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Mongolian Banks Curb FX Flows to Fight Worsening Cash Crunch www.bloomberg.com

Mongolia is facing a worsening foreign currency crunch following Russia’s war with Ukraine and a slump in China’s economy, forcing local banks to restrict the amount of dollars customers can buy.

Khan Bank, the country’s largest bank measured by total

assets, limited the daily amount of cash that can be converted

into foreign currencies to 1 million tugrik ($300) from this

month, Vice President of Wholesale Banking Uuganbayar Terbish

said in an interview on Thursday. That’s down from as much as

300 million tugrik under normal banking conditions and 100

million tugrik in June, he said.

Multiple bank customers who’ve tried to transfer funds at

four different commercial banks in recent weeks confirmed they

were limited to a daily foreign exchange amount of 1 million

tugrik.

“These are not capital controls, but market liquidity

issues,” said Uuganbayar, adding that the restrictions were a

response to the increased demand for dollars and to guard

against speculation. He said the bank wasn’t limiting payments

for the import of goods such as food and fuel, and exceptions

could be made with approval from the treasury department.

Golomt Bank, Xacbank and Trade and Development Bank of

Mongolia didn’t respond to requests for comment.

Mongolia is facing an increasingly serious foreign currency

crunch, with foreign exchange reserves down 40% in August from a

year earlier to $2.7 billion and the current account deficit

ballooning. In addition, the tugrik has taken a beating due to

interest rate hikes overseas, losing 16% of its value against

the dollar this year. The central bank has repeatedly hiked

interest rates this year in an attempt to rein in high inflation

and curb the currency outflows.

The nation’s economic problems stem in part from its two

huge neighbors: Russia and China. Beijing’s Covid Zero policies

have disrupted trade across the border, while the war in Ukraine

has not only driven up the price of imported fuel and goods but

also blocked access to some Russian banks, which had been an

important part of the nation’s financial system.

The situation is somewhat reminiscent of the crisis in

2016, when a slump in global commodity markets forced Mongolian banks to ration foreign currency and the country eventually had to ask the International Monetary Fund for a bailout.

“There’s always risk” of the country needing another

bailout from the IMF, according to Adrienne Lui, an economist at

Citigroup Inc. in Hong Kong, although there are many more

positives now. Commodity prices are still high, and the

government is stable, she said.

While Lui said she didn’t think the situation in Mongolia

was comparable to the crises in Pakistan or Sri Lanka, the

tugrik’s “depreciation will continue as long as balance of

payments stress remains,” she said.

Dollar bonds issued by Mongolia and due in 2023 and 2024

fell about 4 cents Friday, according to prices compiled by

Bloomberg, on pace for their biggest declines since March 2020.

The tugrik also weakened and was trading at 3,337.7 to the

dollar at 4:30 local time.

Rising costs combined with stagnant wages drove young

people to protest outside the parliament house in April,

although inflation has since moderated after hitting a high of

16.1% in June.

Currency Weakens

The central bank hasn’t instructed lenders to restrict

foreign currency transactions, according to Tumentsengel

Baterdene, a spokesman for the Bank of Mongolia. Pressure on the

local currency wasn’t unique to Mongolia, given the turmoil in

foreign exchange markets after the US Federal Reserve’s

aggressive interest rate hikes, he said.

The country’s balance of payments should return to pre-

pandemic levels by the end of the year “with exports regaining

momentum owing to easing of border restrictions” by China, he

added.

The Asian Development Bank approved a $100 million

emergency loan for the country in August to “help it weather the

impacts of severe economic shocks.”

However further risk could come toward the end of the year

when almost $140 million in sovereign debt will mature in early

December and need to be repaid, according to data compiled by

Bloomberg. That’s followed by more than $1.2 billion in debt

which is due next year.

The war has also damaged the country’s access to the

international financial system, with sanctions on Russian banks

after the invasion of Ukraine disrupting payments and blocking

access to the foreign exchange trading platforms they host,

according to Javkhlantugs Ganbaatar, the policy and advocacy

director at the American Chamber of Commerce in Mongolia.

Current Account Deficit

Mongolia posted a $2.2 billion current account deficit so

far this year, partly due to some state-owned companies taking

payment for exports before they’d actually shipped out the coal

and other goods. This has meant that even as exports have hit

records since May in the customs data, there’s little new

foreign currency coming into the economy.

In the spring, coal miners accepted early payments to

bolster the nation’s foreign currency reserves, Javkhlantugs

said. At the time, the central bank governor “spoke of a mass

exit of hard currency” following the invasion of Ukraine, and

the outflow of foreign currencies over three months exceeded

that of the last three years, Javkhlantugs added.

One example of this is state-owned coal producer Erdenes

Tavan Tolgoi, which was told by the government in March to pre-

sell coal to help finance an almost $400 million oil pipeline

development.

Another factor in the deficit is the jump in freight costs

due to the war in Ukraine pushing up petrol prices. Most coal is

exported via truck and the deficit in transport services jumped

to almost $260 million this year due to the increased cost of

foreign fuel. Mongolia recently signed a deal with Russia to cap

imported fuel prices and a new rail line from coal mines in the

Gobi desert to the border with China is expected to expand

export volumes and reduce costs.

How long the dearth of foreign currency lasts will depend

on the term-length of the coal deliveries paid for up front as

well as any further easing of restriction at the border to

China. In addition, as well as the rate cuts announced last

week, the central bank announced a loosening of the reserve

requirements on banks’ foreign-denominated assets, which should

free up some their holdings.

The Asian Development Bank this month lowered its growth

forecast for Mongolia this year to 1.7% from the 2.3% it saw in

April. The World Bank also cut its forecast for growth and noted

that Mongolia was one of the nations in Asia most vulnerable to

capital outflows and a falling exchange rate due to inflation

abroad.

--With assistance from Kevin Kingsbury.

To contact the reporter on this story:

Terrence Edwards in Ulaanbaatar at tedwards100@bloomberg.net

Published Date:2022-10-02

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Mongolian Banks Curb FX Flows to Fight Worsening Cash Crunch www.bloomberg.com

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