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http://zgm.mn/post/767/

Policy-makers seek to lower mortgage rate

​41-60 square meter housings to have the highest demand in the next three years​

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Mongolian Mortgage Corporation HFC LLC, in cooperation with the Ministry of Construction and Urban Development, Ministry of Finance and Financial Regulatory Commission, organized the fifth Asian Fixed Income Summit (AFIS) in Ulaanbaatar yesterday. Total outstanding loans of mortgage loan program has reached MNT 4.2 trillion, involving over 93 thousand people. The Bank of Mongolia (BoM) informed that around 700 loaners received mortgage in May 2018, of which the Government financed 436 units with MNT 30.15 billion and BoM-248 units with MNT 16.3 billion. In total, the BoM plans to finance MNT 192 billion and the Government-MNT 120 billion for the program this year. According to Tenkhleg Zuuch LLC, the housing demand is expected to be 35-40 thousand household in the next three years despite the fact that mortgage program financing has been lowered. Also, 41-60 square meter accommodations are expected to have the highest demand for the next three years. At the forum, the Ministry of Finance disclosed that they have drafted a revision to the financing of mortgage loan program, which is expected to be presented to the Cabinet by September 30. The Government, instead of cooperating with the BoM, will be fully responsible for the program’s financing with the bill. In addition, the regulations of mortgage is also being revised, informed Minister of Construction and Urban Development Badelkhan Khavdislam. He remarked, “We have drafted a mortgage regulation and heard the suggestions of related ministries. It will be presented to the Cabinet in August. Key changes in the draft will mainly involve first-time accommodation buyers, reducing prepayment of mortgage to 25 percent.

Housing loans to expand as mortgage to GDP ratio results lower than average

We also conducted studies on lowering the interest rate to seven percent; however, the study suggested that it is not possible. Actions are being taken to reduce housing price gradually, seeking opportunities to domestically supplying cements and armatures. We will also support private sector initiatives on raising funds for mortgage financing.” Panelists at the AFIS highlighted that Mongolia’s outstanding mortgage to GDP ratio stands at 15.7 percent as of 2017, while the world average was 18.2 percent in 2016. Experts view that this demonstrates that the issuance of housing loans can be expanded further. Mongolian Mortgage Corporation HFC LLC is currently financing the eight percent mortgage program by issuing mortgage-backed securities, granting loans to 64,772 people as of the first quarter of this year. Gantulga Badamkhatan, CEO of the company, remarked, “We are aiming to create loan sources for the program by raising a bond from international banks and financial institutions. We are also studying opportunities to establish a green fund to reduce the prepayment of mortgage loans and support green construction.” As a suggestion, Andrei Milyutin, Senior Financial Sector Specialist at the World Bank Group, advised “Long-term interest rate insurance environment needs to improve. The key elements of estimating accessible housing must include household income, housing prices and sustainability of median household income. It is important to divide loaners into social stratification and hold policies for targeted income level; for instance, increasing loan issuance to low and middle income households.”

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Inflation rises above BoM target

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National Statistics Office (NSO) released the year-end preliminary results of social and economic situations of Mongolia yesterday. The year-end economic indicators were mostly positive as expected thanks to mining sector boom and the implementation of the International Monetary Fund program; however, inflation peaked above the Bank of Mongolia’s (BoM) target level for the second month in December 2018 following the rise in fuel prices and consumption.

2018 was rather generous for Mongolia considering the fact that the economy grew by 6.3 percent in the first half. At the time, the Asian Development Bank highlighted that this was “driven by the expansion of investments in the mining sector and an increase in household consumption on the back of improved household loan grants.” As mentioned, consumer loan played its role in the economy. However, growing inflation is drawback for increased consumption. Consumer loan pushes households to pay three-quarters of their income to loans, creating a situation where the consumer could face bigger risk from the loan repayment.
According to the report, the inflation measured by the national consumer price index increased by 8.1 percent from the previous year. NSO explained that the growth was mainly contributed by increases in prices of food and non-alcoholic beverages by 9.1 percent and alcoholic beverages and tobacco by 8 percent, transport by 9.7 percent, housing, water, electricity, and fuels by 16.3 percent, and health by 11.4 percent.

The Monetary Policy Committee reached a decision to limit household debt-to-income ratio at 70 percent and set the maturity of non-mortgage commercials to not exceed 30 months, which took effect on January 1, 2019. Plus, petroleum price was lowered by MNT 100 this week; thus, economists expect the inflation to stabilize in the upcoming months.

Additionally, the total trade turnover reached USD 12.9 billion as of December 2018, of which exports totaled USD 7 billion and imports - USD 5.9 billion. Compared to the same period of the previous year, export increased by 13.1 percent and import by 35.5 percent. Money supply reached MNT 19.5 trillion in November, displaying MNT 3.6 trillion growth (4.4 percent) year over year. The currency issued in circulation totaled MNT 968.6 billion, an 8.2 percent increase. Additionally, the nominal average exchange rate of the MNT against the USD announced by the Bank of Mongolia depreciated by 8.4 percent from the previous year and fell 3.8 percent against CNY.

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Dissolution of consortium suspends Fifth Thermal Power Plant construction

2019 dubbed Smart Energy System year

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Minister of Energy Davaasuren Tserenpil announced 2019 as the year for smart energy and disclosed the current situation of certain energy projects, including the constructions of the fifth thermal power plant and hydropower plants during a press conference yesterday.

Mr. Davaasuren addressed, “I, hereby, announce this year as the year for Smart Energy System. The entire world is adapting to the usage of a smart system. We have to follow this practice. This will allow us to settle various issues. In doing so, we will involve top-notch programmers, technicians, and engineers, as well as all the government bodies in the energy sector.”

