Examining the potential contagion of a US regional bank collapse on Mongolian banking system
Mongolia's economy is heavily dependent on its mining industry, particularly coal exports, which make up over 90% of total exports. The international banking system's stability significantly affects the country's economy.
The Business Council of Mongolia recently analyzed the effects of a US regional bank collapse on international banking and its potential impacts on Mongolia.
The head of a leading Mongolian bank expressed confidence in the local banking system, citing liquid assets and minimal exposure to government bonds in local currency.
However, challenges like exchange rate volatility and limited economic diversification remain.
The Central Bank of Mongolia reported positive trends, including increased household consumption, recovery in service and non-mining sectors, and foreign exchange reserves reaching $3.5 billion at the end of 2022.
Coal exports have surged (production rose over 200% in February), and inflation has slowed to 12%, possibly reaching a single digit by the end of 2023.
To enhance transparency, governance, and stability, major Mongolian commercial banks are going public this year after postponing their IPOs last year at the International Monetary Fund's recommendation. Two have already completed their IPOs, and three more are expected to follow suit this year. The largest Khan Bank offered 10% of its share to the public in April 2023.
Additionally, all major banks must restrict shareholder ownership to no more than 20% of total issued shares.
Despite these advancements, local currency depreciation continues, and businesses still face exchange rate risks.
Mining companies and investors are pushing for regulatory changes to improve exploration phases and increase cooperation with local communities.
Coal businesses propose that most royalty payments be allocated by local administrations toward healthcare and education services in provinces.
The government must ensure equitable and transparent distribution of mining revenues for the entire population's benefit. Parliament will discuss draft legislation on creating and managing a wealth fund from mining revenues in its spring session.
While Mongolia's banking sector may be less susceptible to international banking system instability, it still confronts economic challenges related to exchange rate volatility, limited diversification, and fair redistribution of mining revenues.
The government must implement reforms and policies to tackle these issues and promote sustainable economic growth.