CEO of the Mongolian Stock Exchange (MSE) Kh.Altai sat down with Unuudur to discuss the recent growth in trading that the exchange has experienced and prospects moving forward.
Last year, the Top 20 Index and MSE ALL Index both grew exponentially. What factors influenced this growth?
The growth of the MSE index in 2017 was the highest in the world. Generally, 2017 was a successful year for the stock market. There were several factors that helped accomplish this. There was a Bloomberg article I read that was published in late 2017 that essentially said somewhere along the lines of “the financial discipline of Mongolia vastly improved in connection with the extended fund facility implemented with IMF. As a result, the improved interest of investors is positively affecting the stock market.”
In addition to this, there were several noteworthy moves on the stock market. For instance, Heineken, a company with a globally famous brand, became a shareholder in a company listed on the MSE, APU. A subsequent merger with large beverage manufacturer Spirt Bal Buram LLC has increased the market value of the company to almost one trillion MNT. This is the first instance that a large multinational company has owned a stake in a company listed on the MSE.
Furthermore, Suu JSC succesfully issued its bond and ITools launched its IPO, both of which were oversubscribed.
Additionally, the MSE traded a record amount of government bonds last year. Yields on government bonds are guaranteed and it is a risk-free investment. Therefore, the demand for government bonds is very high amongst domestic investors. Through this, individuals are gaining more knowledge in regards to the stock market. Consequently, many individuals begin to not only look at bonds but other securities that have a better yield than interest rates on savings. The MSE is like a store in the outskirts of the city that no one visited previously, but now people are lining up to see which new securities are offered on the market.
Government bonds make up a large percentage of trading on the MSE. The finance minister has called on the government to stop issuing bonds with high interest rates. Will this cause a drop in trading at the MSE?
In the last two to three months, the primary market trading of government bonds have not been offered on the MSE. The government issues bonds in two ways. One is through a commercial bank electronic platform through the central bank and the other is to offer it to foreign and domestic investors on the MSE. The participants in the bank platform are commercial banks. When it is issued on the MSE, anyone can purchase bonds through a broker. It is open to large foreign investors and to domestic investors. We have asked the Finance Ministry to issue future government bonds through the MSE. Because of the large number of investors, it is possible to decrease the interest rate through competition.
On the other hand, the increasing stability of the tugrug is another attracting factor for foreign investors. Recently, a large international bank established a sub-custodian agreement with a large Mongolian bank and has proposed investment in government bonds initially. This is also the first instance of a large financial organizations entering the Mongolia stock market.
Some have brushed off the growth of the stock exchange as a bubble. What would you say about this?
We do not see it as a bubble. Our stock market has a lot of potential. Last year saw several steps being taken in the right direction to make use of that potential.
There is an expectation that Mongol Basalt and Lend.mn will launch their IPO. When will a new stock be offered on the MSE?
A stock market is a sytem that links people with projects and ideas to people with money. Several companies are working to launch their IPO. The MSE reviews the materials for an IPO or stock request and sends it to the Financial Regulatory Commission (FRC). The IPO requests mentioned were sent to the FRC. The FRC provides the legal license to conduct trading. The request is in the process of being reviewed.
Most people think of a stock exchange when it comes to the stock market. Outside of the MSE, the stock market has many organizations such as the FRC, Mongolian Central Securities Depository, savings organizations, and brokers. The development of the market is directly connected to the cooperation between these organization. In the last 27 years, there have been a total of 20 IPOs. We need to work towards increasing the number of IPOs and we believe we have opportunity to do so. The process to issue securities must be made more flexible and without obstacles. Because the interest rate of commercial banks is high, companies seek other options for funding. Sourcing funding from a stock exchange costs a lot less than receiving a bank loan. However, because the process tends to get drawn out sometimes, companies are more reluctant. For instance, if the collateral is there, it is a relatively quick process to receive a bank loan. There are some instances where it takes months or even years before a company is allowed to issue its stock on the MSE. The MSE estimates that it is possible for a company to raise anywhere from five to 30 billion MNT on the stock exchange. It is possible to make the process of raising capital on the stock exchange a lot cheaper and easier.
At the meeting of the Business Council of Mongolia, you said that a company will be dual-listed on the MSE by the second quarter of 2018. What is the significance of this?
