondary market for residential mortgages. In the past couple of years MIK has used its own funds to purchase around MNT 3 billion of mortgages from Mongolian banks. One of the original objectives of MIK was to attract foreign investors to buy mortgage backed securities issued by MIK. However, the sub-prime loan crisis and the related problems related to asset backed securities, has made it difficult to attract such investors. Meanwhile, the German KfW bank has designated over EUR 5 million to provide MIK with technical assistance and funds to purchase mortgages from banks. It is expected those funds will be available by mid summer.

Meanwhile, the tightened money supply here has reduced banks’ ability to make new house loans. But concerning Mongolia there is still a great need for more housing, especially in Ulaanbaatar, and thus mortgage financing is essential. The banks in Mongolia need liquidity to make more mortgage loans, which are long term in nature. Therefore a secondary mortgage market is also essential. The Central Bank, the Mongolian Bankers Association and MIK, are working together to find ways to soon provide some liquidity to the banks by helping MIK purchase more existing mortgages from the banks through the issue of some securities into the local market. All parties concerned recognize the importance of helping Mongolians to own their own residences.

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