The document discusses Mongolia's current macroeconomic situation and outlines a vision for achieving a "New Balance". Currently, Mongolia faces fiscal deficits, current account deficits, declining foreign direct investment, and rising non-performing loans. To establish a New Balance, the document proposes pursuing balanced budgets, diversifying the economy beyond mining, boosting investment, narrowing welfare programs, and maintaining low and stable inflation. The New Balance aims for sustainable growth, a balanced external position without deficits, and stable real income increases.

1. BANK OF MONGOLIA
New macro economic balance
A shift from consumption to saving
MUNKHBAYAR Tedevsuren
Head of the Coordination and Analytic Unit
under Financial Stability Council
Advisor to the Governor
2015.11.11
Ulaanbaatar

2. I.
Previously in this Forum
Nov 27, 2015: Macro economic outlook, selection of the policy

3. External environment: In deficit, due to reduced
funding
-207 -1,048 -1,451 -1,608 -1,120 -334
-7%
-22%
-25%
-26%
-20%
-6%
-30%
-25%
-20%
-15%
-10%
-5%
0%
-1,800
-1,600
-1,400
-1,200
-1,000
-800
-600
-400
-200
0
2010 H1 2011 H1 2012 H1 2013 H1 2014 H1 2015 H1
MillionUSD
Deficit of the Current Balance
(first half)
Current Account Balance (CAB), Left CAB/GDP ratio, Right
621
2,402 2,486
1,244
363
44
21%
50%
43%
20%
7%
1% 0%
10%
20%
30%
40%
50%
60%
0
500
1,000
1,500
2,000
2,500
3,000
2010 H1 2011 H1 2012 H1 2013 H1 2014 H1 2015 H1MillionUSD
Foreign Direct Investment
(first half)
FDI, right FDI/GDP

4. Government budget: No change in fiscal policy
42
-391
-1,076
-250
-886
-913
-1,200
-1,000
-800
-600
-400
-200
0
200
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2010 2011 2012 2013 2014 2015 (1-
10)
Fiscal performance, Actual
(yearly basis)
Balance Income Expense
18.7
13.1
7
9
11
13
15
17
19
21
23
200901
05
09
201001
05
09
201101
05
09
201201
05
09
201301
05
09
201401
05
09
201501
05
09
Interest rate
Loan rate
Savings rate
Policy rate
Slide #4:
Under current circumstance, where there is no positive shift in fiscal policy, continued current
account deficit and lagging foreign direct investment, central bank has no choice but tighten
monetary policy.

5. II.
Current situation
Challenges and opportunities of the current macro economic policy

6. -233
1 705
-1 867
-471
125
-3,000
-2,000
-1,000
0
1,000
2,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (1-8
сар)
57
-228
-710
-229 -379
-1747
-2354
-2082
538
705
-3000
-2500
-2000
-1500
-1000
-500
0
500
1000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (1-8
сар)
6%
9%
15%
12%
23%
44%
36%
17%
2% 1% 0%
10%
20%
30%
40%
50%
0
1000
2000
3000
4000
5000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015(1-
6сард)
ГШХО, цэвэр дүнгээр (Зүүн тэнхлэгт) ГШХО/ДНБ (%)
The trade balance is in the positive zone
Source: Mongolbank, General Customs Office, National Statistical Office
Trade balance (Million USD)
-334
-6.1%
-30%
-20%
-10%
0%
10%
20%
-4 000
-3 000
-2 000
-1 000
0
1 000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (1-
6 сард)
Төлбөрийнурсгал тэнцэл Урсгал тэнцэл/ДНБ, Баруун тэнхлэгт
Balance of Payment (Million USD)
Current account balance (Million USD)Foreign Direct Investment (Million USD)
Since 1990, over the past 25 years, only in few years, namely 1994-1995, 2006, 2014-2015
our trade balance was in surplus.
FDI, Net basis (Left) FDI/GDP, %
Balance of Payment Current Balance / GDP (Right)

