The Mongolian government is considering the establishment of an asset management company before the end of the year to offload onerous non-performing loans from domestic banks’ balance sheets. 

Mongolia secured an International Monetary Fund financial package last month to slash a bulging debt load. That package included a requirement for an audit of the domestic banking sector as part of its fiscal discipline guidelines. 

The IMF’s three-year, $434m loan unlocked financial support from the Asian Development Bank, the World Bank, Japan and South Korea, while the People’s Bank of China extended existing swap lines with the Bank of Mongolia, the central bank. The total financial package amounts to $5.5bn, helping Mongolia service external debt repayments of about $2bn through to 2022. 

The 16 banks serving Mongolia’s $10bn economy are small, pay extraordinarily high deposit rates and are burdened with bad debt built up during the mining industry’s previous boom-and-bust cycle. The asset management company would help banks offload NPLs and release capital that is now held against bad loans, which many banks prefer to roll over rather than recognise.

“Many loans are restructured and we have no idea how big [the issue is],” said Neil Saker, the IMF’s representative in Mongolia. “We only have anecdotal evidence because banks don't really report restructured loans.”

NPLs expanded rapidly after drops in commodity prices and in Chinese demand and the resulting squeeze on the Mongolian economy. Overborrowing and overspending at the height of the commodities cycle meant mining-dependent Mongolia built up debt of 90 per cent of GDP and a chunky fiscal deficit of 17 per cent of GDP.

The parliament, known as the Great Hural, is expected to debate the proposal in its autumn session. “The design of the asset management company has been drawn up already,” said Ayumi Konishi, director-general for East Asia at the Asian Development Bank. 

Estimating the size of Mongolian NPLs is not easy, because of both borrowers’ and lenders’ preference for extending loans rather than categorising them as non-performing. According to Bank of Mongolia, the banking sector’s NPL ratio sits at 8.6 per cent. But some market participants believe the true ratio might be as high as 20 per cent.

What is more, much NPL collateral is in the form of mining certificates calculated on the basis of commodity prices before the recent, multiyear slump. “I am sceptical that 100 per cent of the collateral will ever be recovered,” said Graeme Knowd, managing director, banking, at Moody’s.

More transparent books could help some banks attract interest in the NPLs from foreign investors, with banking sources floating Middle Eastern sovereign wealth funds as potential buyers. Generating capital from Mongolian banks' declining profits “is just not sufficient”, Mr Knowd said.

Meanwhile, newly proposed rules aim to make Bank of Mongolia more independent of parliament while limiting the power of the governor. Those laws could be passed as early as next year, according to the IMF.

In March, Ulan Bator avoided defaulting on a $580m Development Bank of Mongolia bond thanks to an IMF agreement. The country now expects a recovery in the commodities cycle and will receive $1bn in foreign direct investment annually for the next five years for the gold and copper Oyu Tolgoi mine.

Published Date:2017-06-12