Impact of US Regional Bank Collapse on Mongolian Banking System.
Mongolia's economy heavily relies on its mining industry, especially coal exports that make up over 90% of total exports. The stability of the international banking system has a significant impact on the country's economy. The Business Council of Mongolia recently evaluated the effects of a possible US regional bank collapse on international banking and its potential impacts on Mongolia.
Despite challenges like exchange rate volatility and limited economic diversification, the head of a leading Mongolian bank expressed confidence in the local banking system, citing liquid assets and minimal exposure to government bonds in local currency. The Central Bank of Mongolia has reported positive trends, including increased household consumption, recovery in service and non-mining sectors, and foreign exchange reserves reaching $3.5 billion at the end of 2022. Coal exports have surged, with production increasing over 200% in February, and inflation has slowed to 12%, possibly reaching a single digit by the end of 2023.
To enhance transparency, governance, and stability, major Mongolian commercial banks are going public this year after postponing their IPOs last year at the International Monetary Fund's recommendation. Two banks have already completed their IPOs, and three more are expected to follow suit this year. Additionally, all major banks must restrict shareholder ownership to no more than 20% of total issued shares.
However, despite these advancements, local currency depreciation persists, and businesses still face exchange rate risks. Mining companies and investors are urging regulatory changes to improve exploration phases and increase cooperation with local communities. Coal businesses propose that most royalty payments be allocated by local administrations toward healthcare and education services in provinces. The government must ensure equitable and transparent distribution of mining revenues for the entire population's benefit. Parliament will discuss draft legislation on creating and managing a wealth fund from mining revenues in its spring session.
While Mongolia's banking sector may be less susceptible to international banking system instability, economic challenges related to exchange rate volatility, limited diversification, and fair redistribution of mining revenues remain. Hence, the government must implement reforms and policies to tackle these issues and promote sustainable economic growth.
