Zoljargal Naidansuren, Governor of Bank of Mongolia

1. Macroeconomic policies:
during balance of payments shock and
after economic adjustment
Zoljargal Naidansuren
Governor
Bank of Mongolia
BANK OF MONGOLIA
Hong Kong
November 18-19, 2014

2. 2
Outline
• Global economic visibility: Improved or not?
• Mongolian economy: Too much dependence on mining?
• Policy responses against balance of payments shock
• Macroeconomic condition during/after shocks and adjustments
• Objectives of macro policy mix in 2015
• Upcoming and future developments

3. 3
-300
-200
-100
0
100
200
300
400
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
World
Asia
Developing economies
Forecasted date 2014F 2015F
World
2012 Oct 4.1
2013 Oct 3.7 3.9
2014 Oct 3.3 3.8
Advanced economies
2012 Oct 2.2
2013 Oct 2.2 2.3
2014 Oct 1.8 2.3
Emerging markets and developing economies
2012 Oct 5.9
2013 Oct 5.1 5.4
2014 Oct 4.4 5.0
Developing Asia
2012 Oct 7.5
2013 Oct 6.7 6.8
2014 Oct 6.5 6.6
Has the global economic visibility been improved?
Sources: Bank of Mongolia, IMF, UNCTAD
The world economic visibility has
still been very poor:
o The Fed’s QE tapering End of QE3
Potential Fed funds rate hike?
o China leadership has still been in the
middle of formulatingnew set of policies.
o Chaos in the EU’s eastern members ≈
Failure!
o Sanctions against Russia Is Russia
isolated from others?
o Japan is in a new experiment
What is clear now?
Emerging market risks are
reevaluated!
Net FDI (billion $US)
Economic growth projections

4. 4
28.8%
10.2%
9.3%
100
110
120
130
140
150
160
-15%
-5%
5%
15%
25%
35%
1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7
2010 2011 2012 2013 2014
YoY change in REER REER index (Right axis)
76% 75%
86% 84% 80%
0%
20%
40%
60%
80%
100%
Jan-Oct
2010 2011 2012 2013 2014
Overdependence on mining: Mongolia cannot go through this fate!
Sources: Customs General Office, Bank of Mongolia
85%
90% 91% 88% 88%
0%
20%
40%
60%
80%
100%
Jan-Oct
2010 2011 2012 2013 2014
Share of mineral exports (2010-2014) ==== 88.4% Share of mining FDI (2010-2014) ==== 80.2%
REER appreciation in 2010 ==== 29% What has happened after 2009 crisis (Awful mix):
o Pro-cyclical fiscal expansion + Cash handouts of 1.9 trillion MNT,
equivalent to 10% of GDP
o Huge trade and current account deficits in 2011-2012
o Real appreciation: 29% in 2010, 8% in 2012
When tides are turned:
o BOP pressure, fiscal deficit, economic slowdown, potential macro
instability…
o Would it induce a negative real GDP growth in 2013-2014?
o Choices were: (1) break the neck via more severe fate as we
experienced back in 2009, or (2) soft landing through unconventional
monetary policy measures

5. 5
-
200
400
600
800
1,000
1,200
1,400
1,600
Q1 Q2Q3Q4 Q1Q2Q3 Q4Q1Q2 Q3Q4Q1 Q2Q3Q4 Q1Q2Q3
2010 2011 2012 2013 2014
0.400
0.600
0.800
1.000
1.200
1.400
1.600
1.800
1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9 1 5 9
2007 2008 2009 2010 2011 2012 2013 2014
How did external sector risks channel into the economy?
Source: Bank of Mongolia
Export prices have still been weak FDI has been bottomed
FDI/GDP
2010:
22%
FDI/GDP
2011: 44%
FDI/GDP
2012: 35%
FDI/GDP
2013: 16%
FDI/GDP
2014: 8%

