As Mongolia's economy slows, the chief executive of its stock market, Bolor Munkhsaikhan, tells Stefania Palma about efforts to deepen local capital markets to help hedge against a volatile currency and to diversify corporate borrowing away from bank loans.

Bolor Munkhsaikhan

In 2012, when Mongolia was enjoying gross domestic product (GDP) growth of 12.4%, The Banker reported that the Mongolian Stock Exchange (MSE) was “struggling to keep pace with the demands of the [economic] boom”. Today, the economy has slowed – the Asian Development Bank predicts almost no growth (0.1%) for the country in 2016, and so too has MSE activity.

To survive the downturn, it is essential to deepen local capital markets across the board, according to MSE chief executive Bolor Munkhsaikhan. However, the number of initial public offerings (IPOs) and the volume of stock trading have both dropped in 2016.

“People are holding on to their stocks for now,” says Mr Bolor. In terms of listings, the latest deals date back to 2015, when Mongol Post was privatised and Mongolia’s Mortgage Corporation issued the largest ever IPO in the market.

Timing is everything

There would be potential deals in the pipeline, but listing at the moment is nigh impossible, according to Mr Bolor. Monos, a local pharmaceutical giant, had planned to list in November, but this might be pushed back. More IPO activity might come from local mining projects or the privatisation of power plants number three and four in capital city Ulaanbaatar, he adds.

“Current monetary and fiscal policies are not favouring new listings,” says Mr Bolor. “The increase in policy rates and austere fiscal policy is not helping the MSE in terms of traditional equity and bond instruments.”

The newly elected Mongolian People’s Party government, which won a landslide victory in the June elections, has since increased policy rates from 10.5% to a record 15% to halt a tumbling currency. It is also looking to cut spending and increase government revenue to fund a budget deficit of more than 18% of GDP.

“It is hard for corporates to issue in the local currency [with the policy rate at 15%]. There was potential for new corporate bonds to be listed on the MSE in August but they’re now on hold,” says Mr Bolor.

Bank no-show

So what about the banks? Khan Bank had considered an IPO in 2008, but refrained due to the global financial crisis. Currently no Mongolian bank is listed on the exchange.

Having more listed lenders could be beneficial for a crowded banking market such as Mongolia: there are 14 lenders for a population of about 3 million. “The MSE could help bank consolidation and mergers,” says Mr Bolor. But at the moment, only a small investment bank is considering an IPO (the name of the bank remains confidential).

“This is not the right time for banks to list,” says Mr Bolor. “The large banks meet corporate governance requirements, but not all smaller ones do.

“Banks themselves don’t want to IPO [either] due to current market conditions or because, culturally, owners in Mongolia [still] want to retain ownership. The stock market has been open for only 25 years. We need a generational change [to see more bank IPOs].”

Deeper capital markets needed

But aside from listings, Mr Bolor is keen to develop local capital markets more broadly. “The goal is to create a variety of financial instruments so we can hedge ourselves against currency moves,” he says. This is crucial since the cyclicality of an economy relying on commodities makes the Mongolian currency prone to volatility. The tugrik lost 8% of its value between the end of July and August 18, when the central bank increased rates to halt the slide.

Meanwhile, a deeper corporate bond market would help companies diversify borrowing away from bank loans, which account for 50% of Mongolian GDP. In a market where bank loans prevail, rates are set by the stronger player – in this case, the banks, says Mr Bolor. “When two people meet, the one with more money is more powerful. [But] in an open market with more players, rates could be more competitive,” he adds.

On the foreign exchange front, MSE is working on developing a futures market, which would help companies focusing on imports hedge against the currency while creating investment opportunities for international investors. But to develop this sector, the MSE needs to build infrastructure as well as adjust the credit default swap rate.

Setting up a derivatives market would also be a way to hedge against currency fluctuations, but for that to happen Mongolia needs to establish a central counterparty clearing house. Currently, the central bank is the only entity setting foreign exchange rates, which sometimes slip. In such a stagnant environment, there seems little immediate prospect of activity in the MSE taking off.


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