Within the frame, electricity and heat measurement instruments will be installed in power plants, which will drastically reduce the risks of accidents and delays. For instance, the ministry is planning to cooperate with the Russian Federation to install a smart system in turbine generators. The cost is currently unidentified and will be set soon as the ministry assigned tasks to the boards of implementing companies.

According to the ministry, the construction of the Fifth Thermal Power Plant has been suspended due to the dissolution of the consortium. Therefore, the ministry plans to increase the capacities of currently existing power plants. For example, the feasibility study of expanding the capacity of the Second Thermal Powerplant to 300MW has been completed. Additionally, Mr. Davaasuren noted that the night-time electricity discount will further continue in 2019- 2020.

As for the Erdeneburen Hydropower Plant, the ministry has reportedly settled the project financing and is planning to commence the construction this year. However, the Egiin Gol Hydroelectricity project is on a hold-up due to environmental issues. The minister highlighted that the completion of these two hydropower plants will create a fully independent electrical system.

On the air pollution reduction actions, the ministry announced to install a 4 kWh heating equipment in 42,000 households in Ulaanbaatar city.

ENERGY SECTOR FACES MNT 20 BILLION LOSS ANNUALLY

According to the Director General of the Energy Regulatory Commission Tleikhan Almalik, the base electric charge did not change since 2015. Currently, Mongolia is purchasing electricity at MNT 32,000 per kWh and is selling them to private entities at MNT 9,000 per kWh. The annual loss of the energy sector is currently over MNT 20 billion. With the exception of coal, all the materials and equipment are imported, and due to the increase in foreign exchange rates, the deficit has further piled up. Therefore, the commission is planning to revise the base charge this year.

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Parliament forms quorum after two months

MP Ulaan Chultem appointed as the Minister of Food, Agriculture and Light Industry

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After prolonging the lawmaking process for about two months, the Parliament finally formed a quorum last week. With multiple urgent items of high importance on the order list, the Parliament appointed Ulaan Chultem as the Minister of Food, Agriculture and Light Industry.

Next on the order list was the suspension of some Parliament members’ special rights who have involved in Small and Medium-sized Enterprise Development Fund embezzlement allegations. The Prosecutor General of Mongolia Enkh-Amgalan Magvannorov submitted a bill on suspending the rights of four Parliament members. Although a number of public servants related to the case were detained, the Parliament viewed that the loans of four MPs, namely Soltan Gombojai, Damba-Ochir Dorjdamba, Undarmaa Batbayar and Enkhbold Luvsan, drawn from the SMEDF are in line with the law of Mongolia.

At the plenary session, Mr. Enkh-Amgalan addressed, “We are investigating everyone related to funds. This is a very large-scale investigation. It is taking time because of the lack of staff. Only 25 people are working on each loans granted from the SMDF and the  Independent Authority Against Corruption is investigating the fund. There are many others, including Animal Husbandry Fund and Agriculture Support Fund.”

Additionally, the end to public demonstration on ousting the Speaker was followed with the meeting of Standing Committee on State Structure last friday. The committee held discussion on President-initiated bill on Parliament Session Procedures, which allows the Parliament to oust the Speaker with the majority votes from Parliament members. Accordingly, the bill will be discussed by the Parliament this week. The ratification of the bill lead to potential dissolution of the Parliament as Democratic Party caucus began collecting signatures for a petition to oust the Speaker.

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Higher gold royalty poses threat to FX reserves

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Due to consecutive failure to form the quorum, the Parliament has delayed its plenary sessions for two months. One of the key items on the order list was a bill on extending 2.5 percent gold royalty for another three years, which was supposed to be ratified before the turn of the year. Thus, gold tax will now be set at pre-revision level at 5-10 percent, depending on the global price of gold.

According to a study conducted by the Bank of Mongolia (BoM), higher royalties lead to  lower gold purchase, which ultimately affects foreign exchange (FX) reserves. For instance, gold tax was at an unbearably high level of 68 percent with the sudden income tax in 2006-2013. As a result, gold purchase fell from 15.5 tons to 2.1 tons by 2010. In other words, the BoM’s treasury fund was almost drained empty.

Officials explain that the sudden income tax, which raised gold tax from 5 percent to 68 percent, was due to boom in copper price; however, the decision had more adverse effects than its benefits as the number of artisanal miners drastically increased as a result.

The 2.5 percent gold royalty was approved in 2014. The result was almost immediate as gold purchase consistently increased in an annual amount, reaching a record high of 22 tons last year, which is 10 percent higher than the previous record in 2017, expanding FX reserves by USD 800 million to a 15-year record.

Therefore, the increased gold royalty is raising concern over a potential tax avoidance of gold producers, reduced gold purchase and increased illegal transportation of gold. A spokesperson of the BoM previously stated, “This law was ratified to boost the economy that was collapsing in 2014. The 9 percent royalties will increase budget revenue by only MNT 50 billion. BoM views the 2.5 percent royalties should be extended by at least 3 years.” BoM estimates to increase foreign exchange (FX) reserves by USD 750 million this year. The 2019 Monetary Policy Guidelines ratified by the Parliament stated to increase FX reserves to USD 6.5 billion in the middle-term.

As for other countries, gold royalty stands at 3 percent in the U.S, 5 percent in Brazil, 4 percent in Indonesia and 2.5 percent in India. This shows that the current 5-10 percent tax is higher than average. 

Miners and investors seek favorable tax environment. China, for instance, deduct only CNY1.2-7 per ton of gold depending on the capacity of the mine, technical conditions and locations, as well as 2 percent royalty on import golds.