In an interview with Udriin Sonin, Director of Mongol Bank’s Market Department J.Bataa spoke about issues related to the foreign currency market, with a focus on the USD exchange rate.
The USD exchange rate that reached 2,050 MNT in March has depreciated by 90 MNT as of today. What is the reason for the USD exchange rate slump?
When any product becomes rare in the market, its prices go up, but when there are sufficient supplies, prices drop. The same principle is observed in the foreign currency market. As of today, commercial banks and currency exchange centers in Mongolia are selling USD for 1,965 to 1,968 MNT, while Mongol Bank set the USD exchange rate at 1,961 MNT.
Are there any seasonal influences in the appreciation of MNT rate?
As Mongolia has a floating exchange rate regime, MNT rate against USD exchange rate is determined through demand and supply equilibrium. Depending on the economic structure features, sometimes we can notice seasonal changes. For example, in the first quarter of every year, we can notice pressure on MNT rates against foreign currency, but starting from the second quarter the pressure noticeably drops.
At the end of the first quarter of last year, the MNT rate against USD appreciated by 5.1 percent, while in the second quarter of 2016, the rate has gradually appreciated by 4.4 percent. In addition to seasonal influences, the government released 500 million USD in bonds on the international market, drew in 250 million USD in syndicated loans and increased the domestic foreign currency supply, meeting the expectations of foreign currency market participants.
Some economists explain that the intensification of Oyu Tolgoi’s underground mine development has influenced the MNT rate appreciation. How realistic is this explanation?
By resolving the financing for Oyu Tolgoi’s underground mine expansion, the company’s operations have intensified and its foreign transaction flow has increased.
As a result of many influences I mentioned before, as of the first four months of 2016, the nation’s balance of payments equaled 202.3 million USD, showing a positive result. This created the basic conditions for MNT rate appreciation against foreign currencies.
How does Mongol Bank participate in the foreign currency market?
Mongol Bank participates in the foreign currency market only when there is a short-term and sudden fluctuation created in exchange rates. Statistics show that Mongol Bank supplied approximately 89.9 million USD to the domestic foreign currency market per month when foreign direct investment into the country was decreasing, prices of mineral products drastically decreasing, and when the country saw deficits in the balance of payments and state budgets over the last three years.
In the last three months, USD purchase orders from commercial banks have drastically decreased at foreign exchange auctions organized by Mongol Bank. That’s why we didn’t participate in the foreign exchange auctions over the last three months. However, Mongol Bank is doing foreign exchange swaps and forward contracts from commercial banks to prevent exchange rate risks, and support payment capability.
The public is concerned about further changes in foreign currency rates. How would you predict the foreign currency rate in the future?
There were several positive changes in basic economic indicators since the beginning of 2016. The annual inflation, measured by the consumer price index, equaled 1.8 percent at the end of May. As of April, the nation’s current balance was 86.6 million USD, while financial balance saw 279.3 million USD in profits. This resulted in positive balance of payments of 202.3 million USD in April, which was an increase of 522.8 million USD compared to 2015.
There are signs of improvement in prices of raw materials in the global market. From the beginning of 2016, prices of iron ore went up by 15.9 percent, copper by 0.3 percent, and prices of gold rose by 20.2 percent. World Bank projected that Mongolia’s economic growth pace will improve starting from 2017, and reach over 10 percent by 2020.
Mongol Bank projects that balance of payments by the end of 2016 will be positive for the first time in the last three years. These expectations are bringing forth possibilities for sustainable foreign currency market conditions.