By PAULIUS KUNCINAS,
Regional Editor, Oxford Business Group
Cheaper credit and signs of long-awaited movement in Mongolia’s mining industry are fuelling hopes of a rebound in the country’s banking sector.
The outlook for Mongolia’s banks has been less than favourable of late, with analysts citing both higher levels of non-performing loans (NPLs) and a fall in lending activity as cause for concern.
However, newfound stability, improved business sentiment and monetary easing are all seen as key for stronger industry growth.
Commodities take their toll
In May, ratings agency Moody’s warned that some of the country’s banks could face downgrades due to their high exposure to commodities, with Mongolia more affected than any other Asia-Pacific nation. In addition, the agency noted that Mongolia’s banks were continuing to work through legacy assets on their balance sheets.
“Pressure on the quality of commodity-related loans could be a contributing factor behind possible negative bank rating actions in Singapore, [South] Korea and Mongolia over the next 12 to 18 months, as reflected in our negative outlooks on many banks in these systems,” Moody’s said in a recent assessment of the financial sector across the Asia-Pacific region.
Metals and mining, which account for 10 percent of all outstanding loans in the Mongolian banking system, were cited as the riskiest exposure for banks in terms of energy and other commodity loans.
However, Eugene Tarzimanov, vice-president and senior credit officer at Moody’s, acknowledged that most risks had already been factored in.
“In general, we do not expect negative bank ratings actions related to commodity exposures, because banks in Asia Pacific have either good financial buffers, moderate commodity exposures or ratings that already capture asset quality weakness,” he noted.
Credit down, NPLs up
The flow of credit in Mongolia has slowed during the last 12 months, with banks adopting a more cautious approach to lending.
In mid-May, the Bank of Mongolia (BOM), Mongolia’s central bank, reported a 5.4 percent year-on-year (y-o-y) fall in outstanding loans at the end of April, with credit declining by 667.5 billion MNT (337.3 million USD) to reach 11.6 trillion MNT (5.86 billion USD).
Principals in arrears in April fell by five percent, or 47.8 billion MT (24.2 million USD), on the previous month to 917.2 billion NT (464.1 million USD). However, this was still up 329.5 billion MNT (166.7 million USD) y-o-y, or 56.1 percent.
NPLs, meanwhile, have become a growing concern, as they reached 1.06 trillion MNT (540 million USD) at the end of April, an increase of 42.5 percent y-o-y and 10 percent month on month (m-o-m).
The upward trend took the total level of NPLs to 9.2 percent of the banking sector’s credit portfolio, the BOM said, up by 3.1 points on the share recorded in April 2015.
In a move aimed at boosting lending, the BOM cut its key policy interest rate by 1.5 percentage points to 10.5 percent in early May.
Inflation, which reached 2.1 percent y-o-y at the end of April, down from 9.2 percent one year earlier, was a key factor in the bank’s decision.
The BOM said low expectations of demand-driven and supply-shock inflationary pressures, alongside a positive outlook for foreign direct investment in the medium term, had given it room to move on rates.
The BOM voiced its confidence that the decision on monetary easing would “positively affect promoting monetary and credit growth, private sector investments and economic activities”.
Analysts will now be watching to see whether Mongolia’s banks decide to expand their loan portfolios.
Oyu Tolgoi breakthrough
The banking sector is further expected to benefit from signs of renewed activity in Mongolia’s mining sector.
In May, British-Australian mining multinational Rio Tinto announced plans to proceed with the stalled 5.3 billion USD expansion of its Oyu Tolgoi copper mine in Mongolia’s South Gobi desert.
The news was welcomed by both government and business leaders.
“Given the current situation, any news regarding progress of Oyu Tolgoi, Mongolia’s landmark project, is good news for the economy,” Chuluun Mergen, executive director of the Business Council of Mongolia, told media in May.
Similarly, Prime Minister Ch.Saikhanbileg said the approval of the project demonstrated that Mongolia was “back to business” after being affected by the commodities downturn.
This Mongolia economic update was produced by Oxford Business Group.