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Data Collecting Survey for Development of Financial And Data Collecting Survey for Development of Financial and Capital Market, and Capacity Building of its Regulation and Supervision in Mongolia Final Report Data Collecting Survey for Development of Financial and Capital Market, Capacity Building its Regulation Supervision Mongolia Financial Regulatory Commission Data Collecting Survey for Development of Financial and Capital Market, and Capacity Building of its Regulation and Supervision in Mongolia Final Report March 2014 March 2014 Japan International Cooperation Agency (JICA) Japan Economic Research Institute Inc. Tokyo Stock Exchange, Inc. 3R JR 14-006 Data Collecting Survey for Development of Financial and Capital Market, and Capacity Building of its Regulation and Supervision in Mongolia Final Report Data Collecting Survey for Development of Financial and Capital Market, Capacity Building its Regulation Supervision Mongolia Financial Regulatory Commission Data Collecting Survey for Development of Financial and Capital Market, and Capacity Building of its Regulation and Supervision in Mongolia Final Report March 2014 March 2014 Japan International Cooperation Agency (JICA) Japan Economic Research Institute Inc. Tokyo Stock Exchange, Inc. Table of Contents 1. Introduction ······································································································· 1 2. Current situation of macro economy and financial/capital markets in Mongolia ················· 3 2.1 General situation of the macro economy ······························································ 3 2.2 Stock/bond markets ························································································ 9 2.3 Banking sector ····························································································· 11 2.4 Nonbank sector ···························································································· 14 2.5 Foreign direct investments ··············································································· 16 3. Fiscal and monetary policies and related laws & regulations ········································· 19 4. Evaluation of financial & capital markets in Mongolia and major issues ·························· 20 4.1 Current situations of financial & capital market development ······································· 20 4.2 Major issues of financial & capital markets ···························································· 27 4.3 Overview and issues of relevant players and organizations ·········································· 28 4.3.1 Financial Regulatory Commission 4.3.2 Infrastructure of securities trading (Mongolian Stock Exchange, Mongolian Securities Clearing House and Central Depository, etc.) 4.3.3 Security companies 4.3.4 Potential security issuers 4.3.5 Institutional investors 4.3.6 Retail investors 4.3.7 Others (rating agencies, law firms, accounting firms, etc.) 5. Current regulatory framework in Mongolian financial market ······································ 53 5.1 Relevant organizations, its functions and structures ·················································· 53 5.2 Related laws ································································································ 60 5.3 Regulations and oversight related to investors ························································ 71 5.4 Regulations and oversight related to issuers ··························································· 74 6. Assistance from other donors and possible assistance measures by the Japanese government in the future ······················································································ 78 7. Current situation and major issues of insurance industry in Mongolia ····························· 82 7.1 Current situation of insurance industry in Mongolia ·················································· 83 7.2 Major issues of insurance industry in Mongolia ······················································· 92 7.3 Assistance from other donors for the insurance industry in Mongolia ······························ 95 7.4 Possible assistance measures by the Japanese government in the future based on experience and knowhow in Japan ····················································································· 96 Abbreviation FRC Financial Regulatory Commission MSE Mongolian Stock Exchange MSCH & CD Mongolian Securities Clearing House & Central Depository BOM Bank of Mongolia DBM Development Bank of Mongolia MOF Ministry of Finance SWF Sovereign Wealth Fund LSE London Stock Exchange SPC State Property Committee SRO Self-Regulatory Organization CCP Central Counterparty Clearing House CSD Central Securities Depository JASDEC Japan Securities Depository Center Inc. KSD Korea Securities Depository HKSCC Hong Kong Securities Clearing Company Limited ETT Erdenes Tavan Tolgoi LLC TDB TDB Capital LLC MICC Mongolia International Capital Corporation MBS Mortgage Backed Securities MONICPA Mongolia Certified Public Accountant Association GDR Global Depositary Receipt KOFIA Korea Financial Investment Association TOCOM Tokyo Commodity Exchange 1. Introduction Growth of Mongolian economy has been accelerating in recent years (17.5% in 2011 and 12.3% in 2012) on the back of capital flows into the development project in the mining sector, as well as the international market conditions for coal and copper. At the same time, the government of Mongolia (‘GOM’) is striving for macroeconomic stability through fiscal discipline under the Fiscal Stability Law (2013), which requires fiscal deficit and official government debt to stay less than 2% and 40% of GDP, respectively. They are also trying, with a view to meeting the growing demand for infrastructure, to diversify their financing toward government bonds in addition to the traditional donor financing, the first lot of which was issued in November 2012. One of the major concerns on Mongolian economy is its heavy dependence on abundant mineral resources, which calls for more diversified industrial structure through vitalizing small and medium scale businesses. Majority of their financing, however, has been through the banking sector, and the capital markets have not provided enough financing opportunities to these businesses. In Mongolia, more than 90% of the listed companies are the former state owned enterprises (‘SOEs’) listed in the process of shifting to the market economy, but the market liquidity is still very low, due to the lack of enough disclosure, problems of corporate governance and compliances., insufficient investor base. The capital market itself is still immature, with insufficient level of regulation and supervision, which needs to be addressed as the financing needs through IPO grow in line with the economic expansion. To guide the economy to a stable growth path, it will be substantially important to provide wider range of financing options through facilitating the financial and capital markets which are open not only to the domestic but also to the foreign investors. Financial Regulatory Commission (‘FRC’), a government entity and a counterpart organization of this study, supervising the non-bank sector including capital markets (i.e. security brokers, insurance companies and non-bank lending entities such as microfinance institutions (MFIs)), is still a young organization established in 2006. It is in tremendous need for human capital/organizational developments and institutional design. Especially they are desperate for preparing the regulatory rules and strengthening the implementation framework, for which the request for a support has been made to JICA. JICA has been extending support for the Bank of Mongolia (‘BOM’) in its bank supervision, an establishment of the Development Bank of Mongolia (‘DBM’), facilitating two-step loans for SMEs through designing the framework and capacity building for the commercial banks. Also in the country analysis paper (2011) and assistance strategy (April 2012), ‘sustainable development of the mining sector and strengthening the governance structure’ have been identified as key areas, for further developing the private sector through stabilizing the macro economy and improving the conditions for fiscal/financial sectors. In that context, this study particularly focuses on the role the capital markets can play in Mongolia, as a new attempt by JICA. Based on the comprehensive observation on fiscal/financial sectors, macroeconomic conditions and direction of the medium-term fiscal/financial policies, the study team collects and analyzes the current status, challenges and assistance needs for the financial/capital markets in Mongolia, for proposing potential projects that can be supported through utilizing the resources from Japan. With that purpose, this study is addressed to the relevant entities such as FRC, Financial Market & Insurance, Ministry of Finance, Mongolian Stock Exchange (‘MSE’), Mongolian Securities Clearing House & Central Depository (‘MSCH&CD’), etc. In parallel with JICA’s existing in banking sector support, this study assumes the future technical cooperation to FRC, with a view to supporting the capital market development through utilizing the experiences in Japan. 1 Figure 1-1 Framework for the financial sector support Sustainable economic growth and the private sector development in Mongolia Diversification of funding sources Improvement of basic infrastructure Stable supply of long-term funds Diversifiedindustrial structure SMEs development Stable macro economy and better environment of the fiscal & financial sector
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