While the rest of the world talks about monetary easing, in Mongolia, the resource-rich nation of 3m, there is a credit crunch.

Mongolia’s GDP grew at more than 15 per cent last year, sparking fears of overheating and inflation concerns that have prompted the government to tighten monetary policy. As a result, banks have faced a liquidity crunch since last autumn and commercial loans are hard to come by in Ulan Bator these days.

Mongolia recently raised capital adequacy ratios and interest rates in a bid to cool inflation, which has become a hot political issue with the Mongolian election coming up this summer.

The tightened monetary policy has left banks scrambling for cash. As the FT reported:

“The banks are out of money now,” said Peter Morrow, former chief executive of Khan Bank, one of Mongolia’s largest. “Liquidity was very high a year ago but it’s been burned up because there is such high growth and high lending.”

Bankers and analysts in Ulan Bator believe that in the current climate, Mongolian banks will increasingly look overseas for capital. Right now Mongolia’s banks have foreign liabilities of around 8 per cent, but that is expected to increase as banks go abroad to issue bonds.

Sardor Koshnazarov, economist at Eurasia Capital, explained that Mongolia’s capital needs will keep growing:

Banking assets to GDP are around 87 per cent, so one might get the impression that banks are well capitalized. But if you look at the next three or four years, when there will be large multibillion dollar mining projects, major infrastructure developments, urbanization and especially a housing programme – all of these will require substantial investment, which would not be available from the banking sector. We believe that banks are undercapitalized to provide financing for those projects going forward in the next four to five years.

Some foreign banks have already sniffed opportunity: on Thursday, Goldman Sachs bought a small stake in Mongolia’s privately owned Trade and Development Bank. Expect more to come.

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