When the maiden sail to financial ocean began

In the country, where one third of population can barely afford to eat every day, everyone must have a job and create a value in order to have all Mongolians live prosperous.

For that purpose Mongolia should diversify its economy. This is the only way.

Diversifying the economy means Mongolians created certain products and services to be in demand on the world market. Harvard researchers concluded in 2010 that meat, cashmere, tourism, information and communication technology and mining logistics service were the most likely ones in such demand.

The first challenge of ours lies in our labor and infrastructure, both of which are currently unable to fully satisfy the needs of the market. We have to build hard-surfaced roads that link not only provinces but also our two neighbors and invest in basic infrastructure such as new sources of heat and power and their transmission network.A report released by the Economic Policy and Competitiveness Research Center in cooperation withThe McKenzie Company suggest that an investment of USD 24 billion will be needed to build the basic infrastructure in the next five years.

How will we raise this huge capital?

By the end of the third quarter of this year, deposits of Mongolian commercial banks increased by 25 percent year on year basis to reach MNT 4.6 trillion, which equals USD 3.2 billion in today’s exchange rate where one dollar is priced at MNT 1400. Bank loans increased by 37 percent to reach MNT 6.9 trillion (USD 5 billion) and the total assets got to USD 5.7 billion. Money market term is not more than a year or shorter, which means that only a small part of it will go into the infrastructure sector.

Mongolia’s public budget, expenditure of which exceeds the half of GDP, will be USD 5 billion in 2013 at the most. Discussions are currently going on whether 1.2 of the five billion can be spent on public investment or not. Most of the investments the state makes does not go into basic infrastructure but goes to social infrastructure such as hospitals and schools. If we assume USD 10 billion is to be raised from banks and the public budget in next few years, where do we find the remaining 14 billion?Although we can acquire some amount of money by getting soft loans from international development banks and foreign governments, it will not be enough.

There is a certain order of raising capital. Capital is raised with own, internal funds first, then loan from others and, finally, getting into own business through equity or shares sales. In this sequence, the volume of capital can be raised grows in a geometric progression.In financial jargon, it is called a “pecking order of money”. Mongolia does not have enough cash, which is why our country has made the choice to get loans from domestic and foreign investors in order to make up the missing capital.One cannot be sure that capital will be raised if shares of Mongolian state-owned companies are put up for sale in foreign capital markets, as it will not work even in the domestic market. Even though almost every enterprise owned by the state is running a deficit, the new government does nothing about it but replace with own people in charge.

Loans from foreign capital markets are relatively long-term and cheaper than those in the domestic market. However, their interest rates are high as well. There is no free money; there are only those who are mistaken that there is.A saying goes “There is no free meal in New York.”

It has been a month since the parliament approved the “renovation” government to get loans by issuing bonds worth USD 5 billion, which will be paid back by the next four or five governments to come. Ministers have started working on selling the bonds in order to raise the first USD 1.5 billion within this year. Likelihood has developed that, despite the need for basic infrastructure development,our country might spend the income from selling bonds for current purposes such as paying for operational cost or resolving social issues.

Loan requirements

Mongolians are familiar to the extent of high jumping blood pressure, with the requirements for getting a loan because fulfilling every requirement set by commercial banks is a tough task.A loan collateral is mandatory. The bank evaluate the value of your collateral itself and if you are lucky 70 percent of value will be the sum of loan you will get. You will never be able to get a loan if you do not have a collateral or have ever got a record of not paying your debt on time. Also, even if you are given a loan, the interest rate is too high.

The bad news is that the government has to fulfill similar requirements as well in order to get loans from the private sector, foreign and domestic.They have to follow those requirements because foreign investors, especially large investment institutions capable of lending billions, have private capital belonging to hundreds of thousands of ordinary people and pension funds of millions of people behind them. About the loan collateral asset, they are already aware of the large quantity of natural resources in Mongolia.

However, how reliable is the Government of Mongolia? Will the government be able to pay back the debt equal to its GDP on time? How are they going to use this money? The lenders are facing these questions.

A conference designated to answer these questions took place in Hong Kong last week. This conference, the largest conference held abroad on making investments in Mongolia, was attended by 350 participants, who had a detailed discussion about Mongolia’s current political and economic environment, business and investment opportunities in Mongolia. It drew a special attention that the conference discussed about not only the mining sector alone but also other sectors such as real estate, insurance and financial markets. Executives of the largest projects in Mongolia (OT and TT) updated the conference with their latest development and progress. The South China Morning Post quoted the words of Chris Gruben, who has a real estate business in Mongolia, after he metaphorically spoke of Mongolia’s reality today as tango that takes “a step forward and two backwards”.Some companies speaking about the real estate market of Mongolian were saying that it was the best time for investing in buildings such as apartments for middle-income families, or commercial estates like parking lots and warehouses instead of luxury apartments. Matthew Wood, the Executive Chairman of Garrison Capital, a company making large investments in mining and petroleum sector, said “If you run a real business, create real values and respect your Mongolian partner, Mongolia is the land of success.”

The Deputy Minister of Economic Development O.Chuluunbat, who represented the Government of Mongolia in the conference, said that coal exports of Mongolia would be up again in the next 5-10 months. Also, representatives from relevant organizations talked about the Sainshand industrial park, the new railway networks and other projects. Foreign representatives at the conference were asking about the development of domestic capital market and the long-awaited securities law. N.Zoljargal, the President of Mongolbank, expressed his wonder about the fact that Standard and Poor’s reduced Mongolia’s credit rating in spite of having an economic growth of 17 percent.

To sum up, the foreign capital market is watching at Mongolia very closely. If the Government of Mongolia spends its income from selling bonds for the original purpose of building only the related infrastructures of large projects and have private investors, foreign and domestic, build up plants and factories and other objects, a brand new era of economic development will come, which will rapidly improve people’s living standard. However, if the government wants to build new factories on its own, operate them and bear every risk, Mongolians will have no trust in it. Mongolia is putting its first ship into the financial ocean by issuing the government bonds.

Mongolians are cheering the great tradition of ocean shore countries of bursting a champagne bottle on the ship’s bow at the maiden sail setting. May our ship sail safely and come back with great achievements!

SOURCE OF THIS ARTICLE : Ub Post

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