Analysis by Dale Choi about Mongolian tugrug depreciation: 27.25% DEPRECIATION Y-O-Y

Mongolian Togrog (Currency)
USDMNT price(Bloomberg)                            1767MNT
Best bid/ask(Bloomberg)                              1753/1783
Market Data ( Bloomberg)

-- Inline image 1

 (Source: Bloomberg)

·      MNT reached historic lows with official reference rate hitting 1776,       y-o-y depreciation of 27.25%( from 1,395.68) and 7% depreciation YTD.
·      According to finalized data for BOP for 2013 from Bank of Mongolia, BOP deficit was US$1.88B, current account deficit was – US$3.155B, decline of US$207M y-o-y
·      Surplus of financial and capital account was US$1.47B , decline of 70% y-o-y, due to decline of FDI surplus by 55% or US$2.4B, decline of portfolio investment surplus by 74 % or US$1.43B
·      January BOP preliminary data shows that current account deficit continues to shrink to “US$ 75.5 million which is decrease of 79 percent or US$ 284.8 million on a YOY basis”.
·      Further, “capital and financial accounts showed surplus of US$ 290.0 million which is decrease of 20 percent or US$ 48.6 million on a YOY basis. This is due to i) 36 percent decline on surplus of foreign direct investment from abroad to Mongolia equaling to US$ 101.3 million, ii) other investments shows decrease of 65 percent or US$ 32.1 million and iii) surplus of portfolio investment increased by US$ 114.1 million compared to a year prior.”
·      According to Bank of Mongolia official foreign exchange reserves stand at US$2.45B as of January 2014
·      According to NSO, “pure”(we understand “net”) international reserves at the end of December of 2013 were US$1.2B
·      Earlier, in November 2013 M.A.D Investment Solutions with warning that they are “not economists nor ..specialists of Mongolia’s macroeconomy” reflected fears of market  saying  “We also see the MNT sliding to a level above 2,000 MNT/USD through Tsaagan Sar 2014 (the Lunar New Year in February)”
·      In August ,2013 when exchange rate was 1544, Mongolian celebrity economist –TV host “Defacto” Jargalsaikhan forecasted that exchange rate will gradually reach 1650 by year end
·      In January 2014, organization called Mongolian Financial Markets Association has forecasted MNT will reach 1600 in by the end of 2014
·      World Bank has stated in January 2014 East Asia and Pacific Economic Prospects
o   "The growth outlook is favorable for Mongolia, Papua New Guinea, and Timor-Leste, but all three countries are facing the formidable challenge related to effective management of a resource boom in the environment of declining commodity prices. Mongolia’s economy is expected to continue to register double-digit growth rates in 2014 and 2015, with growth rate easing to 7.7 percent in 2016 with completion of new production facilities"

o   “The outlook is subject to significant domestic and external risk. An abrupt tightening of international financing conditions could reduce capital flows, exerting financing pressures in the region. The baseline assumes a gradual adjustment of global financial conditions, but a more disorderly reaction of financial markets to a normalization of conditions in the United States and elsewhere cannot be excluded). In such a scenario, capital flows could decline briskly by as much as 80 percent for a period of several months, placing extreme pressure on countries with large current account deficits (Cambodia, Lao, PDR, Indonesia, Malaysia, and Mongolia), overvalued real effective exchange rate (Mongolia), large short-term debt exposures (China, Indonesia, Malaysia, Thailand) and/or limited reserves (Cambodia, Fiji, Lao PDR, Mongolia, Papua New Guinea, and Vietnam).”
o   “Countries where years of expansionary policies have contributed to domestic vulnerabilities are particularly at risk. In such scenarios, those countries that had a significant credit expansion in 2007–2012 (China, Malaysia, Mongolia, Thailand, Vietnam) would experience a spike in debt servicing costs, a sharp rise in non-performing loans, and pressure on the balance sheets of banks, all of which would quickly transmit to lending and investment activity—and in extreme cases could undermine financial stability and lead to a banking crisis .Although public sector indebtedness is relatively low in most economies in the region, if economic cycles turn, public debt could rise rapidly, given implicit guarantees to banking sectors in countries and reliance on state-owned banks to stimulate domestic credit growth (China, Vietnam).”
·      All various scenarios of Mongolia growth which all expected MNT appreciation now have to be revised which is not necessarily a bad thing since Mongolia’s Dutch Disease will be lighter as Mongolia is more competitive now

·      Overall, we view USDMNT price as prices of any assets - random variables impacted  by multitude of interconnected factors such current account, trade balance, FDI, OT revenues, external borrowing by GoM, QE by BoM, Mongolian public confidence, gold sales to BoM by Mongolian gold miners,  etc and  etc . Mongolian economy being a rapidly growing one with large and expensive import bill and inflation directly related to exchange rate and voters being angry at BoM for not “fixing  “ exchange rate make  it even more unpredictable in this regard
·      Random by definition means no one knows the future price of USDMNT
·      Moreover,  we adhere to the view that each market participant actively makes his or her contribution to this ever changing fluctuation/distribution ( for example, herding behavior, self-fulfilling prophecy, etc )
·      Nevertheless, if one looks at USDMNT exchange rate long term it is hard to argue that it is driven by long term fundamentals of Mongolian economy such as balance of payments, and in particular by current and capital accounts balances (especially FDI which is particularly important for financing current account deficit) and market confidence in MNT as a store of value and concern over foreign exchange reserves.
·      Clearly, there are valuable insights into USDMNT fundamentals from last FX crisis of 2009 which was overcome by tightening of monetary policy and appreciation of MNT in 2010 due to the opening of FDI floodgates on the back of signing of OT IA in late 2009.

·      Precarious foreign exchange rate situation is exacerbated by recent negative developments (OT PF dragging on,production cuts to stage 1 unresolved structural issues in coal sector) that highlight vulnerability of double digit growing Mongolian economy stimulated by expansionary fiscal policies, outright QE and artificial construction and banking booms  to further risks from external shocks from capital outflows, limited FX reserves, BoP outlook, high government debt levels on the background of signs of an recovery in more developed economies and increasing global interest rates due to Fed tapering.
·      Despite meaningful progress in UB such as NIL and gold amendment, Mongolian authorities have yet to rise to the occasion decisively using available windows of opportunities and catalyst events such as successfully resolving OT PF, Centerra/Gatsuurt , Minerals Law/106/Standard Bank/Khan, etc issues and to bring in major FDI, build up in various ways official foreign exchange reserves and slow down expansionary policies
·      Mongolian sovereign/political risk remains to be elevated, disconnect and misunderstanding between Mongolia and investors continues to remain substantial and no other major catalyst events are on near term-horizon.
·      We continue to believe that Mongolian metals and mining sector has the ability and capacity to turn around this precarious situation and  reiterate our view that if Mongolia would have used effectively windows of opportunities such as ETT IPO (which would have funded the rail, wash plant, power - the later two ironically the more important) and $4.2B PF for OT last year it would have been rewarded by inflows of FDI beyond its imagination and Mongolia would be now flying bullet proof with the MNT at maybe 1200 and the Mongolian authorities could have much leeway in the policymaking as opposed to having to do all these measures such as new Investment Law, state policy in minerals sector and gold amendment which appear to be too little and too late.
Dale Choi(Чойнхорын Эрдэнэдалай)
Founder, Independent Mongolian Metals & Mining Research

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