One of the fastest growing economies in the world, Mongolia is experiencing a long and stunning credit boom, with lending growing to 48 percent in the last 12 months. As Morgan Stanley, a multinational financial services corporation pointed out last week, that risk is only made greater by the fact that the boom is now mainly being funded by the Central Bank.
Credit in Mongolia has been expanding exponentially in recent years, peaking at 55 percent growth in 2011. However the inherent risk expanded around a year ago, as the country's banks' dependence on Central Bank funding began to grow. They now depend on the Central Bank to a greater extent than the worst of Europe's financially crippled economies. Analysts say that there are some signs that the trend has been checked in the last few months, but for now, the country is hugely exposed to any external shocks.
While the economy continues to grow, with gross domestic product expansion at 12.5 percent in 2012, followed by 11.5 percent in the first half of this year, the International Monetary Fund warned in early October that expansionary fiscal and monetary policy is being used to compensate for slowing exports and foreign investment. That has put pressure on the balance of payments. The IMF worries that "Central Bank reserves have come down considerably from record levels reached in late 2012, following Mongolia's successful first sovereign bond issuance."
Over a year ago, Fitch Ratings - a global credit rating agency - was warning of the pressure these policies were putting on the country’s banks. "The pace of credit growth in the Mongolian banking sector has been rapid even by comparison with other emerging markets," Fitch noted in March 2012. "More stringent controls are needed. Yet the authorities' efforts in controlling credit growth and maintaining adequate capital and liquidity are compromised by lax implementation." However, it appears that even rapidly disappearing central bank reserves are not enough to push Ulaanbaatar into action.