Opportunities and Challenges in Emerging Market

Mongolia

ABA General Meeting and Conference September 12-13, 2013

Norihiko Kato CEO, Khan Bank

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Mongolia

• Second largest landlocked country

• 2.9M population, 1.3M in Ulaanbaatar, young population

• About 40 million livestock

• Market economy since 1990

• Rich Mineral Resources

- coal, copper, iron-ore, gold, uranium, molybdenum, zinc,

rare metals, etc.

Oyu Tolgoi (OT): copper 36M ton, gold 1300 ton

Tavan Tolgoi (TT): coal 6.4B ton (coking coal 1.8B ton)

• Rapid economic growth

• Underdeveloped infrastructure

• Young democracy, Resource nationalism

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7.0%

10.6%

7.3% 8.6%

10.2% 8.9%

-1.3%

6.4%

17.5%

12.3%

-5%

0%

5%

10%

15%

20%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Mongolia East Asia Pacific - Developing Nations

Source: WorldBank

GDP Growth GDP performance

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GDP & GDP Per Capita Outlook GDP Mid Term Outlook (USD in billions) GDP Per Capita (USD)

4.6

6.2

8.7

10

12.9

16

18.9

23.7

0

5

10

15

20

25

2009 2010 2011 2012 2013E 2014E 2015E 2016E

1,688$

2,266$

3,125$ 3,508$

4,477$

5,515$

6,384$

7,904$

0$

1,000$

2,000$

3,000$

4,000$

5,000$

6,000$

7,000$

8,000$

9,000$

2009 2010 2011 2012 2013E 2014E 2015E 2016E

Source: IMF

Source: Bank of Mongolia, NSO, World Bank DataBank

Industry growth rates were 42.5% in wholesale and retail, 16% in manufacturing, 14% in construction, and 8.7% in mining; Supply Chain Effect

GDP Composition by Sector

20%

13%

10%

7% 7%

7%

3%

33%

Mining & quarrying

Agriculture

Wholesale and retail

tradeTransportation and

storageManufacturing

Real estate

Government

Others

GDP Composition

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7

17.8%

22.1%

4.2%

13.0%

10.2%

14.0%

8.8%

0%

5%

10%

15%

20%

25%

2007 2008 2009 2010 2011 2012 Jun ' 12

Core Inflation National CPI

Source: Bank of Mongolia , NSO, World Bank

Inflation

Govt. programs to fight against high inflation

Source: Mongol Bank, NSO, World Bank DataBank

Exports to (2013 2Q)

Imports from (2013 2Q)

Trade Composition

90%

3% 8%

China

Russia

Others

30%

30%

40% China

Russia

Others

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Export Composition (2013 2Q)

Coal

27%

Copper

20% Iron Ore

17%

Gold

7%

Zinc

3%

Cashmere

1%

Other

25%

Import Composition (2013 2Q)

Fuel

29%

Heavy

equipment

&

machinery

28%

Food

11%

Other

32%

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Trade Balance (USD millions)

Trade Balance

Source: Bank of Mongolia , NSO, World Bank

1542.8 1,889

2,534

1,885

2,908

4,780 4,384

2,023

1485.6

2,117

3,244

2,137

3,200

6,526 6,738

3,070

57.2

-228 -710

-252 -292

-1746

-2354

-1047

-4000

-2000

0

2000

4000

6000

8000

2006 2007 2008 2009 2010 2011 2012 YTD Jun '13

Export Import Trade Balance

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“Fiscal Stability Law” (FSL) , effective in 2013, limits the structural deficit within 2 percent of the GDP.

Source: Bank of Mongolia, World Bank

Fiscal Balance (MNT billion)

2156 1992

3122

4400

4968

2462 2321

3080

4792

6043

-306 -329

42

-392

-1075

-2000

-1000

0

1000

2000

3000

4000

5000

6000

7000

2008 2009 2010 2011 2012

Revenue Expenditure Balance

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844 623

1691

4714

3907

1617

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

2008 2009 2010 2011 2012 Jul' 2013

Source: Bank of Mongolia , NSO, World Bank

FDI (USD millions)

Foreign Direct Investment

FDI dropped by 43% (yoy)

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Foreign Exchange Rate

1,170.8

1,148.2

1,229.0

1,524.1

1,442.8

1,368.7

1,256.5

1,195.3

1,396.7

1,318.8

1,394.5

1,410.3 1,446.2

1,499.6

1,617.0

1000

1100

1200

1300

1400

1500

1600

1700

2008

Mar

Jun

Sep

Dec

2009

Mar

Jun

Sep

Dec

2010

Mar

Jun

Sep

Dec

2011

Mar

Jun

Sep

Dec

2012

Mar

Jun

Sep

Dec

2013

Mar

Jun

Jul

Au

g

Source: Bank of Mongolia

Starting mid July MNT depreciated significantly

MNT /USD

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Railway Plan

Black Line – Current Rail Track Red Line – 1st phase

Green Line – 2nd phase Blue Line – 3rd phase

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Mongolia’s Mining Industry

Opportunities

• Proximity to China

• Potential supply to Asia Pacific

• Quality comparable to leading

brand, e.g. coal

• Low cost mining possible

• Untapped natural resources

Challenges

• Underdeveloped Infrastructure

• Political and legal environment

• Limited capital and funding

sources

• Overdependence on competitive

Chinese market

• Environmental issues

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Financial Sector 13 commercial banks, 1 development bank, 195 small NBFIs,162 savings & credit cooperatives,

and 17 insurance companies.

3 foreign banks have representative offices; ING, Standard Chartered Bank, and Bank of China

90-95% percent of financial sector assets are held by commercial banks.

56%

68%

75%

87% 86%

35%

-1%

16%

80%

24%

-25%

0%

25%

50%

75%

100%

0₮

4,000₮

8,000₮

12,000₮

2008 2009 2010 2011 2012

Banking Sector Assets Loans Banking Sector Assets to GDP Loan Growth

Source: Bank of Mongolia, FRC, Banks’ website

MN

T b

illi

on

s

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Mongolia Financial Sector Challenges

Underdeveloped capital markets, custody service, inter-bank market

Underdeveloped non-banking sector; 95% of financial assets held by commercial banks

Small capital of the commercial banks

Underdeveloped derivative market and FX hedging instruments

Legal and regulatory framework

e.g. movable assets pledge, non-banking finance business

Consistency of Fiscal and Monetary policies with banks’ interests

Risk Management and System Investment

Compliance, Governance and Transparency

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Mongolia’s Challenges and Opportunities Challenges

- Export, FDI, OT Phase2

- Fiscal balance, Foreign reserve control

- Infrastructure development

- Consistent & inclusive development plan and

implementation

Mongolia has tremendous potential

- Mining

- Energy & mining resources value added

- Agriculture

- Tourism

- Human resources

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Thank you for your attention.

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Disclaimer

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