New position paper published on Capital Market Developments
OVERVIEW
Mongolia reached upper-middle-income status (UMIC) in 2024 due to its coal-driven economic expansion in 2023. Following years of mining sector expansion, the East Asian nation attained UMIC status for the first time in 2015. That status, however, was only temporary, as a 2016 economic crisis resulted from expansionary macroeconomic policies and foreign shocks to the minerals industry. The mining sector accounts for one-fourth of GDP, 31 percent of state revenue, nearly 80 percent of foreign direct investment, and 92 percent of exports. This heavy reliance makes the country vulnerable to external shocks. In recent years, authorities have tried to develop a prudent banking and financial sector to upscale the capital market’s role.
While the Mongolian Stock Exchange (MSE) sees its market capitalization rise, it plays a rather limited role in the broader financial market dominated by commercial banks. Due to amendments to the Banking Law, five systemically important banks (Khan Bank, Trade and Development Bank, Xac Bank, State Bank, and Golomt Bank) became publicly listed companies. This strategic move resulted in a substantial capital infusion of 302.5 billion MNT, according to the MSE.
In its 2024Q2 Macroeconomic Report-, the Ministry of Economy and Development reiterated that the Mongolian stock market is expanding. The same report shows that market capitalization was 11.3 trillion MNT in Q2, up 2.8 percent and accounting for 16.5 percent of GDP. During the reporting quarter, securities trading totaled 645.8 billion MNT, a 1.4-fold increase from the previous period. Corporate bonds comprised 80.9 percent of trading, 8.9 percent were stocks, 6.9 percent were asset-backed securities, and 3.3 percent were investment fund units.
The MSE’s inclusion as an eligible market in the FTSE Russell’s Frontier Index is a significant achievement. However, no MSE-listed companies are included in index tracking, which consists of 271 constituents (172 from the Asia-Pacific region) as of October 31, 2024. Below are the characteristics of the FTSE Frontier Asia Pacific Index:
Dividend yield: 2.08%
Constituent sizes (Net Market Cap in USD millions):
Average 255
Largest 3,335
Smallest 9
Median 109
Morgan Stanley Capital International (MSCI) is another highly reputable international capital market classification index. The size requirement to qualify for the MSCI Frontier Index used to be fairly high. However, it was recently reduced to having at least one company that meets a total market capitalization of 126 million USD and a floating market capitalization of 63 million USD. There are currently seven companies that meet the total market capitalization requirement. To meet the floating market capitalization requirement, either the companies’ market values need to increase, or the companies need to list more shares on the MSE. There is also a 2.5 percent liquidity requirement. If the MSE were recognized as an MSCI frontier market, it would be excellent international recognition for the market and its listed companies.
In 2015, the Ulaanbaatar Securities Exchange (UBX) became the second stock exchange in Mongolia to receive a special license from the Financial Regulatory Commission (FRC) to engage in trading and settlement activities. To advance the Mongolian capital market’s growth and launch new products and services, UBX, rebranded in 2021 with the slogan “Together Toward Development”, is working to develop its human resources and infrastructure. Privatizing state-owned entities (SOEs) should take place through the MSE or the UBX to develop the Mongolian capital market.
Click here to read the position paper.