Building A Frontier Market:Mongolia
At the Mongolia Today – Opportunity To Reality event hosted on the 20th March in Hong Kong by professional services firm PwC, the passage of the new Mongolian Securities Law, which has been under consideration for some time, was the focal point of the day.
The law contains a number of key provisions which will enhance the openness and efficiency of the Mongolian Stock Exchange and the ability of foreign investors to dual list, trade, and open up the depository receipt market.
Mongolia is a rapidly growing economy, seeing growth of 17.5% in 2011, and over 12% growth in 2012, on a nominal GDP of $9.9 billion in 2012. With the economy increasingly opening up to foreign investment, reform of the capital markets and the mining and agriculture sectors have been high on the agenda. With commercially viable quantities of more than 80 elements on the periodic table available for mining, Mongolia has taken giant leaps up the international ladder of commodities producers. However, the market is in desperate need of capital.
Deputy CEO, Chief Regulatory Office,
Mongolian Stock Exchange
“I think this roundtable proved to be very useful. It provided the regulators with an opportunity to get together in search for an optimal mechanism of how to collaborate and what essentially needs to be accomplished to expand the market and continue promoting foreign institutional investors participation in Mongolia. Obviously, the amount of work that needs to be done in order to support the new initiatives is immense. Nevertheless, those initiatives certainly must be put in practice in order to be fully successful in reaching our end goals. We’re not reinventing the wheel. We are taking the wheel and applying all necessary adjustments to make it much more “polished” in tune with local standards. We need more liquidity, thus, more inward investment.
As I understand, Mongolia has already come on the radar of a number of global investors, and, provided that we make necessary amendments in our legislation to promote opening of our market to foreign investors and foster investor confidence, and strike the right balance between domestic and foreign investors’ interests, we may truly become the next remarkable story of dynamic growth and development.”
“This is the first time that the regulator, exchange, and foreign and national banks have got together to discuss the new business that is due to enter Mongolia in the second half of 2013. The major takeaways from this session were that all parties involved in this business understand the requirements and needs of international investors because the custodian business is there to invite and drive international investment into Mongolia – investment that is very much needed in Mongolia. This has been an excellent starting point for future collaboration between the parties.”
Andrew Economides, Head of Market Development, Mongolian Stock Exchange
“It was a well-organised event and it was very interesting to bring together the Mongolian and the international players. At the moment, one of the major things missing from the Mongolian market is the post-trading infrastructure. We are working on bringing that infrastructure to the market. However, as the market is so new and the people involved in the market lack experience, it is very important for the international players involved to be on our side and to help the market moving forward. It’s also important for foreign institutions to consult with local institutions and the regulators in order for the latter to utilise international experience and expertise. I’m very happy to see that the Mongolian stakeholders, the regulators, the facilitators and the banks, are very keen to listen to what the international community has to say. So I think that all these factors will lead to a positive move forward when the right infrastructure is in place.”
The day itself was split into two segments, first a roundtable, attended by key Mongolian stakeholders, including the stock exchange, the regulator, the central bank, major domestic banks, and foreign banks and brokers looking to enter the market. The conversation was a frank exchange of views, covering what the domestic market wants and needs, and what the foreign banks want and need from the Mongolian regulator and exchange.
The one word summary of the roundtable would be liquidity. The creation of liquidity, and the protection of liquidity providers were key concerns for all parties.The second, larger, part of the day focused on custody and the importance of the relationship between local banks and foreign investors in providing custody services. The balance of protecting Mongolian interests and the wish-lists of foreign banks will be an ongoing debate, but the open discussion at the event was at least good natured.
The roundtable, in which senior participants from the Mongolian central bank, stock exchange, and leading national banks, openly discussed the status quo and ongoing future developments of the capital market with selected foreign institutions, was designed to allow for frank but instructive communication between the key domestic market stakeholders and the foreign investors. The new law also opens up Mongolia to the depository receipt market, by which domestic stocks can be issued by a custodian for trading on a foreign exchange. This market is a key provision for the ability of foreign investors to trade large sums on Mongolian stocks and to gain exposure to domestically listed companies without making oversized trades on the exchange. These two provisions make the dual-listing of stocks a much more attractive prospect on the Mongolian exchange, and should go a long way to alleviating the concerns of foreign investors.
The Mongolian Exchange (MSE) has been working closely with the London Stock Exchange (LSE) of late to allow for the expansion of technological offerings on the MSE, and the LSE has been conducting training programs with the exchange in order to enhance knowledge on international standards and expectations of an exchange. Much of the expectations of the foreign attendees of the event rotated on the safety of their assets, and the developing rule of law. While the new securities legislation goes some way to address these concerns, there remain questions around the full impact, and what volumes can be expected on the exchange, and how the custodians will be able to unite their own needs and those of the investors.
PwC Hong Kong
“PwC was very pleased to host this event at a crucial time in Mongolia’s development phase, which all key stakeholders agree was a valuable opportunity to discuss the issues and regulatory changes that will shape Mongolia’s investment landscape in the decades to come.”
“Mongolia is growing and there’s much interest from foreign investors; there is lots of interest not just on the custody side,we are also meeting with potential bond investors who are keen to cooperate and invest in Mongolia. One of the topics on the agenda was the new securities law, and stability and the safety of investments. In today’s session we had global custody banks pointing out the safety of the assets. It was good to have the involvement of the FRC, the MSE and the regulators of the commercial banks. The commercial banks are discussing the main foundations that they have to build here in Mongolia in order to address the requirements of the foreign global banks that will come into the market and incorporate with the local banks. That was the most important thing that I took from the roundtable.”
Head of BNP Securities Services
“Beyond the traditional interest around the emergence of a new market, there is the excitement of the complete infrastructure set-up. This goes from the market to the regulation bodies, and the traditional financial actors. The Mongolia conference gave a new 360° view of the potential of the market as well as the hurdles ahead to make it investment ready. Fundamentals are there – from the authorities willingness to proceed, to the multiple ongoing initiatives to create the investment framework. As a custodian, we strongly focus on providing a safe and transparent framework for international investors to enter the market in a transparent and secured manner.”
From the wider conference, many of the panels and discussions were built around sharing information of definitions and processes between the Mongolian and international representatives. Ensuring that each participant has a common working definition of key concepts and practices is a key area for making sure that expectations are reasonable, and that they are flexible over time. Of specific interest to the Mongolian bankers in attendance was exactly what benefit cooperation with the international custodians would give them. The knowledge sharing and efficiencies to be gained between the two are of great initial interest, but what about after a few years when the internationals have local market knowledge and their own established business, will the rate of sharing continue? Of vital importance is the management of expectations between the two parties.
Mongolia is becoming a market of interest to investors around the world, both those looking to increase their exposure to high-growth frontier markets, but also those looking to capitalise on China’s continued commodities imports. Liquidity breeds liquidity, and having world-class securities regulation and solid relationships with international banks should make the initial steps much easier.
“As a participant from Mongolia representing a financial institution aiming to provide custody services once the Mongolian regulations are in place, I found the seminar very useful. It was comprehensive in covering all the aspects of custodial services, and had on hand representatives of all the various types of participants, from software vendors to global custodians and major depository receipt players. With the opportunity to understand each bank’s approach to the business and its consequent interest in Mongolia, potential working relationships began coming better into focus. All in all, a worthy event thanks to our host, PwC.”