VZCZCXRO1013
RR RUEHLMC RUEHVC RUEHVK
DE RUEHUM #0487/01 2391525
ZNR UUUUU ZZH
R 271525Z AUG 07
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 1415
INFO RUEHUL/AMEMBASSY SEOUL 2905
RUEHBJ/AMEMBASSY BEIJING 5731
RUEHMO/AMEMBASSY MOSCOW 1877
RUEHKO/AMEMBASSY TOKYO 2617
RUEHML/AMEMBASSY MANILA 1441
RUEHBK/AMEMBASSY BANGKOK 1522
RUEHLO/AMEMBASSY LONDON 0180
RUEHHK/AMCONSUL HONG KONG 0820
RUEHSH/AMCONSUL SHENYANG 0309
RUEHOT/AMEMBASSY OTTAWA 0494
RUEHVK/AMCONSUL VLADIVOSTOK 0142
RUEHVC/AMCONSUL VANCOUVER 0088
RUEATRS/DEPT OF TREASURY WASHDC
RUCPODC/USDOC WASHDC 1363
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0684
RUEKJCS/SECDEF WASHDC

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000487 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR, OPIC, EXIMBANK, AND FEDERAL RESERVE 
STATE FOR EAP/CM, EAP/EP, AND EB/TPP 
USAID FOR DEIDRA WINSTON 
TREASURY PASS USEDS TO IMF, WORLD BANK 
TREASURY FOR FINCEN AND T.T.YANG 
MANILA AND LONDON FOR USED TO ADB, EBRD 
MCC FOR F. REID 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL EAID EMIN SOCI MG
SUBJECT: Central Bank Head: Mongolia Not Threatened by Asian Market 
Downswings 
 
REF: A) Ulaanbaatar 091   B) Ulaanbaatar 394   C) Ulaanbaatar 475 D) 
 
Ulaanbaatar 448 
 
SENSTIVIE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. 
 
¶1. (SBU) SUMMARY: According to Bank of Mongolia (BOM) Governor A. 
Batsukh, Mongolia's exposure to turbulence in Asian markets is low, 
but he fears that recent moves by the US Fed could adversely affect 
the country's foreign currency reserves.  He believes competition in 
the banking sector will help bring down high interest rates and weed 
out under-performing banks.  The BOM's primary mission, he feels, is 
to control inflation, but he conceded that inflation will likely 
rise because of increasing salaries and decreasing supplies of 
consumer goods.  He revealed that the Central Bank is still 
scrutinizing aspects of the controversial sale of Trade and 
Development Bank, and that the launch of the Bank's Financial 
Investigative Unit (FIU) has progressed but capacity hurdles remain. 
 Finally, he hopes that Mongolia would soon agree with the IMF to 
re-start a its Mongolia.  END SUMMARY. 
 
Mongolia Unfazed By Asian Market Turbulence 
------------------------------------------- 
 
¶2. (SBU) During a recent meeting with Econoff and Econ Assistant, 
Mongolia's Central Bank Governor Batsukh opined that recent 
fluctuations in Asian financial markets will have limited impact on 
Mongolia due to the country's modest foreign investment portfolio. 
Nevertheless, he fears that the US Federal Reserve's large scale 
injections of money into the US banking system, combined with 
interest rate cuts, could lead to higher inflation that would 
adversely affect Mongolia's foreign currency reserves.  Other 
economists, business people and bankers with whom we spoke, agree 
that Mongolia's exposure to market swings in Asia is low.  But one 
banker said expected IPOs of Khaan Bank and Golomt Bank would not 
fetch the high prices they had previously anticipated, and that 
offers of cheap money once being shoved at Mongolia (reftel A) had 
dried up somewhat.  Because easy access to cheap credit was a recent 
phenomenon for Mongolia, its slight evaporation is not expected to 
profoundly effect the economy, especially as most banks had been 
rightly cautious about doing deals with brokers. 
 
¶3. (SBU) Batsukh noted that the current crisis was fueled by 
troubles in the US sub-prime mortgage market and, referring to the 
GOM's frenzied plans to sell off 40,000 apartments with government 
bond-backed low cost mortgages (reftel B), hoped that the GOM would 
take heed.  The government's plan to finance low interest mortgages 
with competitive yielding bonds, he said, did not add up (echoing 
the criticism of other financial sector experts), an opinion, he 
says, he has already communicated to the GOM and the banking 
industry.  "Why would banks go along with issuing low interest 
mortgages if the markets were demanding higher prices?" he asked. 
 
Best Remedy for High Interest Rates: Competition 
--------------------------------------------- --- 
 
¶4. (U) Batsukh empathized with howls from Mongolia's business 
community that high lending rates (around 24%, or between 2 to 3 
points per month) and tight repayment schedules were crippling the 
country's economic development (a point driven home during Econoff's 
recent tour of western Mongolian businesses - septel).  However, he 
opines that the BOM has little power to affect rates; and so, 
focuses on keeping inflation in check.  He noted that interest rates 
are slowly coming down and hopes they will drop below 20% by the end 
of this year.   In his view, competition among banks will eventually 
force rates down.  Higher rates in rural areas result from those 
areas being served by only one or two banks. (Note: Mongolia is home 
 
ULAANBAATA 00000487  002 OF 003 
 
 
to 17 banks, most concentrated in Ulaanbaatar and many believed to 
be on shaky financial ground.  End Note.) 
 