7. Stable currency exchange rate
17%
8%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2010 2011 2012 2013 2014 2015M9
Coal export of Australia and Mongolia,
Change of exchange rate (nominal)
Australia: Change in nominal exchange rate /right/
Mongolia: Change in nominal exchange rate /right/
Australia: Coal export as a percentage of total export
Mongolia, Coal export as a percentage of total export
40%
27%
26%
19%
18%
17%
16%
13%
13%
12%
11%
11%
10%
8%
6%
0% 10% 20% 30% 40%
Russia
Brazil
Columbia
Algeria
Nigeria
Australia
Mexico
Canada
South Africa
Chile
Indonesia
Argentina
Peru
Kazakhstan
Mongolia
Change in exchange rate
Against US Dollar /as of Oct 2015/

8. Inflation is at target level: 4.9% (Sep 2015)
Source: National Statistical Office, Mongolbank
Imported
goods
Other domestic
goods
Government regulated goods
and services
Goods and services
included in price
stabilization program

9. Source: Mongolbank
39.3%
20%
25%
30%
35%
40%
45%
1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7
2012 2013 2014 2015
ТТГЧ ТТГЧ-ын зохистой харьцаа
Stable funding ratioLiquidity ratioCapital Adequacy
8%
10%
12%
14%
16%
18%
20%
1 7 1 7 1 7 1 7
2012 2013 2014 2015
1-р зэрэглэлийн өөрийн хөрөнгийн
хүрэлцээ
Өөрийн хөрөнгийн хүрэлцээ
16.7
12.2
Stability of the Banking industry is maintained
First tier capital adequacy
Overall capital adequacy
Ratio Regulatory requirement

10. BUT: Growth of assets and liabilities has been decelerating …
Эх сурвалж: Монголбанк
-10%
10%
30%
50%
70%
90%
1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7
2 012 2 013 2 014 2 015
Зээлийн өсөлт Активынөсөлт
-10%
10%
30%
50%
70%
90%
1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7
2 012 2 013 2 014 2 015
Харилцах,хадгаламжийн өсөлт ПассивынөсөлтLoan growth Asset growth Current & Saving accounts Total Liabilities

11. Non-performing loan is on the rise
Эх сурвалж: Монголбанк
7.3%
5.4%
0%
3%
6%
9%
12%
15%
18%
21%
2008
2009
2010
2011
2012
2013
2014
2015
Чанаргүй зээл / Нийт зээл
Татан буугдсан 3 банкийг
хасч тооцсоноор чанаргүй
зээл, нийт зээлийн
харьцаа
NPL in Foreign Currency 10.8%
NPL in Local Currency 6.2%
0%
5%
10%
15%
20%
25%
I II III IV I II III IV I II III IV I II
2012 2013 2014 2015
Бөөний/жижиглэн худалдаа Үлхөдлөх хөрөнгийн ү/а
Барилга Уул уурхай, олборлолт
Боловсруулах үйлдвэрлэл Бусад
Нийт зээл
Non-performing loans
(NPL) / Total loan
Non-performing loans
of excluding 3 banks
went bankrupt / Total
loan
Retail sales
Construction
Manufacturing
Total loan
Real Estate
Mining
Other

12. Fiscal deficit remains …
Performance of income and expenditures
Эх сурвалж: Сангийн яам
Short fall
Amount (in
billion)
Percent
1. Budget income shortfall 679
1.1 Income tax 72 11%
1.2 Minerals tax 30 4%
1.3 Privatization income 155 23%
1.4 Customs tax on imported goods 46 7%
1.5 VAT on imported goods 235 35%
2. Budget expenditure shortfall 1 226
2.1 Current expenses 335 27%
2.2 Property related expenses
2.2.1 Internal funding 792 65%
2.2.2 External funding 79 6%
42.9% of overall income shortfall was due to
import shrinkage.
Income
Side
Expendit
ure

