The role of BOM: Sustainable growth

Zoljargal NaidansurenGovernor

BANK OF MONGOLIA (BOM)

October 30-31, 2012

Hong Kong

2

Outline

• Macroeconomic overview

• Coordinated macro policy � Strong middle class

• Financial infrastructure and institutional development

3

Sustainable & balanced growth over 10%

Source: Bank of Mongolia, IMF, NSO

10.2%

-1.3%

17.5%

13.2%

16.8%

12.7%

8.0%

15.2%

8.3%

-5%

0%

5%

10%

15%

20%

0

2

4

6

8

10

12

2006 2007 2008 2009 2010 2011 2012* 2013** 2014** 2015** 2016** 2017**

Bill

ion

US

D

Real GDP

Growth, yoy, RHS

Linear (Growth, yoy, RHS)

4

Growth prospects in Asian emerging economies

Source: WEO April 2012, IMF

17.5

8.06.9

6.1 6.3

13.2

8.2 8.1

7.07.5

15.2

-2

0

2

4

6

8

10

12

14

16

18

20

China India Indonesia Vietnam Mongolia

% 2011 2012* 2016*

5

Trade and FX turnover

0

1

2

3

4

5

6

2009 2010 2011 2012

Billion $

Foreign trade turnover1H of each year

Imports

Exports

0

2

4

6

8

10

12

14

2009 2010 2011 2012

Billion $

FX turnover1H of each year

FX outflows

FX inflows

Source: Bank of Mongolia, Customs General Office, Mongolia

6

Balance of payments and gross international reserves

-36

162166

581

38

181

-13

-177

359

112

-1500

-1000

-500

0

500

1000

1500

Q1'10

Q2'10

Q3'10

Q4'10

Q1'11

Q2'11

Q3'11

Q4'11

Q1'12

Q2'12

Capital & financial account

Current account

Overall BOP 0

2

4

6

8

10

12

0

500

1,000

1,500

2,000

2,500

3,000

2007

/01 05 09

2008

/01 05 09

2009

/01 05 09

2010

/01 05 09

2011

/01 05 09

2012

/01 05

Mill

ion

US

D

Gross reserves

Import coverage, months(RHS)

Source: Bank of Mongolia

7

Exchange rate system

Annual Report on Exchange Arrangements and Exchange Restrictions

(AREAER) 2010

FLOATINGMONGOLIA

No exchange rate target at all BOM Intervention is only for

smoothing excessive volatility

No capital control � Positive expectation on overall FX net flows

8

FX net flows and reference exchange rate

Source: Bank of Mongolia

Stability since March 2009Daily average volatility: only 0.08% in 2012

9

Is MNT a volatile currency?

Currencies(last 32 months)

Daily average volatility

(%)

Maximumdepreciationper day (%)

Maximumappreciationper day (%)

Australian dollar 0.62% 4.35% 3.00%

Canadian dollar 0.46% 3.36% 2.06%

New Zealand dollar 0.65% 5.03% 2.44%

Russian ruble 0.49% 3.18% 2.55%

Chilean peso 0.49% 4.78% 2.24%

South African rand 0.70% 5.03% 3.39%

Brazilian real 0.66% 5.05% 3.76%

Norwegian kroner 0.62% 3.31% 2.82%

Tanzanian schilling 0.36% 5.15% 9.34%

Papua New Guinea kina 0.18% 3.39% 3.20%

Mongolian togrog 0.20% 1.26% 1.69%

0.52% 4.26% 3.48%

10

Money supply

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,00020

08-0

1

2008

-04

2008

-07

2008

-10

2009

-01

2009

-04

2009

-07

2009

-10

2010

-01

2010

-04

2010

-07

2010

-10

2011

-01

2011

-04

2011

-07

2011

-10

2012

-01

2012

-04

2012

-07

Bill

ion

to

gro

g

M2 YoY change

Source: Bank of Mongolia

11

Inflation dynamic

Source: Bank of Mongolia

Demand pull inflation: � Monetary policy instruments

Cost push inflation: � Price stabilization program with the Government

12

Inflation target & projection

0

5

10

15

20

0

5

10

15

20

2011 I 2011 II 2011 III 2011 IV 2012 I 2012 II 2012 III 2012 IV 2013 I 2013 II 2013 III 2013 IV

%%

Source: Bank of Mongolia

Inflation target:

