D. Batjargal: A crisis is a Test for Businessmen

Total savings in Mongolia account to more than 1 trillion MNT. The 187 billion MNT would be some 15-16% of that. I expect no problem with the Government issuing bonds for less than 20% of the total savings. The structure of the Mongolian deposit holders looks somewhat interesting to me – over 800 billion MNT is kept in just few hands. If deposit holders withdraw their savings to purchase government bonds, commercial banks might find themselves in a bit difficult situation. Banks might encounter difficulties if the depositors’ funds are locked in somewhere and cannot be released, and because banks cannot ask their loans back before the maturity term. Yet, the Mongolian Development Fund money is placed in the treasury account. Therefore, the commercial banks will have a chance to improve their management. If deposits start to be withdrawn, commercial banks will be forced to improve their management. Second,  M&A is possible among the many small commercial banks, which is indeed a positive development. It is another impetus for improving management. These many small banks combined have enormous expenditures. The profitability of the banking business is huge. Yet the commercial banks do not effectively support businesses. Long-term investment loans by commercial banks aim not at supporting the businesses, rather the banks look for less risky creditors, and as soon as they secure a real estate backed loan, they get pacified. So in that sense, M&A would definitely help Mongolian banks improve management and cut expenditures. Mongolian financial sector resides on commercial banking. Therefore, it may turn out to be a right step to issue bonds. Three hundred billion is not a number compared to only the savings. Perhaps, the capital market might be activated to some extend. Some portion of the bonds would clearly be offered outside Mongolia. Having issued quite substantial amount of bonds, we could offer South Korea or Japan where the savings rate is very high. In fact, we could draw large funds from Japan. Maybe, Mongolian government enjoys good reputation in Japan. Our sumo wrestlers would contribute to the positive image of Mongolia. Japan with its some 128 million population, with the highest rate of savings in the world is a resourceful economy. Therefore, Japan could potentially offer some funding. Short-term bonds, however, won’t be much effective. Mongolia won’t be hurt much by long-term bonds. The deficit of some 300 billion MNT we have now was mainly generated by administrative expenditures and the expansionary social assistance and benefits regime. We need now to resort to the global market, Japan for instance, for money. Most important decision would be how to best spend these funds. Once the money is secured, we must spend it for the production of globally competitive, value added products. The most irrational policy would be to try to rescue all businesses. Any crisis is a harsh test and challenge for businesses. The companies which withstand this challenge are destined to evolve as the engines of a country’s economic growth. If we feed the companies with government money, we will have raised life-long parasites, which will always dwell under the government, living off on tenders and germinating corruption and bribery. I do not see the crisis facing our economy as something petrifying. We have to look at the crisis as a chance to clean up our economy and give birth to new strong and healthy companies to drive the country’s economy. To develop the country within a short period of time we need to issue a substantial amount of long-term bonds. We shouldn’t be scared of the crisis. And we do not need half-a-year, or one-year maturity bonds. Servicing of 300 billion MNT worth short-term bonds will lead even to more acute problems. Let’s issue 3, 5 or even 10-year-term bonds. In three years, once we have survived the crisis, these bonds won’t burden the budget.

Some portion of the bonds is to be offered overseas. South Korea might purchase quite a substantial part of the bonds. Some three billion USD loan is being secured from PRC. Will interests of these countries to participate in the development of strategic deposits be attached to these loans and investments?

That’s possible. Some conditions for preferential treatment or the like may be stringed though. I recall a similar case with Ivanhoe Mines lending 50 million USD to Mongolia for repaying Mongolia’s debts. Such arrangements are no attractive. Better would be to trade straightforward at Tokyo Stock Exchange. If our deposits and mines are always used as the means of primary resort, we will get accustomed to solve matters in the simplest and laziest way. Such a way of resolving issues would leave us indebted and under constant pressures.

In January the Government established a Working Group to deal with the crisis. Was it a belated action?

Maybe a belated step. In fact, our Government has gone ignorant about the state of our economy since the times we had been enjoying high commodity prices, gullibly believing that such a price haven would continue forever. Now they are all panicking, which is not surprising at all. Surely they must be panicking with a defaulting budget. Yet they never listened to economists. Even if they happen to listen, the decisions always tend to be political. Talks to please people die hard. Sweet-tongued lures are made to only safely locate the few in the government. If they leave the place, their past misdemeanors would be revealed. At any rate they conceal their offences. Back to your question, even belatedly it [the Working Group] had to be established. It’s important that at least someone tells, advises the Government what to do. Otherwise, the economy will only worsen. The recession will further aggravate, which would only add to people’s misery. Although belatedly, the work needs to be urgently done.

