Banks in Mongolia saw weaker profits in 2015 as one of Asia’s fastest growing economies cools, triggering higher borrowing costs and an increase in non-performing loans (NPLs), while credit rating agencies are also watching the banks’ vulnerability to China's continued economic slowdown. Recent downgrades in Mongolia's sovereign credit rating following falls in commodity prices have added more pressure by increasing the cost of borrowing in overseas markets. The devaluation of the tugrik, which has lost about a quarter of its value against the US dollar since the start of 2013, has also pushed up the price of new foreign currency loans as well as the cost of servicing existing loans.
Despite this, banks are working to regain some momentum by beefing up their retail operations. Furthermore, Prime Minister Ch. Saikhanbileg has promised to clear the way for the delayed second stage of the Oyu Tolgoi mining project, a $5bn investment that would help reinvigorate the economy.
Credit Downgrades Hit Banks
The spate of ratings cuts are cooling the appetite for lending to private-sector banks. Standard and Poor’s cut its long-term sovereign credit rating from BB- to B+ in April 2014 amid concerns over the health of the economy. Moody’s has also flagged its concerns, in July 2014 cutting its assessment of Mongolia’s sovereign standing to B2, a ranking that denotes a high degree of credit risk.
Moody’s also cited Mongolia’s strained external liquidity position and the government’s expansionary monetary and fiscal policies, including the initiatives aimed at providing liquidity injections to the banking system. It also warned that Mongolia is vulnerable to any further slow down in the Chinese economy and a reduction in raw materials exports, which would add pressure to domestic growth and liquidity.
Positive revision to Mongolia's credit outlook is unlikely for now, with prices of key commodities such as coal and copper still weak. Economic growth stood at 7.8% in 2014 after the economy expanded by 12.3% in 2013, according to the National Statistical Office. The World Bank lowered its growth forecast for Mongolia this year to 6.3%, down from the 9.5% it had predicted in July.
As a result of the contracting economy, banks are likely to see the performance of their loan books deteriorate further. Data issued by the central bank showed that outstanding loans stood at MNT12.4trn ($7.4bn), up 15.9% or MNT1.7trn ($1bn), year-on-year. While the NPL ratio declined from 5.3% to 5%, the value of NPLs increased by 10.6%, to MNT623.9bn ($374.3m).
Housing Slow Down
There is also concern about the cooling of the local property market. House sales are significantly down on last year, with apartment sales down to a level five times lower than in 2013 according to some estimates.
With banks having extended credit to construction firms and developers, an increase in unsold real estate could drive NPL rates further.
G. Ganbold, former CEO of Golomt Bank, suggested the property slowdown may require banks to adjust their risk exposures in certain areas. “One potential problem area is construction and real estate,” Ganbold told OBG. “We faced a big boom in 2011 and 2012, and now there are many unfinished projects or finished developments that cannot find buyers.”
Mongolian banks still see potential for expansion in some areas. Khan Bank CEO, Norihiko Kato, sees growth in retail electronic banking, especially through mobile phones. “On the whole, there are opportunities to be had and while the banking sector may not grow as quickly as it has in the past few years, its expansion will continue to outpace that of the overall economy going forward,” he said. There are also hopes the government will clear some of the log-jams that have held up major foreign investment projects, in particular the Rio Tinto project in Oyu Tolgoi, which has the potential to account for a third of Mongolia’s GDP when fully up and running. Upon being appointed, Prime Minister Saikhanbileg indicated that his main priority in office would be to invigorate the economy.
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