13. III.
Next step: Aim for the “New balance”
4 policies: Budget, Structure, Currency Exchange, Monetary

14. • Cycle of the Mineral price
– Started due to the urbanization and industrialization of
major economies and
– Trend continued for a long term
– Grew, reached the highest point and went down
• Current cycle
– Closely tied to economy growth of the BRIC countries,
especially China
– Topped out during 2011
1894-
1932
1932-
1971
1971-
1999
1999-
Peak year 1917 1951 1973 2011
Price change in rising cycle
in %
50.2% 72.0% 38.9% 81.3%
Price change in falling cycle
in %
-54.6% -43.3% -52.5% -
Number of years continued 38 39 28 -
Years grew 23 19 2 12
Years fell 15 20 26 4
Source: Erten & Ocampo (2012): Super-cycles of commodity prices since the mid-
nineteenth century
The mining super cycle is over
0.00
0.40
0.80
1.20
1.60
2.00
20013
12
9
6
20043
12
9
6
20073
12
9
6
20103
12
9
6
20133
12
9
6
Export price index of Mongolia
from 2001 till 2015
Price index for total export Copper price index Coal price index
•Total export grew 9 times ↑
•Copper price went up 6 times ↑
• Total Export 2.1 ↓
• Copper = 1.5 times ↓
• Coal = 3.4 times ↓

15. What is the “New balance” ?
 External balance
– Payment balance without deficit
– Financing of the current balance is stable and less costly
 Internal balance
– Low and steady inflation
– A realistic and consolidated budget, without pressure to increase domestic debt
 Economy during the new balance era
– Sound growth (5%-7%)
– Real income per capita is steadily increasing
– Foreign and domestic savings finances the investments
– Төрөлжсөн эдийн засагтай, уул уурхайн бус экспортын хувь өссөн
– With diversified economy, portion of non-mining industries continued to grow
– Based on the competent private sector

16. - Restructuring
- Diversification of economy and Exports
- Increased investment
- Targeted/narrowed welfare
- Current account>0%
- Trade Balance: +10%
- Balance of services: <-10%
- Foreign debt: 10% FDI: 15%-20%
IN SURPLUS
BALANCED AND STABLE
LOW AND STEADY
- In mid term: 5%-7%
- Supply side=0%
- Demand side
Domestic factors=3%-4%
External factors=2%-3%
IN ALL LEVEL
- Ioncome in foreign currency
Government: Tax
Mongolbank: Currency reserve
- Domestic income:
Government: Funds
Private sector: Mortgage / Export
STABLE REAL INCOME
SUSTAINABLE GROWTH / 5%-7% /
New Balance
NEW BALANCE
In a nutshell New balance is …
- Balance: -7.9% /incl. MSE/
- Same expense with less income
- Domestic debt pressured private sector
- High pressure debt servicing
- Current account: -$359
- Trade Balance: +$950
- Balance of Services: -$568
- FDI < 1%, Foreign Debt
ӨНДӨР АЛДАГДАЛТАЙ ХЭВЭЭР
BALANCED
REDUCED
- 4.9% as of Sep 2015
- Supply side inflation =0%
-Demand side inflation =4.9%
Domestic factors =2.0%
External factors =2.9%
HOUSEHOLDS ONLY
- Income in foreign currency:
Government: Foreign debt
Central Bank: Reduced
- Domestic income:
Government: Domestic debt’s risen
Private sector: Mortgage program is
started
REAL INCOME IS MAINTAINED
Low around 3% , but real
CURRENT SITUATION
Улсын
төсөв
Төлбөрийн
тэнцэл
Инфляци
Хуримтлал
- Тэнцэл: +3.1% < -6.9%
- Хавтгайрсан халамж, нийгмийн бодлого
- Хөгжлийн банк
- Данхар төр, төрийн оролцоо
- Урсгал тэнцэл: +$372 > -$3,362
- Худалдааны алдагдал: +$372 > -$1,553
- Үйлчилгээний тэнцэл: +67 > -$1,100
- ГШХО-аас шууд: +$191 > $4,408
МӨЧЛӨГ ДАГАСАН АЛДАГДАЛ
ӨНДӨР АЛДАГДАЛ
ӨНДӨР ИНФЛЯЦИ
- 12.6% дундаж инфляци
- Нийлүүлэлтийн гаралтай=4.3%
- Эрэлтийн гаралтай=8.3%
Дотоод хүчин зүйл=6.0%
Гадаад хүчин зүйл=2.3%
ЗӨВХӨН ВАЛЮТЫН НӨӨЦ
- Гадаад валютын орлогоо
Засгийн газар: Эхэлсэн/Зарцуулсан
Монголбанк: Нэмэгдүүлсэн
-Дотоодын орлогоо
Засгийн газар: Урсгал зардал/халамж
Хувийн хэвшил: Хэрэглээнд
БОДИТ ОРЛОГО БУУРСАН
ДУНДАЖ=8.9% [-1.3% +17.3%]
Balance
BALANCE DURING SUPER CYCLE
MONETARY POLICY:
- Traditional only
- Cycle dependent
- Hinders demand
FISCAL POLICY:
- Depends on the cycle
- Expends beyond budget
- Right balance of current expense and
investment is not maintained
CONVENTIONAL
MONETARY POLICY:
To curb demand side
inflation
NON-CONVENTIONAL
MONETARY POLICY:
To eliminate supply side
inflation, Mortgage
program
EXCHANGE RATE
POLICY: To absorb
external shocks with
flexible currency polciy
CURRENCY EXCHANGE
POLICY:
- Drastic devaluation
- Low currency reserve
ЭЗ-ийн өсөлт
Ажил эрхлэлт
Budget
Payment
balance
Inflation
Saving
Economic Growth
Employment
- Balance: +3.1% => -6.9%
- Faulty welfare policy
- Development bank
- Government involvement
- Current account: +$372 => -$3,362
- Trade deficit: +$372 => -$1,553
- Balance of services: +67 => -$1,100
-FDI: +$191 => +$4,408
IN DEFICIT
IN DEFICIT
HIGH
- Average inflation 9.9%
- Supply side inflation =5.4%
- Demand side inflation =4.5%
Domestic factors =2.3%
External factors =2.2%
ONLY CURRENCY RESERVE
- Income in foreign currency
Government: Gathered/Spent
Central Bank: Increased
-Domestic income
Goverment: Current expense/Welfare
Private sector: Consumption
REAL INCOME IS INCREASED [Instable]
HIGH=8.9% [-1.3% +17.3%]
Balance
4
policies

