The financial market is a tool that constantly finances economic growth. A financial market consists of two parts: the capital market and the money market. Money markets are for short-term, usually one year or less, borrowing and lending and are sometimes called banking markets. On the other hand, a capital market is a market where long-term (one to thirty years) securities (bonds, stocks and other) are traded.
It can be said that the financial market is an ocean that provides the main condition for convertibility and continual movement of money, which is one of the greatest human inventions ever. Carrying out the duties of a broker, banking and financial institutions collect surplus capital from capital-abundant parties on certain conditions and selling it to those who are in need of capital after dividing the capital into packages by time and amount needed by the buyers.
Mongolia restored its money market along with its main institutions in the 20th century. The Mongolian Empire, which was a big player in the 12-15th century money market, was the first one to introduce paper money. In the 21st century, the capital market is being introduced in Mongolia. However, this is taking too long and is falling behind the needs of our time. Our economy, which has an average annual growth of 15%, has become like a car with a stuttering engine going on its lowest gear.
The Mongolian economy has always been based on its banking market and our capital market is only just beginning to be seen, which reminds us of a person standing on one leg or a bird with only one wing.
Current state of the Mongolian capital market
In 1991, a stock exchange was established in Mongolia not to raise capital but with the purpose of allocating capital by distributing shares of state-owned companies to every citizen in an equal way. People who lacked knowledge about the capital market sold their shares in haste, registered late in most cases and only a few people who acquired the majority of a company’s shares have been ignoring the minority’s rights and interests. This is the main reason why people have had a very wrong and negative understanding about the capital market.
The least amount of shares of only a small number of companies were traded on the Mongolian Stock Exchange (MSE) during privatization. By the late 90s, Mongolian Securities Clearing House and Central Depository was separated from the MSE’s structure and terms and conditions for advance payment was tightened, which put the security trade in its place.
Due to the needs of the market, the capital market has recovered since 2008 and, even though about ten companies raised capital from the primary market, a few companies issued stock and spread false information by using loopholes in the law and capital market regulations. Those companies eventually went bankrupt, which caused many losses.
Since 2009, in order to restore and develop the capital market, our parliament and the government have started to change the laws regarding the structure, organization, direction and role of the MSE. At first, changes were made to company law and the government signed a strategic partnership agreement with the London Stock Exchange in April 2011.
Last year, infrastructures of international standards were introduced to the MSE and technological reforms were made in the stock register, sales and payment. Furthermore, the London Stock Exchange’s model was installed and dozens of people were sent abroad for training.
A new securities law was developed after collecting opinions and advice from international lawyers, the London Stock Exchange, the World Bank, the MSE’s members and experts. Other market rules needed for efficient, organized and transparent market operations were developed with assistance from the London Stock Exchange and were sent to the Financial Regulatory Commission. Also, terms and conditions for a securities settlement, which was the biggest obstacle, were changed so that it complies with the international standards and a system called T+3 is being introduced for a prompt settlement by mortgaging properties.
In 2011, the total trade was increased by MNT 257.4 billion (46.2 billion for stocks, 206.7 billion for the government bonds), which was 3.8 times higher than that of the previous year. The partnership with the famous London Stock Exchange has created positive expectations among the participants of the market. However, the total capacity of Mongolia’s capital market still does not exceed $2 billion, which is four times less than the total assets owned by the banking sector. Why is the number of traders not going up even after a favourable infrastructure is created?
We should focus more on making the legal environment clearer, giving companies more incentive to raise money from the capital market and convincing investors that they can make good investments through buying stocks.
The next step
Conditions have to be created so that national companies can raise capital by issuing stock in order to finance their business growth. For the purpose of ensuring that there is enough money in our capital market, the world’s large investment funds, especially pension and insurance funds, have to come into Mongolia. Those funds only come into countries with a reliable payment system where the capital market fully functions, the rules of the game are clear and operations of companies that issue stock are transparent with an executive administration and board of the directors.
We have a lot of work to do because even our domestic funds are not participating in the capital market. It is not clear what interests our funds have, how many of them exist and where our social, health and pension funds are located. People are still wondering why there is no public representation in the administration of those funds. Instead of distributing free cash to people, the government should have financed its economy through those funds, plus the mining income fund. If they had done so, inflation would have decreased, the market capacity would have expanded and the first foreign funds would have entered Mongolia.
There is a need to list securities of companies that own shares of strategic deposits on domestic and foreign exchanges (dual listing), to introduce depository receipts and more forms of payment and to create legal conditions for custodian services.
Companies that operate mines in Mongolia and issue its stock abroad have a great deal of interest in selling their stock on the Mongolian Stock Exchange and having Mongolian shareholders. The reason is that Mongolian shareholders will not sit idle when Mongolian politicians change laws on weekends bringing instability to the politics and devaluing capital.
It must be understood that large, national, private companies improve their competitiveness and acquire more political risk protection by becoming public. If they become public companies, they and their children will not be able to sneak into politics. If every state-owned company, including the Mongolian Stock Exchange itself, is made into a public company, shares of which are freely traded between people, the company will lose all kinds of political risks and its administration will not have to be replaced after every election. Furthermore, if a public property is supervised by the public through owning shares, there will be less unregistered properties and less people trying so hard to get into politics. It is time people’s lives became less dependent on political elections.
Conclusion
The biggest obstacle to solving the problems above and developing our capital market has become the government of Mongolia itself. This is why Mongolia’s domestic companies are more interested in issuing its stock on foreign exchanges, not on the domestic one.
In order to develop its capital market, Mongolia has to fulfil its foremost goal: reform its securities law, make the government’s operations transparent as well as that of companies that issue stock, prepare its personnel and have them work permanently and appoint a skilful management team. Waiting for these to happen, the world investment funds are looking closely at Mongolia.
Translated by B.AMAR