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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
