Currency trend in 2017

1. Hans Holzhacker
December 2016
TEE
Currency trend in 2017
1

2. Mongolia has not done too badly – more to come or sufficient?
Mongolia
Azerbaijan
Brazil
China
Euro
Indonesia
Kazakhstan
Nigeria
Russia
40
50
60
70
80
90
100
110
120
Currencies against the USD
Jan 2014 = 100
Source: IMF, Golomt Bank Research
2

3. Fundamentally the exchange rate is not too far from where it should be.
100
105
110
115
120
125
130
135
140
145
150
155
160
165
170
175
180
185
190
195
200
2000/12
2001/06
2001/12
2002/06
2002/12
2003/06
2003/12
2004/06
2004/12
2005/06
2005/12
2006/06
2006/12
2007/06
2007/12
2008/06
2008/12
2009/06
2009/12
2010/06
2010/12
2011/06
2011/12
2012/06
2012/12
2013/06
2013/12
2014/06
2014/12
2015/06
2015/12
Real effective (trade weighted, inflation adjusted) exchangerate
Dec 2000 = 100
Source: Mongolbank, Golomt Bank Research
3

4. MNT does not look heavily overvalued also by GDP comparison (current
USD, Purchasing Power Parity); MNT roughly in line with GDP per capita
MongoliaRussia
China
United States
79,508 Brunei Darussalam
132,870 Qatar
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
GDP at current exchange rate / GDP at PPP
IMF 2016 estimates
Current/PPP fx-rate GDP per capita (PPP), USD, r.h.s.
Poly. (Current/PPP fx-rate) Poly. (GDP per capita (PPP), USD, r.h.s.)
Source: IMF, Golomt Bank Research
4

5. Until mid-2016, the MNT had moved broadly in line with
the copper price.
0
1000
2000
3000
4000
5000
6000
7000
80001,700
1,800
1,900
2,000
2,100
2,200
2,300
2,400
MNT and copper price
MNT/USD Copper price (LME USD/ton), r.h.s.
Source: Bloomberg, Mongolbank, Golomt Bank Research
5

6. However, foreign exchange reserves are very low.
Mongolia desperately needs foreign capital inflows.
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2006/01
2006/05
2006/09
2007/01
2007/05
2007/09
2008/01
2008/05
2008/09
2009/01
2009/05
2009/09
2010/01
2010/05
2010/09
2011/01
2011/05
2011/09
2012/01
2012/05
2012/09
2013/01
2013/05
2013/09
2014/01
2014/05
2014/09
2015/01
2015/05
2015/09
2016/01
2016/05
2016/09
Foreign exchange reserves, USDmn
Repayments Loan Repayment date
Development bank bond USD 550 million 2017.03.21
USD 500 million 2018.01.05
USD 1 billion 2022.12.05
Samuraibond /DBM/ JPY 30 billion 2023.12.25
MMC bond USD 600 million 2017.03.29
TDB Dim Sum bond CNY 700 million 2017.01.21
Mongolia 2018 - Dim Sum Bond CNY 1 billion 2018.01.30
TDB 2020 bond USD 500 million 2020.05.19
Mongolia 2021 USD 500 million 2021.04.06
Government bond
Repayments due total about
USD 1350mn in 2017-18,
ex the restructured MMC bond.
Source: Bloomberg, Mongolbank, Golomt Bank Research
-20
-10
0
10
20
30
40
50
60
70
80
1/3/2013
3/3/2013
5/3/2013
7/3/2013
9/3/2013
11/3/2013
1/3/2014
3/3/2014
5/3/2014
7/3/2014
9/3/2014
11/3/2014
1/3/2015
3/3/2015
5/3/2015
7/3/2015
9/3/2015
11/3/2015
1/3/2016
3/3/2016
5/3/2016
7/3/2016
9/3/2016
11/3/2016
Mongolbank's spot USD-selling, USDmn
USDmn
30 per. Mov. Avg. (USDmn)
6

7. The current state of the economy: technically in recession
2000
2500
3000
3500
4000
4500
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
GDP at constant 2010 prices
Original series Final seasonally adjusted series
Nominal household income, % yoy 2015 1/4 2015 2/4 2015 3/4 2015 4/4 2016 1/4 2016 2/4 2016 3/4
Total income 7.0 5.3 -2.1 -13.1 -10.9 -9.1 -10.8
Monetary income-Total 6.4 5.6 -2.6 -12.7 -9.8 -10.4 -9.0
Wages and salaries 8.1 6.3 -2.0 -10.7 -2.8 -6.3 -5.5
Pensions and allowances 8.9 14.2 13.5 8.3 1.3 -0.9 -1.6
Source: Mongolian statistical information service, Golomt Bank Research 7

