B.Lkhagvasuren: Central Bank will Fully Support Enhancing Foreign Investment

• 2023-07-21 01:42:08

After the successful IPOs of five major commercial banks, the Governor of the Bank of Mongolia, Lhagvasuren Byadran has been interviewed about the investment environment in the banking and financial sector.

-The successful IPOs of several major banks in Mongolia have attracted the participation of both foreign and domestic investors. How do you evaluate the investment environment of Mongolia's banking and financial sector after these events?

Regardless of whether they are foreign or domestic, professional and institutional investors typically seek long-term, stable returns. Among numerous options, choosing Mongolia, particularly the banking sector, and making investment decisions is a clear and strong message and evaluation of us.

Of course, investors make decisions based on a variety of factors, including banks' business models and competitiveness, credit ratings, and the regulatory environment. The Bank of Mongolia, as a regulatory and policy-making body, is responsible for "ensuring the stability of the financial market and banking system," as stated in the central banking law. Therefore, the priority is to ensure that commercial banks are financially sound and healthy. Only then it will be possible to protect depositors, maintain financial stability, and attract investment.

The Bank of Mongolia has paid special attention to the big picture, such as building the essential building blocks of financial stability, making the necessary reforms in the banking sector, and regularly improving its supervisory framework. By going public, banks are becoming more transparent and accountable, with better governance and ownership structures.

-What was the significance of IPOs for the banking industry?

When Mongolia began its transition to a market economy, creating a two-tiered banking system with the central bank and commercial banks was a historic reform. Now, after 30 years, the domestic systemically important banks going public can be considered the next major reform. This is an important event that marks the beginning of the next 30 years of the banking industry in Mongolia. In this sense, it is a remarkable time for bank customers, regulators, and investors.

Some people point out that even after 30 years of transitioning to a market economy, foreign investment in Mongolia remains limited. What is the Central Bank doing to address this concern?

Our legal mandate is related to price stability and financial stability. Therefore, we aim for maintaining a healthy economy and a stable banking sector where any investor, domestic or foreign, can put in their money. Of course, attracting investment from the international market has positive effects on Mongolia's reputation, foreign exchange (FX) inflow, international reserves, and stability of the Mongolian Tugrik (MNT). In addition to the inflow of capital, there are many other benefits that cannot be measured by money, such as knowledge, expertise, and business culture. Therefore, if a reputable foreign bank requests to operate in Mongolia, the Central Bank will welcome them with open arms within the scope of our regulatory framework. We will fully support such initiatives to enhance foreign investment, as Mongolia's financial sector will advance to a new stage of development if it connects with the international market. Of course, the regulatory body will also assess the risks.

On the other hand, there are many reasons why investment has not come in as we would like in the last 30 years. One big reason is directly related to the size of our domestic market. The businesses of Mongolian enterprises and the income level of citizens have not yet reached sufficient levels to attract large investors. Additionally, the cost of transportation is high. As a result, the "FDI, production, export" model has been difficult to implement in the manufacturing sector. Large mining projects are a different story. In the services sector, several internationally renowned banks have opened representative offices and conducted research on the domestic market. However, they have not yet decided to invest additional capital and open branches to conduct business on a larger scale. We have recently passed the Law on Banks Specialized in Investment Activities, which we hope will open up new opportunities for foreign investors who are interested in financing large-scale projects. Hopefully, we can achieve this goal soon.

-Investors probably make their decisions based on the competitiveness and risks of the entire Mongolian economy, not just the banking sector. Meanwhile, in the latest reports, such as the IMD World Competitiveness ranking, Mongolia is ranked 62nd out of 64 countries, right?

First of all, investors consider many factors before entering any market, such as the country's political, economic, legal, and tax environments, as well as workforce skills, costs, and infrastructure development. In this sense, attracting foreign investment is not just an issue for the banking or mining sectors.

Second, it is clear that we need to provide more information to investors. Our development partners, international organizations, and credit rating agencies all emphasize Mongolia's great potential. A large market is just across the border, and a mega-mining project like OT is actually ready for full production. I hope there will be many more, and it is important for us to fully utilize our potential.

That being said, it is not a bad indicator that Mongolia is actually included in the report and ranked 62nd. This means that out of more than 200 countries in the world, Mongolia's information is fairly transparent, and we are cooperating openly with the international community. If you look at the economies that are included in the top 60 of the IMD competitiveness ranking, you will see countries like BRICS and G20. There are already more than 100 countries that were not included in the ranking because they do not have comparable international statistics or because they do not collaborate with the ranking institution. If you look at it this way, it can be understood that Mongolia is one step ahead of many countries, and we are putting in efforts to improve our competitiveness.

-Let's go back to the topic of bank IPOs. Some retail investors seem unhappy when the stock prices do not perform well on the secondary market. Is the banking sector really a good investment option?

Short-term volatility in stock prices is a natural part of any market. However, the long-term trend is a very important factor. I am optimistic about the future of the Mongolian banking sector because it is the backbone of the economy.

If you look at the financial statements of the banks, you will see that their fundamentals are sound. They have gone through a number of independent evaluations, such as asset quality reviews (AQRs), before going public. Therefore, the fluctuations in stock prices are more closely linked to the characteristics of the stock market than to the business of the banks. In general, there are two factors that influence the price swing of stocks traded on the Mongolian Stock Exchange (MSE). First, it is related to the maturity of our market. Institutional and professional investors have not yet matured, and there have not been enough participants with long-term investment horizons and investment strategies. On the other hand, there are many individual or retail investors who have a relatively short-term mindset. In some cases, this is a matter of financial literacy. Therefore, the Central Bank has been implementing financial education programs.

Finally, it is important to emphasize that the Central Bank does not provide investment advice or recommendations. The Bank of Mongolia's objective is to sustain economic stability through price stability and financial stability. To this end, we are executing necessary reforms to make the banking sector more resilient. These reforms entail reforming banking sector legislation, updating our supervisory framework to a risk-based approach, conducting an asset quality assessment, and launching initial public offerings (IPOs) of domestic systemically important banks (DSIBs).

The Bank of Mongolia collaborates closely with Mongolia's bilateral and multilateral development partners. We are dedicated to implementing all promised measures to keep the Mongolian banking sector healthy and secure. We believe that this, in turn, will help to maintain investor confidence not only in the banking sector, but also in other economic sectors, Mongolia's sovereign rating, and the trading of government bonds.

- Thank you!