E.Odjargal talks to G.Amartuvshin of Development Bank of Mongolia, and finds that only months after taking over as Executive Director, he is putting in place big changes and envisions radically different ways for the institution to work more professionally, free of political control.
What are your priorities at DBM?
There are three.
First, to improve the internal organization and governance practices. Regulations and lending procedures have been streamlined. DBM used to be criticized for delay in acting on loan requests from companies and, often enough, these could not even be traced. Now the entire process has been made more transparent. Second, the credit quality. Six cases of unpaid loans have been transferred to the prosecutor. Overdue loans that have not been disclosed to the public have been transferred to the Special Asset Unit and claims filed in court. If the issue of non-performing loans is not resolved quickly, it would adversely affect the bank’s performance and profitability. Third, issue of new loans. DBM is a policy bank, responsible for offering financial help to major projects and programs related to Mongolia’s economic development and so we have to be ready to service such loan requests.
What is the size of your asset and how much outstanding loan have you got?
As of June 30, our total assets amounted to MNT4.6 trillion. Of this MNT1.39 trillion is our own, and the rest is foreign and domestic funds with us. The most recent of these came into our account in December 2018 when a certain part of the proceeds of a $500-million bond was kept with us. We now have the equivalent of MNT600 billion to lend, which is enough to meet all possible needs.
Is there any plan to raise new capital from foreign markets?
As of now, there is no plan to issue new bonds this year. However, we shall be using our partnership agreements with foreign development banks to raise capital for investment in specific projects. For example, the total financing of the renovation of the Thermal Power Plant No. 4 is being sourced from the Russian Vnesheconombank. A certain amount of the loan has already been received and more will come as the work progresses. Similar borrowings will be arranged when the need arises to fund a specific project.
DBM revised its lending policy in May. Is any specific sector your new focus and why did you choose it?
The law says that 60% of DBM’s lending should be to support exports. The current figure is 57%-58%, and we hope to meet the 60% requirement within this year.
Currently, a new “Supporting non-mining export” program is being studied and if it is taken up, we shall offer part financing.
In general, DBM finances projects and programs that support export or increase the inflow of foreign currency, create new jobs and support value-added industries. The mining sector meets all these criteria but we focus on financing railways, roads and energy projects that support infrastructure rather than going for direct financing of mining activities. Financing of wool and cashmere programs was approved last year, but for various reasons the first loans were issued only this June. The delay was unfortunate and this time the choice of new cashmere programs will be announced in September, all preparatory work should be over by the year-end and the loans released before the Lunar New Year.
Could you tell us more about how you support and fund mining projects?
As I said, DBM supports infrastructure development, for example, railway projects. We might in the future provide low-interest and long-term loans to large extractive companies like Erdenes Tavan Tolgoi to take up cost-cutting programs so that they can work more profitably. Since the mining sector contributes heavily to Mongolia’s foreign reserves, DBM needs to have discussions with major mining companies on how to maximize foreign exchange inflow. u
What loans have been issued to the mining sector by the DBM? How many state-owned companies are among the borrowers?
One that is directly linked to mining is a loan of MNT69 billion for the Gold 2 program. Processing plants that are financed by our bank, unless they are agricultural, get their raw materials from the mining sector. For example, Beren’s project will process iron ore to produce metal products. Other examples are MAK Euro cement, Monpolymet, and Khutul cement factories. The few mining projects that received funds from us all did so under the 2017-2018 Gold Program. As mineral prices have fallen, these projects are facing difficulty in repayment, but we are confident that the situation will soon be rectified.
As I said, the bank favours infrastructure development to support mining rather than providing direct financing for mining operations. For example, the Quiet Station project is being financed to increase the capacity of transit crossing through Gashuunsukhait border and to improve the working condition of drivers. Infrastructure projects include rail and road projects as part of the construction of the oil refinery.
Were companies that borrowed under the Gold 2 program in compliance with the bank’s criteria?
Some of the borrowers did not achieve the promised results. However, the 14 enterprises that received loans worth altogether MNT70 billion, sold 159 kg of gold in 2017 and 630 kg in 2018.
DBM now has a different financing approach, and is unlikely to again fund any such program as Gold 2. This is work for commercial banks, as our new policy makes clear.
How much risk is there of mining project loans not being repaid?
Taking risks is part of bank work, so the possibility is always there that some of our borrowers would default. Of course, such risks should be kept at a minimum. For that, utmost care should be taken to assess the quality of the loan proposal. There is a dichotomy here. On the one hand, large projects are important for the economy, but on the other, these are very difficult to implement. The likelihood of missing the repayment schedule because of implementation delay is very high. It is important to find out the reasons for default. Maybe the essential equipment did not arrive in time and thus there was delay in construction, or production started later than scheduled. Maybe the project planning was poor, and it did not generate the estimated revenue. Maybe everything was right but there were unexpected changes in market conditions.
We tend to have a sympathetic approach when projects run behind schedule. Such things can happen everywhere, especially in Mongolia. If we are convinced that the delay was unavoidable and not really the project holder’s fault, the bank may re-negotiate with the borrower the terms of repayment. However, we tend to be less flexible if we feel that the project planning was at fault. In the case of such non-performing loans we check if the borrower’s collateral is adequate, or transfer the case to a prosecutor. The present DBM procedure includes consideration of the possibilities and effects of a sharp fall in MNT value.
