ECONOMIC RESEARCH INSTITUTE STUDY OF DEVELOPING CORPORATE BOND MARKETS IN MONGOLIA Final Report ULAANBAATAR 2 “CORPORATE BOND SURVEY” Final Report Team Leader: B. Tuvshintugs (Ph. D) Members: Z. Manlaibaatar T. Dulguun October 2019 3 Table of Contents 1. Introduction ........................................................................................................................................... 9 2. Current situation of macroeconomy and financial/capital markets in Mongolia ................................ 10 2.1. General situation of the macroeconomy ..................................................................................... 10 2.2. Bond market ................................................................................................................................ 10 2.2.1. Government bonds .............................................................................................................. 10 2.2.2. Corporate bond .................................................................................................................... 11 2.2.3. Private placement corporate bonds ..................................................................................... 13 2.2.4. Asset-backed securities ....................................................................................................... 14 2.2.5. International market bond issuances ................................................................................... 16 2.3. Equity market .............................................................................................................................. 17 2.3.1. Listed securities................................................................................................................... 19 2.3.2. Initial Public Offerings ........................................................................................................ 23 2.3.3. Securities on Mongolian Securities Exchange .................................................................... 24 2.4. Banking sector ............................................................................................................................ 24 2.4.1. Basel framework ................................................................................................................. 25 2.4.2. Macro prudential ................................................................................................................. 26 2.4.3. Financial soundness ............................................................................................................ 28 2.5. Nonbank sector ........................................................................................................................... 29 2.5.1. Non-bank financial institutions ........................................................................................... 29 2.5.2. Savings and credit cooperatives .......................................................................................... 30 2.6. Insurance sector .......................................................................................................................... 30 3. Current legal framework ..................................................................................................................... 31 3.1. Relevant organizations, its functions and structures ................................................................... 31 3.1.1. Financial Regulatory Commission ...................................................................................... 31 3.1.2. Bank of Mongolia ............................................................................................................... 34 3.1.3. Mongolian Stock Exchange ................................................................................................ 38 3.1.4. Mongolian Securities Exchange .......................................................................................... 38 3.1.5. Mongolian Central Securities Depository & Mongolian Securities Clearing House .......... 39 3.2. Related laws ................................................................................................................................ 41 3.2.1. Securities Market Law ........................................................................................................ 41 4 3.2.2. Banking Law ....................................................................................................................... 42 3.2.3. Company Law ..................................................................................................................... 44 3.2.4. Other legislations ................................................................................................................ 44 3.3. Regulations and oversight related to investors............................................................................ 46 3.4. Regulations and oversight related to issuers ............................................................................... 46 3.4.1. Company Law provisions ................................................................................................... 49 3.4.2. Securities Market Law provisions ....................................................................................... 50 3.4.3. Tax framework .................................................................................................................... 51 4. Market assessment and major issues ................................................................................................... 54 4.1. Issuer ........................................................................................................................................... 54 4.1.1. Cost of issuing ..................................................................................................................... 54 4.1.2. Impediments to issuing ....................................................................................................... 55 4.2. Intermediaries ............................................................................................................................. 58 4.2.1. Securities’ companies ......................................................................................................... 58 4.2.2. Insurance companies ........................................................................................................... 62 4.2.3. Credit Guarantee Fund ........................................................................................................ 63 4.2.4. Deposit Insurance Corporation ........................................................................................... 63 4.3. Investor ....................................................................................................................................... 65 4.3.1. Insurance companies ........................................................................................................... 68 4.3.2. Investment/trust funds and pension funds ........................................................................... 69 4.3.3. Cost of investing ................................................................................................................. 71 4.3.4. Impediments to investing .................................................................................................... 71 5. Outlook ............................................................................................................................................... 72 5.1. Projections of economic growth and financial requirements of domestic financial markets ...... 72 5.2. Projections of corporate bond market size .................................................................................. 74 5.3. Potential SME financing ............................................................................................................. 77 6. Recommendation ................................................................................................................................ 78 5 List of Figures Figure 1. Value of government bonds issued on MSE, billion MNT ......................................................... 11 Figure 2. Value of corporate bonds issued, billion MNT ........................................................................... 13 Figure 3. Mortgage loan financing system .................................................................................................. 14 Figure 4. Total number of borrowers and amount per RMBS .................................................................... 16 Figure 5. MSE market capitalization (LHS) and average TOP 20 Index (RHS) ........................................ 18 Figure 6. Capital adequacy ratio of bank sector .......................................................................................... 29 Figure 7. Return on asset and equity of bank sector ................................................................................... 29 Figure 8. FRC organizational structure ....................................................................................................... 33 Figure 9. BoM organizational structure ...................................................................................................... 35 Figure 10. MSE organizational structure .................................................................................................... 38 Figure 11. MSX organizational structure ...................................................................................................