6. 6
Response against balance of payments shock [1]
Ensured financial and macroeconomic stability thanks to counter-
cyclical policy measures in 2013
o Prevented from a potential broad money growth and credit crunch in 2013
o Secured over 180K jobs in agriculture, construction, manufacturing industries
Maintained balanced economic growth:
o 2013: 11.7%, of which QE under unconventional monetary policy affected over
8.6 percentagepoints of real GDP growth
o First 3 quartersof 2014: 7.0%
Created investment-friendlier environment
o Enhanced legal environment
o Resolved the issues on 106 suspended mineral exploration licenses
o Reformed institutional issues on regulatory authorities of investments

7. 7
Response against balance of payments shock [2]
Implemented economic stimulus measures (Parliament resolution # 34)
o Improving balance of payments
o Promoting business activities through tax rebates (SME equipments are exempt from
customs duty and VAT for 2 years; 10% reduced tax on banks’ FX proceeds from abroad; 90% CIT
refund to entities with annual sales revenue less than 1.5 bn. MNT)
o Reforming the state propertymanagement
Absorbed impacts of BOP shocks through flexible exchange rate and
foreign exchange reserves
o Necessary adjustments in trade and currentaccount
o NEER depreciation: -15.5% in 2013 and -4.6% in Jan-Sep 2014
o REER depreciation: -7.2% in 2013 and -4.4% in Jan-Aug 2014
Increased reserve buffer and additional cushions
o Extended BOM-PBOC local currencyswap line by 3 years until May 2017
o Increased size of the swap line to 15 billion RMB (2.5 billion USD equivalent)

8. 8
Response against balance of payments shock [3]
Reduced supply driven inflationary pressure thanks to PSP
o Share of supply shock inflation in total CPI inflation has been declined from 34%
in 2010-2012to only 5% in 2014
o Sustainable, efficient,and market-based supply chain mechanism based on
warehousefinancing
Increased the middle class savings through sustainable mortgage
financing program
o Over 61K mortgage holders pay 30 billion MNT each month as mortgage payment
o Outstanding mortgage loans: 2.6 trillion MNT (14% of GDP)
o Securitization of mortgage loans: MBS issuance over 800 billion MNT
Promoted long-term capital inflows and reduced FX risks
o Banks’ long-term (3 years or more) FX denominated bonds and external loans are
exempt from reserves requirement
o Long-term MNT-USD swapswith domestic banks

9. 9
Response against balance of payments shock [4]
Recent developments in monetary policy stance
o Increased monetary policy interest rate by 150 bp to 12% in late July
o Gradual phasing out of PSP and QE under unconventional monetary policy
Recent developments in prudential regulations
o Increased risk weights for FX loans (100%-120%)
o Restored 1% of general provisioning on new loans
o Tier II capital shall not exceedTier I capital
o Total subordinated debt qualified as a Tier II capital shall not exceed 50% of total
Tier I capital
Recent changes in fiscal policy
o Prudent fiscal policy to maintain fiscal stability
o Include off-budgetspending into general government budget
o Adhere to FSL rules to gradually achieve -2% budget deficit target

10. 10
Real GDP growth: Balanced and healthy
Source: National statistical office
6.2%
17.5%
12.4%
11.7%
7.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2010 2011 2012 2013 Q1-Q3 2014
2013 2014
12.8% 7.0%
1 Agriculture 18.9% 15.4%
2 Mining 15.9% 26.0%
3 Manufacturing 17.4% 4.7%
4 Energy 5.9% 4.1%
5 Construction 91.8% -10.9%
6 Wholesale and retail trade -6.5% -6.8%
7 Transportation and warehousing 4.8% 11.8%
8 Telecommunication 14.3% 4.3%
9 Other services 9.1% 9.4%
10 Net taxes on products 17.7% -9.3%
Real GDP growth (const. 2010)
Q1-Q3

11. 11
106.8
22.4
21.6
-20
0
20
40
60
80
100
120
4 9 2 7 12 5 10 3 8 1 6 11 4 9 2 7 12 5 10
2007 2008 2009 2010 2011 2012 2013 2014
Credit growth (YoY)
Credit growth (excl. 8% mortgage)
M2 and credit growth: Consistent with macro fundamentals
Source: Bank of Mongolia
14.4
12.2
-10
0
10
20
30
40
50
60
70
80
4 9 2 7 12 5 10 3 8 1 6 11 4 9 2 7 12 5 10
2007 2008 2009 2010 2011 2012 2013 2014
M2 growth (YoY) М2 growth (excl. 8% mortgage)

