Mongolia is quickly adopting a technology that develops the country by simply printing more money.This technology resembles a snowball rolling down from a mountain top. It ultimately traps a country in domestic and external debts, resulting in its people becoming poor and moving abroad. Such examples can be seen from many countries that look like a democracy, but are truly controlled by a group of individuals, or a dictator who buys their way out of elections to exercise their rule for many years.
A classic example is Zimbabwe, a country that printed 100-billion notes and put its fiscal system into complete bankruptcy. As a result, Zimbabwe recently adopted the national currency of China, whom they acquired most of their loans from. A month ago, the young wife of a struggling 92 year old man assumed presidency of the country from her husband.
Mongolia needs to be informed, to understand, and be critical towards the nature and methodology of the alchemists who are trying to make development out of printed money.
Even though many politicians and people from banks and financial institutions are attacking me, I wanted to share my opinion here since democracy and pluralism have not been completely defeated yet.
INCEPTION
By the end of 2012, Mongolbank and the government had initiated a program to establish a stable system for housing mortgages. A month later the government issued Chinggis bonds on the international market and raised 1.5 billion USD.
Not long after, Mongolbank printed 2.8 trillion MNT using the money that came from the Chinggis bonds as collateral, and supplied the money to commercial banks to grant 20 year, 8 percent housing mortgages to people, and give soft loans to construction companies.
The loan package of the 8-percent mortgage is currently owned by nine commercial banks, Mongolian Mortgage Corporation owned by Mongolbank, and MMC Activ, which is wholly owned by Mongolian Mortgage Corporation.
Afterwards, MMC Activ proposed residents mortgage-backed securities (RMBS) to commercial banks. The ordinary securities were bought by commercial banks, whereas the preferred ones were purchased by Mongolbank. This scheme was implemented successfully in 2015, and Mongolian Mortgage Corporation carried out an IPO for 15 percent of its shares.
The Mongolian Mortgage Corporation shares were bought by commercial banks, and 40 percent were purchased by TDB Capital. It brought residents mortgage-backed securities to Mongolia.
So why aren’t people who understand what this means, being happy and fighting to buy the Mongolian Mortgage Corporation shares? The good news about the 8 percent housing mortgage is that approximately 43,000 households took up the program in three years and got an apartment. The total amount of housing mortgages, which is around 3 trillion MNT, made up one third of all bank loans.
On the other hand, the price of apartments increased by 50-60 percent following the launch of the mortgaging program. However, apartments were still being sold due to interest rates being only half that of market rates. Nevertheless, having assessed risks in the market and taken economic decline into account, banks were putting a full stop to these loans by the end of 2015.
On December 4, 2015, the constitutional court made a decision specifically related to the rights of people to use their property. As a result, commercial banks completely stopped the housing mortgages.
BUILD-UP
In order to take advantage of this halt in housing mortgages, the authorities wanted to keep the constitutional court under their control, and resume the soft loans until after the elections. Then, they announced that they made a decision – a very risky one – last week.
Apparently, the authorities will take actions aimed at reducing the interest rate of housing mortgages from 8 percent to 5, and making up 10 percent of 30 percent down payment from the public budget before Tsagaan Sar. They intend to rescue the construction industry by helping sell the readily available 20,000 apartments quickly.
Ulaanbaatar has a demand of 200,000 apartments. Removing the limit of 80 square metres in housing mortgages will aid selling bigger apartments. Another new idea is to have the pension fund receive the income from the residents mortgage-backed securities, which will commence the fulfillment of the government’s duty to send 8 trillion MNT to this fund.
This should all be good news because many people will get an apartment, and face less debt pressure. Apartments will be sold, and the pension fund will have money. However, the authorities and the related banks cannot answer one question: Who is going to pay for all of this?
MONEY DOES NOT JUST FALL FROM THE SKY
If the interest rate of housing mortgages is made 5 percent by the market rather than the government, there is no problem. It will just bring about gradual economic development as seen in other countries. The interest rate of housing loans is normally 1-2 percent higher than the inflation rate.
The Mongolbank policy rate, which currently stands at 13 percent, is fixed to the rates of savings, the largest source of capital for commercial banks. In Mongolia, the inflation basket takes into account operating costs of apartments rather than their prices. Therefore, any decrease in inflation does not mean a reduction in apartment prices. Furthermore, since the government is assisting in the purchase of apartments, the prices will not hike immediately, but will eventually increase by the end of 2016.
If the 8 percent housing mortgage is not stopped, and continues with an interest rate of 5 percent, Mongolbank will have no choice but to print more money and inject it into the market.
Printing more money leads to either stronger purchasing power and increased supply, or an increase in prices. The increase in prices, which is inflation, is paid for by everyone.
If prices are not to be increased, the gap is made up from somewhere else, usually the public budget. As mining exports, which helped pay for deficits, are now more limited than before, the government has been acquiring domestic and foreign loans.
Today the government is unable to raise a loan from abroad. Therefore, their only choice to make up for the deficit is to increase various taxes and milk money from the businesses and ordinary people. It means that the difference between the market rates and the softened rates provided by the housing mortgage is paid for by every single citizen of Mongolia.
The snowball, unless stopped, will keep getting bigger and continue rolling down the mountain. Before anyone knows it, it will become unstoppable. If that happens, every citizen of Mongolia will have to bear the burden of huge debts.
2016.01.13