Mongolia’s recent economic transformation from a country hit by a commodity down cycle to its current export-fuelled growth trajectory against the backdrop of substantial deleveraging from its national debt, is remarkable.
Recent macro-economic indicators show that exports rose by 25% in 2017, and 17% in the first seven months of 2018. Adding to its current buoyant outlook, in July 2018, Fitch Ratings lifted the nation’s long-term foreign currency issuer default rating (IDR), from B- to B, with a stable outlook. The rating agency said its positive action reflects the nation’s fiscal and external metrics, buoyed by Mongolia’s improving balance of payments, strong foreign direct investment inflows (FDI), government reforms and economic growth. At the same time, inflation remained under the Bank of Mongolia’s goal of 8%. Going forward, the government’s external debt is required to be maintained at 60%, according to the nation’s Fiscal Stability Law.
Mandated as both a policy and export-import bank, the 100% state-owned Development Bank of Mongolia (DBM), is helping to support and drive the nation’s continuous and sustainable recovery via a targeted focus on export and manufacturing.
AMENDED REGULATIONS AND BUSINESS MODEL
The bank has undergone a number of significant changes in the past two years. Its charter, internal policies and procedures have been substantially reformed and amended, following the parliamentary adoption of a new and revised law pertaining to the Development Bank of Mongolia. Other reforms included appointing a new management team in 2016, the same year that the government increased DBM’s capital by MNT1 trillion ($420 million) and transferred loan portfolios, to be repaid from the state budget, to the Ministry of Finance.
These regulatory and business model changes are significant as they allow the bank to grow as a classic development financial institution. These pivotal changes to legislation and its business model transferred decisions about financing projects away from the central government, to DBM.
According to the revised law, DBM finances bankable projects and programmes that conform to the government’s sustainable development agendas, and must be co-financed with local and international partners.
DBM’s board now has significantly more representation from government, including three state secretaries of key line ministries who sit on the board, along with four independent members; while at the same time giving greater autonomy in selection and project funding. International auditors, regulators and the Bank of Mongolia oversees the bank’s performance and compliance under the new guidelines, and the bank now uses its comprehensive income to build a reserve fund in order to insure its future operation.
“DBM has been completely transformed,” said CEO Batbayar Balgan. “As the nation’s development bank, we now focus our resources on projects that are at least 60% export driven - on value-added mining, infrastructure and manufacturing projects. We concentrate on other areas as well, one example is upgrading Mongolia’s thriving cashmere industry. We promote gold mining, agriculture and meat production for export, and there’s also a strong commercial demand for mineral commodities from China.”
“Transparency is important to our operations. For example, our digital transformation means borrowers can now apply for a loan online and can check how their application is progressing, and who is reviewing it,” Batbayar said.
PROJECT FINANCING
According to the July 2018 World Bank report, much of the nation’s FDI inflows have targeted the Mongolia’s rich natural resources – gold, copper and coal. While foreign investment focuses on mineral resources such as the nation’s massive gold reserves, Mongolian exports of its ‘golden fleece’ – cashmere - is growing at around 10% year-on-year. Encouraging local value-adding for this valuable commodity is an important DBM project.
When deciding on an investment, Batbayar said DBM’s team focuses on project feasibility, governance, transparency, internal controls and risk management. Typically, DBM’s borrowers include direct lending to larger corporates and small and medium-sized enterprises (SMEs) through local commercial banks. Having greater autonomy about project selection means the bank only raises funds when a project has been approved and once it has passed stringent due diligence and risk assessment thresholds.
In the first half of 2018, DBM’s total loan portfolio was $983 million, distributed across seven project areas, of which 38% was allocated to manufacturing projects, and 24% to urban development programmes. However, DBM doesn’t just target large-scale projects, it also loaned $257 million to SMEs.
Over the past quarter century, the nation has sustained close ties to its partners and has facilitated trade between its neighbours. DBM contributes to this as a financial leasing operator by providing private and public clients with financial leasing solutions and supports economic growth by promoting leading and strategically significant sectors.
ECONOMIC INDICATORS FOR GROWTH
The World Bank, the Asian Development Bank (ADB) and the International Monetary Fund (IMF) all agree Mongolia’s outlook is positive. Indeed, the IMF’s recent country report states the nation is making good progress under the government’s economic recovery program and the IMF’s extended fund facility of $434.3 million, as part of a broader $5.5 billion financing package supported by international partners and donors
The IMF’s 4th review released on July 5, 2018, highlighted the fact that “Mongolia’s performance remains strong; a combination of strong policy implementation and a supportive external environment has helped the authorities over-perform on all end-March 2018 quantitative targets.” The review noted that Mongolia has made good progress helped by a favourable external environment, strong programme implementation, and a considerable improvement in fiscal substantiality, debt dynamics and external buffers.
Fitch’s outlook for growth remains favourable, given Mongolia’s recent strong growth with real gross domestic product (GDP) reaching 5.1% in 2017, up from 1.2% in 2016, on the back of FDI recovery, consumer credit and mineral exports. Robust FDI inflows into the mining sector, such as the Rio Tinto-managed Oyu Tolgoi mine, which holds one of the world’s largest gold and copper reserves, and a strong construction sector, contributed to the GDP increase of 6.3% year-on-year for the first half of 2018.
LOOKING TO THE FUTURE
Currently, DBM’s mandate supports a plethora of economic sectors, including manufacturing, agriculture, mining, construction, energy, health and social welfare, and Batbayar is confident the bank will continue to drive the nation’s economic prosperity, focusing on bankable and cash-flow generating projects.
“As a leading financial institution, we are committed to providing financial solutions that ensure sustainable economic growth, while maximising returns through value-added domestic production. With DBM’s new directions and drive, we are well on the way to achieving our goal,” Batbayar said.