17. By way of fiscal policy
• Follow 3 budget principles:
– Not to increase the domestic debt
– Plan realistically
– Plan united/consolidated
• Policy measures
– Keep the budgetary expenditures at the same level of 2015
– Consistently revise the composition of the income and expenses
• To implement following decrees passed by parliament:
– Decree No. 41 of 2015:
– Comprehensive Macro Adjustment Plan (CMAP)
[1] A proper state budget (Consolidated, realistic, and balanced)
[2] An additional source of the foreign currency and increase of the foreign assets
– Decree No. 34 of 2014:
[1] An improvement for sustainable and proper budget
[2] Integrated approach for sourcing of a funding in foreign currency and increase FDI
[3] Improving of financial stability and risk reduction
[4] Financial industry restructuring to inhibit saving
– Decree No. 69 of 2014
Enforcing an effective implementation of government foreign debt servicing plan

18. By way of the restructuring policy
• Diversification of the economy overall:
– Support investments in non-mining sectors, improve their
competitiveness, to make their export to make up to 30% of total
export
– Focus on agriculture, travel industries
– Invest in R&Ds of the key industries
• Revise current social insurance framework
• Create saving and investment mechanism domestically
• Improve the management of the state owned assets
• Continue consistent supply chain of the goods
• Introduce export insurance and other forms of insurance

19. By way of the maintaining the balanced external
environment
• To start or resume mega projects in mining and other sectors
• Increase the foreign direct investment from 1% of the GDP to 15-
20%, and diversify the structure.
• Improve the government debt management to keep the stability:
– Improve the sovereign credit rating
– Increase the funding of the foreign currency
• Make necessary efforts to intensify research to increase export in
relation to Economic Cooperation Agreement signed with
Government of Japan

20. By way of the monetary policy
• By balancing the macro economy keep the inflation within 5-7%
range from 2016 to 2018
• By balancing the macro economy enable GDP growth of 6-9%,
7.5% in average
• Keep the financial stability, support the development of the financial
markets, and for the purpose of preventing the risk to get
accumulated in the banking or other financial industries, nourish the
secondary market of bad assets and revise relevant regulations.

21. Thank you for your
attention!