“The capital market must be expanded to take the economy forward”

Ch.Otgochuluu, advisor to the President, shares with S.Bold-Erdene his impressions of a recent visit to Germany to study the operation of stock exchanges and of the legal environment regulating the capital market. He also details the steps Mongolia must take to become a major financial center in the region.

Where did you go and what are the first things you learned?
We visited  Frankfurt, the banking and financial center of Germany. The capital market plays a pivotal role in the economy everywhere. As we saw in Mongolia, the country went into a recession when the banks stopped issuing loans, as that was the only source of capital for most major companies. The  capital market has to be expanded to eliminate this total dependence on the banking sector. The capital market works through the stock exchange and the one cannot develop without the other.

Will the present plan to privatize the Mongolian Stock Exchange make it  an integral part of the capital market?
Talk of privatizing the stock exchange has been around for many years, but it became urgent following the announcement that 2010 would be the year of business reforms. The connection is obvious. It seems, however, that privatization will not be immediate. It is likely that a foreign team will be asked to restructure the exchange and run it for some time to put it on course and only then will it be privatized. There could be other options as well. The inadequacies in the work of the stock exchange now are not the fault or incompetence of its administration or participants. It has to do with the uncertain environment in which the stock exchange works, the severely restricted capital market, the lack of experience and exposure among the staff and the absence of proper state support and guidance.

What was the main objective of the visit of the mission to Germany?
The primary goal was to introduce Mongolian policy makers and executors to the ways of the capital market in Germany, which has a similar legal background as here, and offer them an insight into what needs to be done here. The visit was sponsored by the GTZ and our team included MPs, advisors to the President and the Parliament Speaker, officials from the Ministry of Finance, the Government Secretariat, the State Property Committee, the Financial Regulatory Agency, Mongol Bank, the Stock Exchange and the National Development and Innovation Committee.
The second objective was to establish a working relationship with the state organizations regulating the stock exchange. Both objectives were well achieved.

What institutions did you visit?
The first place we went to was the  Securities Institute, a private organization that  collects the views of business entities and offers these to legislators. It also offers various advisory services to actors in the capital market. For example, a lawyer working in the financial regulatory agency may not know much about high finance and can seek the help of the institute. Similarly it provides information to politicians and the public and also do advocacy work on public issues.
Then we went to the stock exchange where shares and bonds of companies -- large, medium and small -- are traded, on the floor and in real time. We saw how trading is conducted with countries in other time zones, like America and Japan. We also studied its systems of internal monitoring and network security.

How is the state involved in the operations of the stock exchange?
The Central Bank, the Ministry of Finance and affiliated organizations regulate its operations to ensure that it does not deviate from the fiscal and monetary policy, and also helps raise capital. We watched a presentation from the Central Bank which showed how the bank had once worked to develop the bond and debt market but gradually realized that it could not do this alone. It started collaborating with the private sector to better meet  its needs. The stock exchange now trades in bonds and has the full trust of customers.
Another important organization we visited is similar to our Financial Regulatory Agency. It controls and regulates activities of the stock exchange to ensure that  the rights and interests of shareholders and investors are safeguarded.

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