Is there a desperate need to borrow 3 billion USD from China?

Generally speaking, if we too heavily indebt to our two neighbors, this would entail certain interest and benefits thereof. Conditions and terms will be set. Various policies and interests, political pressures had been tied up to the former USSR 10 billion transferrable rouble debt. Therefore, we better look for credits from somewhere farther away than our two neighbors. Chinese government is deeply interested to give a loan to Mongolia. It is strategically important for them to give credit to Mongolia to promote their own economic growth. Russia as well would be interested to have Mongolia indebted so as to not to lose Mongolia under China’s influence. Abstaining to borrow from the two neighbors and not letting too great a representation of a third country’s interest in our economy is a matter of national economic security of Mongolia. Most optimal would be to borrow from a high income developed country. This would help balance the interests and benefits of other countries in Mongolia.

The Mongolbank states that it has a three-month worth foreign exchange reserves. Do you believe that the Mongolbank would be able to keep foreign exchange rate stable?

Who else except the Mongolbank should keep it? That’s the very mission of the Mongolbank. If the rate is just slightly let out of control due to temporary rate swings, artificial expectations and speculations, created by private individual exchangers, the situation will become unmanageable. But we’ve got to manage it. Without management, Mongolia will sink in inflation. Production costs in Mongolia are increasing as most inputs and raw materials are imported. On the other hand, income is declining. Huge funds are locked in frozen capital. How to get out of such a situation? There is a danger, we might slide into an unmanageable inflation. Therefore, the exchange rates must be regulated. There are other ways of struggle for survival. Not with our foreign exchange reserves though. We need to stop “individual plays” at the currency market. These speculative plays create rumors and grapevine, which people believe to be the case, to be true. Mongols are easily deceived, and what if people withdraw their savings and buy dollars? We just can’t afford this to happen. The key is not in selling our reserves, the key is in monitoring the regulation. It’s crucial for commercial banks to undertake forex transactions without any difficulties. We need to curtail dollar demand in Mongolia, stop trading in dollars within Mongolia. Sharp appreciation of dollar could be earning billions of MNT a day for a few people who command huge savings. This must be stopped. Just think of how much a threat this represents to Mongolia’s economic security – rates swing by 200-300 MNT and then are sharply dropped. This is the work of just some few businessmen. That could seriously affect inflation and forex rate speculations.

Thus, we need to look into what resources we could mobilize. Look for inefficient expenditures. Improve corporate governance. Can our corporate executives track any unsound expenditures from their company books? Do we keep our financial accounting and cost accounting in the proper manner? Can companies realistically account for their costs? Are their pricing policies in par with the cost analysis? I would say, on most of these questions, Mongolian businesses would fail. Why? Although Mongolia is said to have adopted international accounting standards, the books are always converted into the old accounting system. There are no auditing companies and organizations which could rectify accounting errors. We don’t have CPAs. The three thousand certified public accountants of Mongolia do not know the international accounting standards and the CPA is granted just like an award, and not as a professional title at all. Therefore, let’s first see to rectifying these pressing errors and mistakes.

Our institute has 200 students, being trained specifically in international accounting standards. By 2010 we will have graduated the first batch of 40-50 students. These students are not tested, examined in Mongolia by the lecturers they are taught. They are examined online at the head training office in London. In case of paper tests, a designated official from the British Embassy unseals the test, has the test done and takes the sheets delivered to London. The performance of our foreign professors is measures by how successful our students are at that test. All lecturers are taught in English. This program is entirely different from a bachelor decree accounting course. We train professionals, experts here. In the future, the signature of that very professional becomes a guarantee for the accuracy of the financial reporting and accounting. Once a company employs such an accountant, the company would go global. If can’t afford such an accountant, nobody might trust the company. However beautiful the report might look like, because Mongolian companies have always kept 4-5 different reports, no one would trust. Hence, if we want to go global, to grow larger, we need to think of such matters today. Just look at the strategic management. Who have virtually all Mongolian businesses become builders? This is all the illustration of the level and scope of business, entrepreneurial thinking. The time has come to abandon deep-rooted backward business mentality.