Mongolia: blue skies - for now

The full inbound flight earlier this month – heavily populated with expatriates – told the story: Mongolia is booming.  The drive to city-centre confirmed the impression.  On our 2017 visit the city’s Soviet-era power plant sat ~5km outside Ulaanbaatar’s outskirts.  It now sits in the middle of a suburb.

Our meetings with issuers indicate repayment and/or refinancing arrangements are in place for upcoming Mongolian maturities.  We believe their policy role ensures sovereign resources are at the ready as a last resort.  These and several potential bank issuers plan to engage global capital markets in the coming 18 months.  Several indicated overseas dual-listings as well as the Yankee market.

Mining and real estate activity are driving a rapid post-pandemic recovery.  Local forecasters we met expect FY23 GDP growth around 5.3% and 5.7% in 2024.  Coal exports are the current driver but copper will shortly take over as Oyu Tolgoi’s underground operations come on-line. The construction industry is struggling to keep pace and labour at all levels is in chronically short supply.  It comes as little surprise that key economic metrics are in the green: at 1H23 the central government’s budget was in surplus, inflation at 9.2% was well off its 1H22 16% peak, foreign exchange reserves are nudging US$4.0bn (vs US$2.3bn 1H22 trough) and trade balance set to beat 2022’s record US$3.8bn surplus.

Meetings with the nation’s newly-designated systemically important banks (Golomt, Khan, State Bank, TDBM and Xac) shows the sector in robust health.  The system’s capital adequacy and liquidity ratios averaged just under 18% and 40% at 1H23 – roughly 1.5x and 1.3x their respective regulatory minimums.  At 9.2% non-performing loans were well off their 13.0% pandemic high with loan books nearly 95% MNT-denominated.  Profits are set to exceed 2022 records. Mandatory IPOs of the above institutions have left them flush with cash and heavily capitalized.

Despite current blue skies we see clouds on the horizon.  Inflation and interest rates appear set to remain stubbornly high as the Central Bank battles inflation from pre-election spending. The property sector is particularly worrying.  Reliable data is scarce but several industry players we met indicate prices are up nearly 10% year-to-date with one mentioning high-end apartments trading at US$2200/m2.  Bankers and multilateral staff voiced concern over the proliferation of non-bank finance companies and the rapid expansion of unsecured credit – particularly given the lack of consumer protection legislation and education.  Established city dwellers report social friction as they jostle with newly urbanized rural migrants.  The country’s extractive industry reliance remains a perennial concern.