12. 12
(887)
(2,759)
(3,362)
(3,192)
(929)
-14%
-31%
-33%
-28%
-12%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
(4,000)
(3,500)
(3,000)
(2,500)
(2,000)
(1,500)
(1,000)
(500)
-
2010 2011 2012 2013 2014
Jan-Sep
CAD(mln$US), Left axis CADtoGDPratio
(379)
(1,747)
(2,354)
(2,082)
131
(3,000)
(2,000)
(1,000)
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Jan-Oct
2010 2011 2012 2013 2014
Exports(mln $US) Imports(mln $US) Tradebalance (mln $US)
Macroeconomic external balance: Trade surplus + CAD
Source: Bank of Mongolia, Customs general office

13. 13
16.0
8.3
14.9
12.1
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
2012 2013 2014
Inflation: Medium term target = 7%
Source: National statistical office
-3
0
3
6
9
12
15
18
I II III IV I II III IV I II III
2012 2013 2014
%
PSPgoods' inflation
Imported goods' inflation
Other domesticgoods' inflation
Stateadministered goods' and services'inflation

14. 14
36.08%
0%
10%
20%
30%
40%
50%
60%
2006
2007
2008
2009
2010
2011
2012
2013
2014
Minimumrequirement
Liquidity ratio
2.85%
0%
5%
10%
15%
20%
25%
2006
2007
2008
2009
2010
2011
2012
2013
2014
16.7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2006
2007
2008
2009
2010
2011
2012
2013
2014
Minimumrequirement
Capitaladequacy
Banking sector: Sound and stable
Capital adequacy
Source: Bank of Mongolia
NPLLiquidity
Updated by October 2014

15. 15
0
500
1000
1500
2000
12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11
2012 2013 2014
Billion MNT
12 weeks 28 weeks
52 weeks 3 years
5 years 10 years
Government bond market development
Source: Bank of Mongolia
Government bills & bonds traded: 4.5 trillion MNT since Dec 2012
1860
billion
MNT

16. 16
Macro policy mix in 2015
Optimal macroeconomicpolicy mix:
Fiscal policy Monetary policy
1. Maintaining external balance
2. Prudent
3. Stability-oriented
4. Non inflationary
5. Non restrictive to the private sector
1. Maintaining external balance
2. Medium term (2015-2017) target 7%
3. Flexible exchange rate
4. Financial stability
5. Financial infrastructure development
Sustainable and balanced
economic growth

17. 17
Upcoming and future developments [1]
1. New Government and cabinet reshuffling:
o More efficient cabinet structure
o Faster and more effective decisions on FDI promotion and implementationof major
projects (including projects under PPP terms)
2. OT phase II project financing
3. TT project implementation
4. Transit-transportation: Agreed tariffs and ports (8) with China
5. Railway investments/developments: Parliament resolution on railway
gauge was issued in Oct 2014
6. Enhanced cooperation on trade and investments with Russia:
o Russian investments in agro and food processing More exports to Russia
o Settlement of bilateral trade in Ruble Positive to the balance of payments
o Access to Ruble market + Local currency swap line between BOM and CBR

18. 18
Upcoming and future developments [2]
7. EPA with Japan in April 2015 (expected)
8. Public debt management policy and FDI promotion:
o “Governmentexternal debt servicing plan”
o Adoption of “Debtmanagementlaw”
o Matching funds to promote FDI
9. Access to onshore and offshore RMB denominated bond markets.
10. Savings, Investments and Diversification Policy:
o Pension fund reform
o Sovereign wealth fund legislation
o Establishmentof investment funds and their capitalization
o Non mineral sector developments:Sustainable and competitiveagricultural industry

19. Bank of Mongolia (Central Bank)
Baga toiruu-3, 15160 Ulaanbaatar 46, Mongolia
Tel: +976-11-322169
Fax: +976-11-311471
http://www.mongolbank.mn
Thank you for your
kind attention