Angana Banerji: Domestic private sector activity is likely to be increasingly constrained

Angana Banerji: Domestic private sector activity is likely to be increasingly constrained

  • By Dulguun   -   Oct 17,2022
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The Annual Meetings of the Boards of Governors of the International Monetary Fund (IMF) and the World Bank Group took place last week and IMF released its new “World Economic Outlook” report. To get full insights into the fund’s economic projections for Mongolia, as well as other timely issues concerning the banking and financial spheres, The UB Post spoke exclusively with IMF Mission Chief to Mongolia Angana Banerji.

What is IMF’s updated projection for Mongolian economic growth? How are the economic uncertainties affecting businesses and households?

Real GDP growth is forecast to reach 2.5 percent in 2022 and rise to 4 percent in 2023, mainly on account of stronger growth in the mining sector. The post-pandemic recovery underway in Mongolia is expected to continue in the second half of 2022 and 2023, assuming that the Chinese border disruptions are largely resolved by end-2022. Coal export production is likely to resume following the depletion of accumulated inventories. The start of Oyu Tolgoi’s underground mine production in the first half of 2023 should provide a significant economic boost.

Household and business activity have been recovering well due to the successful containment of the pandemic and the normalization of movement. Such activity is also boosted by large support provided by the budget through various transfers and subsidized lending programs mandated by Parliament. These measures have been ongoing since 2020 and remain in the pipeline. However, going forward, domestic private sector activity is likely to be increasingly constrained by persistently high inflation and decelerating credit growth due to increased risk aversion by banks amid high economic uncertainty and deteriorating liquidity following the drawdown of pandemic savings.

One of the biggest challenges facing the Mongolian economy is the instability of the tugrug and the decline in foreign exchange reserves. What can Mongolia do to stabilize the exchange rate of the tugrug against the US dollar and boost its foreign exchange reserves?

Much greater exchange rate flexibility is needed. While greater exchange rate flexibility will pass through to inflation and make external debt repayments more expensive, it will improve private sector incentives to better manage external liabilities and will help contain imports and speculation.

Strong consolidation and cutbacks in fiscal and quasi-fiscal policy support to the economy are urgently needed to reduce import demand. Especially the government should sharply cut back and prioritize public investment (including those financed by state-owned enterprises using export proceeds), ensure that Mongolia’s repatriation requirements are respected, improve coordination with the Bank of Mongolia (BOM) on external payments and roll back tax exemptions on imports, which undercut the impact of exchange rate depreciation.

The government should, however, continue to facilitate automated zero-contact exports at the China border, open new trade portals and facilitate new FDI inflows.

The minister of finance believes that all economic uncertainties and bottlenecks will disappear if the issues at the border with China are resolved. Do you agree with this? What should Mongolia do to recover faster?

China’s border disruptions have indeed hurt Mongolia’s economic growth since mid-2021 by leading to a sharp contraction in the mining sector for four consecutive quarters. These disruptions have affected supply chains, which have led to shortages and inflation pressures.

The government’s efforts to resolve border disruptions have improved exports of coal and copper and eased supply constraints in recent months. This should help support economic growth.

Mongolia’s economic outlook is subject to several downside risks such as those stemming from tighter global financial conditions at a time of large external debt repayments, slower growth in China and a further expansion of sanctions on Russia. 

Additional policy measures will therefore be necessary to ensure that external and internal imbalances are addressed in a timely manner. Specifically, greater exchange rate flexibility, higher international reserves and significantly stronger fiscal and quasi-fiscal policies are urgently needed.

IMF has been actively engaged in improving the banking sector in Mongolia. Under the amended Banking Law, large commercial banks must become publicly traded banks this year and smaller banks next year. Do you think they will be able to do so on time?

It is important to have a single point of communication to ensure confidence in the IPO process. We recommend that the BOM be that single point of communication in the IPO process.

Since the asset quality review provides a snapshot assessment of domestic systemically important bank (D-SIB) balance sheets as of end-March 2022, we have recommended that the BOM continue to closely monitor banking sector conditions and take additional supervisory actions, if necessary. This is important given the recent deterioration of macroeconomic conditions and ongoing monetary tightening.

We continue to believe that the prospects for full shareholder diversification by end-2023 remain challenging due to the thin capitalization of the stock exchange and the economic uncertainty facing Mongolia. We recommend that the legal implications of not adhering to the timeline be thought through carefully to avoid triggering banking sector instability.

Despite IMF’s recommendation, Mongol Bank has recently announced increased financing for the discounted mortgage program. Can you comment on this?

It is our understanding that the BOM’s announcement effectively starts tapering the mortgage program.

The mortgage program is jointly financed by the BOM and commercial banks. Since January 2022, the BOM has placed a monthly ceiling (30 billion MNT) on the total financing from the BOM on this program. This cap remains unchanged.

Prior to the recent announcement, the BOM provided 60 percent of the financing of these loans and commercial banks the remaining 40 percent. Given the cap in BOM financing of 30 billion MNT, a 60 percent BOM share limited the total size of the discounted mortgage program to 50 billion MNT per month. Given the need to taper the volume of mortgage financing and reduce banks’ funding costs for this program considering the rising market interest rates, the BOM has recently changed its financing portion from 60 percent to 80 percent, effective October 2022. This would reduce the total amount of mortgage loan supply from 50 billion MNT to 37.5 billion MNT per month.

Dulguun Bayarsaikhan