Why Mongolia must master its reticence in resources

One person who’s seen this change first hand is J Peter Morrow, who was part of that World Bank team in 2000 and subsequently became CEO of the country’s leading bank, Khan Bank (which has its roots in Agricultural Cooperative Bank of Mongolia, formed from that 1991 State Bank break-up but in receivership by 1999). “Since the system was started again, you’d have to say it’s been hugely successful,” he says. “There’s been growth on average of 15% a year in loans and deposits, problem loans are below 5%, and with the terrific economy in the last eight years the banks have had the profits and reinvestments to build their businesses.”

At Khan Bank itself, recent loan growth has been around 70% compounded in loans, and 55% in deposits – a gap that led it to launch the MTN programme described in the main article. “We’re at a stage in development in Mongolia where it’s small but growing very rapidly, where internal capital formation cannot keep up with the demand for capital. International funding becomes critical to fill that gap [between loans and deposits], and fill it in a way that is often cheaper than domestic sources of funds, and for longer terms.”

Morrow describes the regulatory environment as “excellent”, with banking laws and regulations that look much like those in western countries, and a system that follows Basel 1 and will switch to Basel 2. The central bank, the Bank of Mongolia (known locally as Mongolbank), has “talented people and is a liberal, favourable, free market banking environment with effective regulation.”

Even here, the credit crunch seems to be echoing. In October Mongolia’s cabinet authorised a $500 million capital injection into Mongolia’s commercial banks – but isn’t going to give it until it’s needed. But the strange thing is, it’s for different reasons than elsewhere in the world. Mongolia’s banks still meet the country’s prudential requirements, according to the central bank, and bad loans are understood to be below 3% on an industry-wide basis. Instead, the concerns are about a lack of liquidity in mortgage lending.

BOX: REVISING THE LAW

One of the most controversial elements of the proposed mining revisions was a clause allowing the government to seek a stake of up to 51% in key projects. While miners are generally ready to proceed even on those terms, they would certainly prefer not to. They’re not just concerned about missing out; they fear that governments will be unable to accompany their stake with capital, requiring the other parties to increase the cash they have to contribute up front relative to their stake.

But the worsening global environment may yet work to the advantage of the mining groups, as Mongolia’s senior politicians appear to be stepping back from the 51% clause (the previous draft, one which never quite made it to a vote, had talked about a more palatable 34%). Our interview with President Enkhbayer (p xx) clearly reflects this, saying that the more realistic views among Mongolians represent “the good side of the financial crisis.” And he says that a change in the law giving Mongolians more than 50% ownership “is not yet done and probably will not be done.”

Investors also hope that revisions might include a change to a contentious windfall tax, which stands at 68% on copper concentrate where the price exceeds a certain level, and is similarly onerous on gold. But the truth is, foreign companies are likely to accept no end of irksome royalties and tweaks in the amendments – they just want to get started.

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