8. Mostly affected: mining, construction, trade
-10
-5
0
5
10
15
20
25
30 20111/4
20112/4
20113/4
20114/4
20121/4
20122/4
20123/4
20124/4
20131/4
20132/4
20133/4
20134/4
20141/4
20142/4
20143/4
20154/4
20151/4
20152/4
20153/4
20154/4
20161/4
20162/4
20163/4
Real GDP growth by components, % yoy Net taxes on products
Services
Information and
communication
Transportation and
storage
Wholesale and retail
trade; repair of motor
vehicles
Construction
Electricity, gas, steam
and air conditioning
supply
Industry
Mining and quarrying
Agriculture
Source: Mongolian statistical information service, Golomt Bank Research
8

9. Main reason: low fixed investment
7.4
18.1
39.4
28.1
15.8
4.1 3.9
25.2
21.4
24.2
28.2
18.5
23.1
16.6
0
10
20
30
40
50
60
70
2009 2010 2011 2012 2013 2014 2015
Fixed investment in % of GDP
Mining and quarrying Non-mining investment
Source: Mongolian statistical information service, Golomt Bank Research
9

10. Mongolbank funding needs to continue to some extent, also to finance (indirectly)
the budget deficit. More liquidity poses some threat to the fx-rate, however.
0
5
10
15
20
25
30
35
40
45
50
2005M01
2005M07
2006M01
2006M07
2007M01
2007M07
2008M01
2008M07
2009M01
2009M07
2010M01
2010M07
2011M01
2011M07
2012M01
2012M07
2013M01
2013M07
2014M01
2014M07
2015M01
2015M07
2016M01
2016M07
Central bank funding
in % of M2
Private sector
General Government
Non-Bank financial institutions
Banks
Central bank claims on:
Source: Mongolbank, Golomt Bank Research 10

11. Hope is on:
• For kick-starting fixed investment and
for foreign direct investment:
OT2, ТT mining, Gatsuurt mining, Railway between
TT – Gashuunsuhait, the TT-power plant, some other
• For foreign loans:
IMF-stand-by, Swap-rollover, bilateral government loans (together
with FDI sufficient to avoid a default)
• For commodity prices and Chinese imports:
China faster downsizing resources than metal production
FDI inflows of USD 1-1.3bn annually plus USD 1bn in loans should be
sufficient to stabilize the exchange rate. Mongolbank interventions
are likely to be moderate and focus on smoothing volatility. There is
substantial foreign exchange risk, but also a good chance, that the
MNT will not substantially weaken further. 11

12. 12
China cuts investment in mining much more than in metal production –
Chance for Mongolia?
Investment in Fixed Assets for the First Ten Months
of 2016
Jan-Oct
Increase from a
year earlier, (%)
China’s investment in Fixed Assets 8.3
-Mining, of which -20.9
--Mining and Washing of Coal -23.6
--Extraction of Petroleum and Natural Gas -34.7
--Ore Mining, Smelting and Pressing of Ferrous Metals -28.7
--Ore Mining, Smelting and Pressing of Non-Ferrous Metal -8.7
--Ore Mining, Processing of Non-Metallic Minerals -1.3
-Manufacturing, of which 3.1
Smelting and Pressing of Ferrous Metals -0.2
Smelting and Pressing of Non-Ferrous Metal -7.1
Source: National Bureau of Statistics of China

13. Macro Variables Realistic Good Bad
Probability* 60% 10% 20%
Foreign Direct
Investment, USDbn
-4.1(adj.
0.1)/1.4/1.4
-4.1(adj.
0.1)/1.8/2.0
-4.1(adj.
0.1)/0.2/0.2
Growth in export
prices, ann. average, % 3.0/3.0/3.1 3.0/10.0/8.0 3.0/-7.3/-7.2
Fixed investment
2010 prices, % -9.7/13.4/16.6 -9.7/16.1/23.8 -9.7/-3.6/-2.2
GDP growth,
2010 prices, % -2.9/1.3/3.4 -2.9/3.1/6.6 -2.9/-1.9/-2.5
Inflation, annual
average, % 1.2/3.2/7.4 1.2/4.7/8.6 1.2/4.9/7.9
MNT/USD, eop 2500/2475/2410 2500/2450/2380 2500/2814/3075
* There is a 10% chance for a dramatic scenario (sovereign default)
Macro Scenarios 2016/17/18
13

14. 14
Thank you for your attention!!
Hans Holzhacker
hans@golomtbank.com