At this point, we cannot reveal which company will be dual-listed. I can say that a company listed on the TSX Venture Exchange is in the process of preparing for a dual-listing. The first dual-listed company will be on the MSE by the end of this year. The prospect of dual-listing has been discussed for many years. There was discussion regarding trading shares of the Erdenes Tavan Tolgoi on the London and Hong Kong Stock Exchanges and also the MSE. This was never implemented.
In the last 15 years, many foreign companies operating in Mongolia have traded their stock on the London, New York, Toronto, Australia, and Hong Kong stock exchanges. The Mongolian government and several companies have issued bonds on the international market. Yet, the domestic stock market is not intertwined with these other stock exchanges at all. Even though the legal basis was set up previously, there were no rules and procedures regarding dual-listing. Subject to approval by the FRC, if approved, the rules and procedures will allow a foreign mining company listed on a foreign stock exchange to be listed on the MSE. This means that Mongolian citizens can purchase stock in these companies and reap the benefits of mining in Mongolia. This is very crucial.
Second, this will be a catalyst for increased investment. It is inevitable that the interest of domestic investors will increase. We see this as a revolutionary turning point in the development of the Mongolian stock market. There are around 30 companies listed on foreign stock exchanges that operate in Mongolia.
Outside of dual-listing, what other action needs to be taken by the MSE?
We want to be included in the FTSE’s frontier market list. The MSE was added to the FTSE Russell frontier markets watchlist in 2012 as a result of the adoption of the T+3 settlement system, which refer to the settlement dates of security transactions which occur on a transaction date plus three days. Unfortunately, the MSE was removed from the watch list in September 2017 following a review concluding a delay of compliance with the requirements. The issue is that we have not been able to implement T+2 and T+3 payment systems. Unfortunately, this concerns not only the MSE but the FRC, the Mongolian Central Securities Depository and the cooperation between these organizations.
If we make the payment system more clear to investors, in a sense, the credit rating of our stock exchange will improve. If we fulfill the international requirements for the payment system, large investment funds such as BlackRock and the Norwegian Oil Fund will be able to invest through the MSE. This will allow trading to skyrocket.
Yet, because we have not been able to accomplish anything in regards to this over the last five years, we were removed from the watchlist. I believe it is because the size of the Mongolian capital market is relatively small but the organization and structure of it is too large.
Outside of this, we want to attract domestic institutional investors and pension funds. In any stock market, pensions funds tend to be the largest investors.
The MSE Board of Directors recently revised its index calculation rules and sent it to the FRC for approval. What advantages and changes will the new rules bring?
The changes reflect the advice and feedback from foreign funds and stakeholders of the stock market. The MSE index is dependent on only a few companies and tends to fluctuate a lot. The Top 20, Tier 1 and 2 will all be calculated separtely. The MSE ALL index will be terminated. Most companies classified in Tier III are inactive and inclusion of such companies in the index calculation will hinder the accurate depiction of market trend, reducing the intensity of market growth or decline.
…A mining company listed on the TSX Venture Exchange is in the process of preparing for a dual-listing. The first dual-listed company will be on the MSE by the end of this year. The prospect of dual-listing has been discussed for many years. There was discussion regarding trading shares of the Erdenes Tavan Tolgoi on the London and Hong Kong Stock Exchanges and also the MSE. This was never implemented…
Some companies do not send their quarterly reports on time. What action is being taken regarding this?
Around 50 percent of companies do not send in their financial reports. We have proposed to the FRC to revoke the license of companies that have not complied with the law and sent in their financial reports on consecutive years. On the other hand, we must remember that the liquidity of the MSE is bad right now. Some companies are not able to benefit from being listed on the MSE. Companies with adequate liquidity that are seeking funding will of course comply with the rules.
The privatization of the MSE has been discussed for many years. What are your thoughts on this?
The stock exchange must be privatized. This is a time-sensitive move. Internationally, most stock exchanges operate as joint stock companies. It is looking like the MSE is the last state-owned stock exchange in the world. The banking sector was privatized in 1996. Since then, the financial capacity, services, and operations of the banking sector have expanded significantly. Compared to this, we all know what the development level of the stock market is at right now.
The Mongolian Securities Exchange was established. Has competition increased since the establishment of a private exchange?
To be honest, there has been no real change in competition. Of course, I won’t deny the fact that this may change one day.