Identifier
Created
Classification
Origin
07ULAANBAATAR487
2007-08-27 15:25:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Ulaanbaatar
Cable title:  

Central Bank Head: Mongolia Not Threatened by Asian Market

Tags:  EFIN ECON PREL EAID EMIN SOCI MG 
pdf how-to read a cable
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ZNR UUUUU ZZH
R 271525Z AUG 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 1415
INFO RUEHUL/AMEMBASSY SEOUL 2905
RUEHBJ/AMEMBASSY BEIJING 5731
RUEHMO/AMEMBASSY MOSCOW 1877
RUEHKO/AMEMBASSY TOKYO 2617
RUEHML/AMEMBASSY MANILA 1441
RUEHBK/AMEMBASSY BANGKOK 1522
RUEHLO/AMEMBASSY LONDON 0180
RUEHHK/AMCONSUL HONG KONG 0820
RUEHSH/AMCONSUL SHENYANG 0309
RUEHOT/AMEMBASSY OTTAWA 0494
RUEHVK/AMCONSUL VLADIVOSTOK 0142
RUEHVC/AMCONSUL VANCOUVER 0088
RUEATRS/DEPT OF TREASURY WASHDC
RUCPODC/USDOC WASHDC 1363
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0684
RUEKJCS/SECDEF WASHDC
UNCLAS SECTION 01 OF 03 ULAANBAATAR 000487 

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR, OPIC, EXIMBANK, AND FEDERAL RESERVE
STATE FOR EAP/CM, EAP/EP, AND EB/TPP
USAID FOR DEIDRA WINSTON
TREASURY PASS USEDS TO IMF, WORLD BANK
TREASURY FOR FINCEN AND T.T.YANG
MANILA AND LONDON FOR USED TO ADB, EBRD
MCC FOR F. REID

E.O. 12958: N/A
TAGS: EFIN ECON PREL EAID EMIN SOCI MG
SUBJECT: Central Bank Head: Mongolia Not Threatened by Asian Market
Downswings

REF: A) Ulaanbaatar 091 B) Ulaanbaatar 394 C) Ulaanbaatar 475 D)

Ulaanbaatar 448

SENSTIVIE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION.

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000487

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR, OPIC, EXIMBANK, AND FEDERAL RESERVE
STATE FOR EAP/CM, EAP/EP, AND EB/TPP
USAID FOR DEIDRA WINSTON
TREASURY PASS USEDS TO IMF, WORLD BANK
TREASURY FOR FINCEN AND T.T.YANG
MANILA AND LONDON FOR USED TO ADB, EBRD
MCC FOR F. REID

E.O. 12958: N/A
TAGS: EFIN ECON PREL EAID EMIN SOCI MG
SUBJECT: Central Bank Head: Mongolia Not Threatened by Asian Market
Downswings

REF: A) Ulaanbaatar 091 B) Ulaanbaatar 394 C) Ulaanbaatar 475 D)

Ulaanbaatar 448

SENSTIVIE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION.


1. (SBU) SUMMARY: According to Bank of Mongolia (BOM) Governor A.
Batsukh, Mongolia's exposure to turbulence in Asian markets is low,
but he fears that recent moves by the US Fed could adversely affect
the country's foreign currency reserves. He believes competition in
the banking sector will help bring down high interest rates and weed
out under-performing banks. The BOM's primary mission, he feels, is
to control inflation, but he conceded that inflation will likely
rise because of increasing salaries and decreasing supplies of
consumer goods. He revealed that the Central Bank is still
scrutinizing aspects of the controversial sale of Trade and
Development Bank, and that the launch of the Bank's Financial
Investigative Unit (FIU) has progressed but capacity hurdles remain.
Finally, he hopes that Mongolia would soon agree with the IMF to
re-start a its Mongolia. END SUMMARY.

Mongolia Unfazed By Asian Market Turbulence
--------------


2. (SBU) During a recent meeting with Econoff and Econ Assistant,
Mongolia's Central Bank Governor Batsukh opined that recent
fluctuations in Asian financial markets will have limited impact on
Mongolia due to the country's modest foreign investment portfolio.
Nevertheless, he fears that the US Federal Reserve's large scale
injections of money into the US banking system, combined with
interest rate cuts, could lead to higher inflation that would
adversely affect Mongolia's foreign currency reserves. Other
economists, business people and bankers with whom we spoke, agree
that Mongolia's exposure to market swings in Asia is low. But one
banker said expected IPOs of Khaan Bank and Golomt Bank would not

fetch the high prices they had previously anticipated, and that
offers of cheap money once being shoved at Mongolia (reftel A) had
dried up somewhat. Because easy access to cheap credit was a recent
phenomenon for Mongolia, its slight evaporation is not expected to
profoundly effect the economy, especially as most banks had been
rightly cautious about doing deals with brokers.


3. (SBU) Batsukh noted that the current crisis was fueled by
troubles in the US sub-prime mortgage market and, referring to the
GOM's frenzied plans to sell off 40,000 apartments with government
bond-backed low cost mortgages (reftel B),hoped that the GOM would
take heed. The government's plan to finance low interest mortgages
with competitive yielding bonds, he said, did not add up (echoing
the criticism of other financial sector experts),an opinion, he
says, he has already communicated to the GOM and the banking
industry. "Why would banks go along with issuing low interest
mortgages if the markets were demanding higher prices?" he asked.