What about your loans to New Railway and Mongolian Railway?
They were transferred to the State budget in 2016 and are no longer on our books.
Will DBM lend to new railroad construction projects?
The case for that is that a railroad will have many benefits. More efficient transport facilities will increase our mining export revenue. Commercial banks will not be able to lend such huge amounts on favourable terms. The State budget will also be strained to allot such big sums. Therefore, I believe such cases should qualify for DBM support.
Is there any current discussion at DBM to fund railroad projects?
We have had some preliminary discussion and have also talked with the Ministry and Mongolian Railway. However, there is nothing definite or specific.
Are there any new mining projects that have asked for loans?
There are. Among them are energy projects. I feel DBM should fund them as demand for energy is, and will keep on, increasing as the mining sector grows. Like all development banks, DBM must be involved in developing basic infrastructure, which includes energy, roads, transportation and logistics.
What is DBM’s involvement in the proposed Russia-Mongolia-China economic corridor?
We are in talks with the development banks of our two neighbours, though there is as yet nothing clear about the areas and nature of any bilateral or trilateral collaboration. Development Bank of China is interested in financing energy and infrastructure projects and Bank of Russia is already working with DBM on Thermal Power Plant IV project.
Is it true that DBM and the sector Ministries of these projects do not share good relations?
I cannot speak on the situation before my time, but at present the relations are good and DBM is in regular touch with the Ministries you mention. Knowing that any misunderstanding will harm the progress of projects, DBM works closely with these ministries and has arranged 2-3 meetings with them on how we support main projects in agriculture, mining, road and transportation and energy. The Government has directed DBM to define the development of important sectors of the economy and cooperate with ministries. We always check with the Development Policy Department on their views on whether a project is in line with Mongolia’s development policy.
DBM played an important role in the repayment of Mongolia’s debts in 2017. More such repayments are due from 2021. How will you manage things this time?
DBM does not take independent decisions on external debt and will do as instructed by the Ministry of Finance. Since we are in no position to make a one-time repayment of $20 billion, there will have to be refinancing or revision of terms.
We shall do whatever we might be asked to do.
Tell us about the memorandum of understanding signed between your subsidiary DBM Asset Management and Russian Direct Investment Fund during President Putin’s recent visit.
The biggest challenge for Mongolia is to find funding at all levels -- corporate, sectoral and national. So much development work cannot be taken up for lack of money. Taking a loan is not always the solution, as repayment of the principal amount and the interest thereon has to follow a time frame, but there are projects which by their very nature and purpose would take long to generate regular and disposable profits. These cannot keep to the usual repayment schedules and so should not be implemented with commercial borrowing.
This is where DBM steps in, by making available big loans with lower interest rates that have to be repaid over a long term. There are other ways like direct investment and allotment from the state budget. Our policy is that DBM itself will offer loans and support direct investment through DBM Asset management. The mou is an intent of cooperation with Russian Investment Fund (RIF), in which DBM can propose to RIF investment in pre-researched joint venture projects. On its part, RIF can suggest to DBM investing in projects it is interested in implementing in Mongolia. This is the first step and DBM hopes to follow up with similar cooperation with other countries’ investment funds.
As an economist and a banker, how do you see Mongolia’s current investment environment? What are the major obstacles and the principal advantages?
I feel the investment climate is looking good. Since the economy is growing, foreign investors are getting interested. They come to Mongolia seeking higher returns despite the high risks, but they can always bring in risk management experts to deal with risks associated with corporate governance and finance. However, the legal and political environment may turn up unpredictable risks for which investors cannot be adequately prepared. Furthermore, there are macroeconomic risks special to the region. When the Chinese economy slows down, there is an immediate impact on Mongolia. No one can accurately predict such risks but even then, I would think potential investors in Mongolia are mostly deterred by the legal and political risks here. The recently proposed changes in judicial governance can prove to be crucial, and if they really do come up, it would raise Mongolia’s credibility level among foreign investors, who need to be sure that any contractual dispute over their investment in Mongolia would be fairly decided in court. Some of the proposed amendments to the Constitution also look very positive.
Altogether both the economy and the investment climate have improved, and the corporate world is convinced of the good intentions of the government and politicians. Instead of quick profits during a short stay, I think now companies are more looking at developing long-term projects with steady profits.
Can the Development Bank operate without government interference?
This is our hardest problem. An institution like the Development Bank can succeed and achieve its goals only if it is kept separate from politics. Last year’s amendment to the law on the Development Bank was a big step in that direction. It precludes any member of the government or parliament from giving directions to the Development Bank, thus giving us the leeway to evaluate loan requests professionally and take decisions solely on merit. Our job when approving a request for financing is to make sure that the project aligns with Mongolia’s long-term development policy and is economically viable. We should not be made to finance short-term projects with political overtones.
Revising the rules and regulations on lending has been the first step for DBM to stress its intention to work professionally and independently. Some structural changes have also been made. We are working to improve and increase the transparency of our current in-process loans. Of course, independence from politics will not be achieved overnight. We shall be submitting to the government for its approval proposals to change some rules governing DBM. The law on the bank also needs some changes. As a shareholder the government has the right to be represented on the board of directors, but there should be no political appointee in the core management team. As CEO, I decide on the management team to work with me. There is no place in it for someone who is not a professional or has no work experience in the banking and finance sector.