/ Aug 20, 2009

Randolph Koppa, President of TDB: We could say the economy is still not well, and although there are positive signs

Question: What do you think of the economic situation of Mongolia since the beginning of the world financial crisis started to impact Mongolia in 2008? Is the Mongolian economy over the worst yet?

Answer: The worst is not over although there are some aspects which may be showing improvement. Business activity is still running at a level of 15% or more behind the levels of late 2007 and early 2008. From a positive side, this means that imports have been at a lower level than in 2008, easing the pressure on the country’s balance of payments.

Randolph Koppa, President of TDB

Inflation is down. The year on year increase could be below 10% in 2009 compared to 22% in 2008. Unfortunately, the tight money policies of 2008 and the interest policy of 2009 designed to protect the tugrug value against the dollar has meant that interest rates have remained high. There has been a notable increase in bank deposits in the second quarter so bank liquidity has improved. However, the increase in past due and non performing loans means banks will be cautious in expanding lending operations and borrowing rates will likely remain high.

The outlook for the export revenues has brightened a bit as copper prices have moved back up over $6,000 a ton. During the first half of 2009 however, copper revenues were $65 million below the previous year, so there will have to be a big increase in exports to meet get close to last year’s export revenues. Fortunately, China still seems to be buying copper.

Likewise, the gold price remains high and the windfall profit tax level has been adjusted to promote more gold extraction and sale. The Government arranged some international funding which has been made available to the banks to help the mining companies extract gold during the summer and autumn to increase the country’s exports. Unfortunately, the suspension of Boroo Gold’s operations for three months will curtail the full potential benefit for this year’s export revenues.

China is importing more coking coal, and Mongolian mines are extracting more for sale. Total coal production is up 11% this year so far compared to last; however, export prices are lower.

Question: You said imports are down. Does this not mean a potential shortage of key commodities?

Answer: Not necessarily. The average price for imported petroleum products is down from the previous year, but volumes are not. At the same time, Mongolia continues to export increased amount of crude petroleum to China, which offsets much of the impact of petroleum import costs. As for grain and key foodstuffs, the number of hectares in Mongolia planted in cereal grains is up 31 percent from last year. So far, judging from the good amount of rain early this summer, the harvest could be a good one which means the country gets closer to the goal of grain independence.

As for other key foodstuffs and consumer products, there has been a noticeable shift in buying habits to lower priced options on everyday items. Large purchases, such as automobiles are more and more deferred. Thus, although imports are down, there should not be shortages of necessary. It is more of a belt tightening to get through the tougher times. This has been happening around the world.

Question: What about the construction sector?

Answer: Times are indeed difficult for many developers and builders. The increase materials costs and the tight money of the past year have resulted in delays in completing many projects. An estimated 400 works are in various stages of construction representing about 30,000 residential units valued at potentially MNT 1.5 trillion. Of course, this is not too great a number considering the need for at least 100,000 units in Ulaanbaatar alone in the next few years. The problem is that there a around 10,000 finished or nearly finished units which need to be sold this season to get operations back to a more normal state. The tight money in the banking sector has made it difficult for banks to lend more to construction projects and to make mortgage loans to eligible buyers. While some progress is being made in finishing projects and banks are making some mortgage loans related to those projects they finance, there is still a need for more funding.

One initiative to deal with this is the recent agreement the Bank of Mongolia has made with MIK ( Mongolian Mortgage Corporation) to support the issuance of MIK bonds up to MNT 25 billion to buy mortgages from the banks and enable them to redeploy those funds to new mortgage loans. Up to 20% of the pent up urgent financing need could be met this way. MIK is awaiting approval from the FRC in the next couple of weeks to be able to proceed. If successful, this could prompt the start of a real domestic debt market leading to further such bond issues next year to get housing finance activity on a proper track.

Question: Meanwhile, haven’t these construction loans put the banks in trouble?

Answer: It is true that construction loans have become a bigger portion of the non performing bank loans, which have increased to over 11% of total loans, with a further 7% in past due loans. However, many of the problem loans are not related to construction activity, but to a broad variety a activities, including mining, herding, and domestic trade. Some poor lending practices of the past few years of easy money and strong GDP growth are also coming to light. The World Bank has been conferring with the Bank of Mongolia on ways to support the banking sector, both with capital and funding to help the sector get through the present difficult times. It is likely that some of the long awaited consolidation in the sector will occur. For the time being, of course, the government’s guarantee of deposits in banks remains in effect.

The supports of the World Bank and the IMF have been an important element in stabilizing Mongolia’s currency and in supporting the domestic budget deficit. Their role will continue to be needed to get the economy and the banks through the current economic troubles.

Question: How is TDB doing these past months?

Answer: With all the issues of tight money and poor performance in much of the economy, TDB has had to be very selective in its lending activity and to maintain liquidity and loan portfolio quality. There has been an increase in non performing loans as well as past due loans, although our levels are, so far, manageable. TDB is continuing to work with our 360 corporate as well as numerous SME and small business clients to help them continue to finance their operations. We continue to have over 25% of the loans to the corporate sector and are conscious of our role and responsibility as the country’s main corporate bank. We also maintain a strong presence in the foreign exchange market as well as the handling of remittances and trade finance business.

At the end of June, the bank’s total assets reached MNT 725 billion and earnings after tax were MNT 11 billion. The bank’s capital adequacy and liquidity positions have been maintained on a high level. There has been an increase in deposits and the bank is selectively increasing its lending activities. At the same time, we will maintain strong liquidity and work hard to monitor the loan portfolio. Maintaining strong earnings, liquidity and good credit quality are key to help us to getting through the current times.

Question: What should the Government be doing?

Answer: First, some good actions were made which need to be continued. First, the government committed to controlling the budget deficit and limiting foreign borrowings as conditions for the IMF and World Bank funding. This discipline must be maintained. Second, some assistance to the financial sector has been made in the form of some additional funding for specific sectors. I already mentioned the need for some further measure to strengthen the banking sector.

One important action would be to finally conclude an agreement on the major mining project such as Oyu Tolgoi. I do not mean to comment on which elements of the agreement are good for Mongolia and which are not. It is, of course, important to get the right agreement with the right partner. Although the international investment and mining community continues to be frustrated with the delays, that is not the important point now. From my perspective as a foreign banker working for several years in Mongolia, and as someone asked to assess the current economic situation, I can say that as soon as an agreement would be reached, even though the ore would not be exported for a few years, there will be an immediate significant uptick in the local economy. There will begin the spending of money here on various preparation activities for the mine and the infrastructure to support it. This spending will trickle quickly into the local banks and help improve liquidity and increase lending capacity. Overnight, a sense of optimism will overtake the current mood of caution, and investment decisions, locally and abroad, will be made, all of which will quickly impact this still small and fragile economy.

Question: Any final words?

Answer: In conclusion we could say the economy is still not well, and although there are positive signs, things may take a while to get good again. There are challenges in the mining, construction, agricultural, trade and financial sectors. Support of the international community is available and is so far helping. An early agreement on OT would help, but in the meantime, it seems we should be able to muddle through.

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