Best Remedy for High Interest Rates: Competition
-------------- ---


4. (U) Batsukh empathized with howls from Mongolia's business
community that high lending rates (around 24%, or between 2 to 3
points per month) and tight repayment schedules were crippling the
country's economic development (a point driven home during Econoff's
recent tour of western Mongolian businesses - septel). However, he
opines that the BOM has little power to affect rates; and so,
focuses on keeping inflation in check. He noted that interest rates
are slowly coming down and hopes they will drop below 20% by the end
of this year. In his view, competition among banks will eventually
force rates down. Higher rates in rural areas result from those
areas being served by only one or two banks. (Note: Mongolia is home

ULAANBAATA 00000487 002 OF 003


to 17 banks, most concentrated in Ulaanbaatar and many believed to
be on shaky financial ground. End Note.)


5. (U) Ironically, many of Mongolia's sturdier banks complain that
there is too much competition; far too many financial institutions
vying for a limited number of customers by offering unrealistically
high savings rates. Bankers told us the BOM needed to crack down on
the desperate behavior and risky practices of weaker banks that harm
the industry and keeping interest rates high. Batsukh countered
that the BOM has raised the minimum reserve requirement (now at Tg 8
billion, approximately US$6.7 million) several times since he
assumed the governorship, in order to force weaker banks to fold or
merge, but that all have so far survived the changes. He has also
pressured smaller banks to improve corporate governance. Batsukh
believes that competition will eventually weed out the weaker
banks.

Banking Irregularities Are Probed
--------------


6. (U) Batsukh reported that the situation at the recently
privatized "Savings Bank" has stabilized, with no continuation of
the run on accounts that transpired after the bank revealed the
disappearance of some 14 billion tg (US$11.8 million) while under
GOM management. He said he is not involved in the investigation or
prosecution of the likely suspects, and left it to the police for
any further comment.


7. (SBU) Regarding the controversial and still murky details
surrounding the sale of the Trade and Development Bank (TDB),the
country's largest, Batsukh contradicted earlier informal statements
to us from BOM officials that the sale in toto had been approved.
Rather, he said that the BOM has only approved certain portions of
the sale; specifically, transactions that had taken place within the
BOM's jurisdiction of Mongolia (i.e., the sale of the Asian
Development Bank and International Finance Corporation's stake to
new buyers). He stressed that the BOM is still carefully
scrutinizing other aspects of the sale.


8. (SBU) He was unclear if BOM knows who the real buyers are, but
said he is convinced that depositors' funds were not/not used to
finance the deal. He then asked if we had spoken with Gerald Metals
(the U.S. metals trading firm that previously owned the bank) about
the deal, suggesting they would have all the answers. (COMMENT:
Batsukh's demeanor suggested frustration over Gerald Metals' lack of
cooperation with the BOM's investigation of the sale. He hopes we
might have more luck in getting answers from them. His statements
might also be a backhanded way to tie an American company, and by
extension the US Embassy, into some of the more questionable aspects
of the sale, given that the Embassy has regularly pressed the BOM to
more thoroughly investigate the deal and to make its findings
available to the public. Questions surrounding the transaction led
post to withdraw its accounts from TDB earlier this year. END
COMMENT.)

Inflation Expected to Rise
--------------

(U) Batsukh said that despite the Bank's efforts to limit inflation
under control, inflation will likely rise this year: He guessed to
8%. He blamed this on increasing fuel prices, increasing civil
servant wages, and recently enacted marriage and child stipends,
combined with shrinking supplies of basic consumer goods due to the
rail transport problems (reftel C). A member of Mongolia's MCA
National Council Batsukh believes that MCC plans to improve the
railway will impact transport and shipping positively.

ULAANBAATA 00000487 003 OF 003




9. Financial Investigative Unit's Delayed Launch
--------------


10. (U) Batsukh reported that the Financial Investigative Unit (FIU)
had finally hired additional staff but conceded that it was
slow-going in getting the unit up and running to effective capacity.
He repeated FIU chief Tumurbat's complaint that finding qualified
personnel to man the FIU, as well as locating sources of TA and
financing for proper equipment, represent the greatest challenges to
the FIU's successful launch. For example, he said they had only
recently found someone to supply them with the software required.
UNIDO will provide it for free with an annual fee to be paid by the
GOM. Finally, Batsukh revealed that the BOM recently dispatched MOU
texts to both Korea and Japan to coordinate efforts at fighting
money laundering and terrorist financing, but had yet to hear back
from either.

Mongolia and the IMF
--------------

(SBU) In what Batsukh stressed were only his personal opinions, he
hoped the GOM would conclude a program with the IMF soon. He
expressed frustration over the GOM's inability to effectively manage
its own budget process. (Note: Last year's budget ended with a
surplus of US$186 million, or 7%, despite pledges to target for a 4%
deficit and widespread budget-busting social spending by Mongolia's
parliament. Parliament recently revised this year's budget when
revenue projections came in much higher than expected - reftel D.
End Note.) Batsukh opined that a renewed IMF program would help
instill budget discipline sadly lacking in Mongolia. However, he
criticizes IMF programs for being too standardized and rigid, and
urges both sides to show some flexibility to enable Mongolia to
enter into a new agreement. He planned to broach the subject with
the IMF's Article IV Consultation team visiting Mongolia in early
September.
Minton