Money will be Scarce This Spring

Besides, due to low copper price, revenue plans fell short of projections. Hence, from the fourth quarter of the last year on the stability of the banking system has been an issue of critical importance. As the situation deteriorated so dramatically within a short time the Mongolbank started taking measures to mitigate the effects and reduced our  interest rate. We kept the commercial banks’ required reserves at 5.6-6 per cent. Banks’ loan portfolios were scrutinized in October 2008, and an alarming tendency was observed that the banks were accrued debts for incomplete construction loans. Therefore, to ease the tension the Mongolbank provided 63 billion MNT worth loans to a few commercial banks whose portfolio had loans for 80% complete constructions so as to assist the builders finish constructions. Generally, the Central Bank does not prioritize any particular sector, however, as the situation was rapidly worsening, especially when the bank assets were locked in constructions, the Central Bank did undertake this measure. From then on the Mongolbank has been observing prudence in credit activities.

Depositors started withdrawing their savings since November-December 2008. At that moment the Mongolbank began providing collateralized loans through commercial banks. Within 3 months, under the collateralized loans all in all 223 billion MNT was injected into the economy. A larger commercial bank normally disburses around 223 billion MNT loans a year. This is a brief recap on measures we undertook in the recent past.

Now a few words about the prospects for 2009. As inflation slides down, the Mongolbank shall further work to ease the monetary policy. We are working on the options for policy easing. Easing or tempering can be achieved through money supply. This spring we are likely to experience a similar situation of the last quarter of 2008 – scarcity of money. In such a case, the Mongolbank could deploy the money supply channel. There are possibilities to undertake measures in this direction.

We have prepared for a Cabinet session discussion and approval a program to overcome the crisis within a short period of time and with fewer losses. If the Government has identified the sectors to render financial support it may now work on how to supply the needed funds.

The Mongolbank will submit to the Parliament a number of bills, draft laws. Some have already been submitted. To mention some of the major amendments and changes to laws, the consolidated supervision system would undergo certain changes. For instance, for the Mongolbank to inspect a commercial bank and fully assess its possible risks, we need to look into the financial position of the bank. Therefore, the Mongolbank inspections could couple with, say, Financial Supervisory Committee so as to reveal the financial fundamentals of the entire group so as to assess the overall risks. This is important, and the need to do so is posed by the market itself. Consolidated financial supervision shall be implemented from 2009 on. The legal and regulatory environment shall be created by changing and amending pertinent banking laws.

A host of measures shall be undertaken in the area of tightening banking supervision. The Mongolbank would decide to ……… This would help the commercial banks withstand risks to a certain extent. At the times of lingering slowdown in the economy, the banks’ loan portfolio usually falls.

Therefore, actions are needed to support the financial sustainability especially to bear the risks of bad assets. One of new measures to be implemented in 2009 will be the examination of the 16 commercial banks against the optimal ratios of banking activities. The Mongolbank shall be reporting the public on the observance by commercial banks of these optimal ratios on a monthly basis. This would help us tighten financial discipline of banks.

 There is an urgent need to increase the foreign exchange reserves. At of the moment, we have about 600 million USD reserves. We are drawing a specific plan to replenish the stock within a short period of time. Through purely as the Central bank, we have started acting. For instance, we have agreed on currency swap principles with the PRC. Measures are being taken on strengthening foreign trade, the first one being a deal for Mongolian importers with Chinese state owned insurance company.