(end-2013): 8%

(2014-2015): 6%

13

Banking sector: Assets and outstanding loans

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

2,000

4,000

6,000

8,000

10,000

12,000

2005

-03

2005

-11

2006

-07

2007

-03

2007

-11

2008

-07

2009

-03

2009

-11

2010

-07

2011

-03

2011

-11

2012

-07

Total Assets

YoY change

Since the crisis:+260%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2006

-01

2006

-07

2007

-01

2007

-07

2008

-01

2008

-07

2009

-01

2009

-07

2010

-01

2010

-07

2011

-01

2011

-07

2012

-01

2012

-07

Bill

ion

tog

rog Loans outstanding

NPL to loan ratio

Source: Bank of Mongolia

14

Mortgage market

Developed countries

45%

40%38%

36%

13%10%

6%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Герм

ан

Япо

н

Хон

г ко

нг

Син

гапу

р

Сол

онго

с

БН

ХА

У

Мон

гол

Mortgage / GDP2011

Japa

n

Ho

ng

Ko

ng

Sin

ga

po

re

Ko

rea

Ch

ina

Mo

ng

oli

a

Source: European Mortgage Federation, www.economywatch.com

IMF, Financial Stability Board

Ge

rma

ny

15

Coordinated macro policy ���� Strong middle class!

• Fiscal policy ���� Countercyclical– Adhere to Fiscal Stability Law

– Fiscal anchors and Stabilization fund

– Public investments to abolish supply constraints and increase absorption capacity

– Targeted social welfare program

– Reform of social insurance fund

• Monetary policy– Low and stable inflation � Macro stability and sustainable long-term growth

– Financial stability � Macro and micro prudential measures

– Flexible exchange rate

– Financial infrastructure and institutional development

– Special programs with the Government to stabilize supply driven inflation

16

Financial infrastructure and institutional development

• Reform on deposit insurance scheme frameworks– Replacing blanket deposit guarantee (reducing risk to government)

– Enhancing discipline and responsibility of banking sector

• Reform on social security system– Separating social security fund from budget

– Investing domestic capital market (development projects, mortgage market)

• Developing mortgage market– MBS domestic offering

– MBS access to foreign investors

• Developing Government bond market– New procedure introduced

– Secondary market development (benchmark yield curve)

17

Government bond market development

• New procedure introduced on 24 October 2012

– Providing primary and secondary market development

– Strengthening fiscal and monetary policies’ coordination

– Using T-bills as a monetary policy tool

• Some important dedication on the New procedure

– MOF to issue Government securities at regular basis

– BOM to conduct treasury auction

– Commercial banks acting as primary dealers

� Bond issued by Sep 2012: MNT 609.6 billion

� Bond to issue by Dec 2012: MNT 270 billion

18

Importance of Government Bond Market DevelopmentFiscal Policy

Monetary Policy

Market development

Investment Opportunity

• Financing the budget deficit

• Financing the public investments

• Using T-bills as a monetary policy tool

• Coordinating fiscal & monetary policy

• MNT benchmark yield curve

• Development of financial instruments

• Liquid asset

• Low risk investment

• Tax exemption on interest earnings

Ministry of Finance

Bank of Mongolia

Commercial banks

Institutional & Private Investors

• Issuing government securities

• Conducting treasury auction

• Acting as primary dealers

Pri

ma

ry m

ark

et

Se

con

da

ry m

arke

t

Bank of Mongolia (Central Bank)

Baga toiruu-3, 15160 Ulaanbaatar 46, Mongolia

Tel: +976-11-322169

Fax: +976-11-311471

http://www.mongolbank.mn

Thank you for your kind attention

Perfect timing and right place to invest in and cooperate with Mongolia