¶5. (U) Ironically, many of Mongolia's sturdier banks complain that 
there is too much competition; far too many financial institutions 
vying for a limited number of customers by offering unrealistically 
high savings rates.  Bankers told us the BOM needed to crack down on 
the desperate behavior and risky practices of weaker banks that harm 
the industry and keeping interest rates high.  Batsukh countered 
that the BOM has raised the minimum reserve requirement (now at Tg 8 
billion, approximately US$6.7 million) several times since he 
assumed the governorship, in order  to force weaker banks to fold or 
merge, but that all have so far survived the changes.  He has also 
pressured smaller banks to improve corporate governance.  Batsukh 
believes that competition will eventually weed out the weaker 
banks. 
 
Banking Irregularities Are Probed 
--------------------------------- 
 
¶6. (U) Batsukh reported that the situation at the recently 
privatized "Savings Bank" has stabilized, with no continuation of 
the run on accounts that transpired after the bank revealed the 
disappearance of some 14 billion tg (US$11.8 million) while under 
GOM management.  He said he is not involved in the investigation or 
prosecution of the likely suspects, and left it to the police for 
any further comment. 
 
¶7. (SBU) Regarding the controversial and still murky details 
surrounding the sale of the Trade and Development Bank (TDB), the 
country's largest, Batsukh contradicted earlier informal statements 
to us from BOM officials that the sale in toto had been approved. 
Rather, he said that the BOM has only approved certain portions of 
the sale; specifically, transactions that had taken place within the 
BOM's jurisdiction of Mongolia (i.e., the sale of the Asian 
Development Bank and International Finance Corporation's stake to 
new buyers).  He stressed that the BOM is still carefully 
scrutinizing other aspects of the sale. 
 
¶8. (SBU) He was unclear if BOM knows who the real buyers are, but 
said he is convinced that depositors' funds were not/not used to 
finance the deal.  He then asked if we had spoken with Gerald Metals 
(the U.S. metals trading firm that previously owned the bank) about 
the deal, suggesting they would have all the answers.  (COMMENT: 
Batsukh's demeanor suggested frustration over Gerald Metals' lack of 
cooperation with the BOM's investigation of the sale.  He hopes we 
might have more luck in getting answers from them. His statements 
might also be a backhanded way to tie an American company, and by 
extension the US Embassy, into some of the more questionable aspects 
of the sale, given that the Embassy has regularly pressed the BOM to 
more thoroughly investigate the deal and to make its findings 
available to the public.  Questions surrounding the transaction led 
post to withdraw its accounts from TDB earlier this year.  END 
COMMENT.) 
 
Inflation Expected to Rise 
-------------------------- 
 
(U) Batsukh said that despite the Bank's efforts to limit inflation 
under control, inflation will likely rise this year: He guessed to 
8%.  He blamed this on increasing fuel prices, increasing civil 
servant wages, and recently enacted marriage and child stipends, 
combined with shrinking supplies of basic consumer goods due to the 
rail transport problems (reftel C).  A member of Mongolia's MCA 
National Council Batsukh believes that  MCC plans to improve the 
railway will impact transport and shipping positively. 
 
ULAANBAATA 00000487  003 OF 003 
 
 
 
¶9. Financial Investigative Unit's Delayed Launch 
--------------------------------------------- 
 
¶10. (U) Batsukh reported that the Financial Investigative Unit (FIU) 
had finally hired additional staff but conceded that it was 
slow-going in getting the unit up and running to effective capacity. 
 He repeated FIU chief Tumurbat's complaint that finding qualified 
personnel to man the FIU, as well as locating sources of TA and 
financing for proper equipment, represent the greatest challenges to 
the FIU's successful launch.  For example, he said they had only 
recently found someone to supply them with the software required. 
UNIDO will provide it for free with an annual fee to be paid by the 
GOM.  Finally, Batsukh revealed that the BOM recently dispatched MOU 
texts to both Korea and Japan to coordinate efforts at fighting 
money laundering and terrorist financing, but had yet to hear back 
from either. 
 
Mongolia and the IMF 
-------------------- 
 
(SBU) In what Batsukh stressed were only his personal opinions, he 
hoped the GOM would conclude a program with the IMF soon.  He 
expressed frustration over the GOM's inability to effectively manage 
its own budget process.   (Note: Last year's budget ended with a 
surplus of US$186 million, or 7%, despite pledges to target for a 4% 
deficit and widespread budget-busting social spending by Mongolia's 
parliament.  Parliament recently revised this year's budget when 
revenue projections came in much higher than expected - reftel D. 
End Note.)  Batsukh opined that a renewed IMF program would help 
instill budget discipline sadly lacking in Mongolia.  However, he 
criticizes IMF programs for being too standardized and rigid, and 
urges both sides to show some flexibility to enable Mongolia to 
enter into a new agreement.  He planned to broach the subject with 
the IMF's Article IV Consultation team visiting Mongolia in early 
September. 
Minton