A Favorable Macroeconomic Environment as the Basis for Trade Finance Infrastructure Development in Mongolia

1. A Favorable Macroeconomic Environment as the Basisfor Trade Finance Infrastructure Development in Mongolia

2. Presentation Outline Definition Overview of Factors that affect trade finance infrastructure development Overview of ITC’s Trade Finance Pointers Methodology Detailed review of Selected Macroeconomic TFP for Mongolia Conclusion

3. Trade Finance Infrastructure:a Definition

4. Keys to Trade Finance Infrastructure Development Availability of international finance/banking expertise both in the public and private sector Appropriate financial sector regulations A conducive (favorable) macroeconomic environment including an effective legal framework

5. Macroeconomic Environment and Trade Finance Infrastructure

6. ITC’s Trade Finance Pointers (TFPs) Methodology What are TFPs for? To detect where to focus efforts for trade finance infrastructure development What are TFPs? A trade finance “blood test” result sheet based on 52 indicators/factors that affect the trade finance environment Summarized using easy-to-read graphs and tables

7. ITC’s Trade Finance Pointers (TFPs) Methodology

8. TFP Benchmarking Process For each indicator, a country receives a “score” or “flag” based on its ranking among 129 other developing countries

10. Trade Indicators Trade openness Net barter terms of trade Trade cover ratio Change in total trade

11. Trade Openness in Mongolia [Exports+Imports]/GDP Increased trade openness is generally favorable

12. Net Barter Terms of Trade (NBTT) [export price index]/[import price index] Base year is 1995; NBTT=100% Increasing NBTT is favorable

13. Cover Ratio (Exports/Imports) Low cover ratio increase ST trade finance needs Higher cover ratio more favorable LT

14. 5-Year Change in Total Trade (TT) [TT2001 - TT1996] / TT1996 More Trade, More Trade Finance...

15. Net [External] Resources Net Flows of Long Term Debt Net FDI flows [Net Portfolio flows] Net Official Development Aid

16. Net Flows of LT Debt [LT2001-LT2000]/GNI Consistently high LT Debt inflows is not favorable

17. Net FDI flows (as % of GNI) More FDI is likely to have positive LT influence on trade finance sector development

18. Net Official Development Aid Net ODA flows (as % of GNI) may have a positive LT impact on Trade Finance Infrastructure Development

19. External Debt and Liquidity Total external debt stock Total external debt service Foreign exchange reserves Current account balance Short term debt

20. Total Debt Stock (% of GNI) All public and private ST and LT ext. debt High debt stocks may not be sustainable

21. Total External Debt Service Calculated as % of exports. Include payments actually made May reduce availability of credit for trade

22. International Reserves Measured in months of total imports Reserves help stabilize exchange rate

23. Current Account Balance (CAB) [Savings-Investment]/GNI A positive CAB would tend to be favorable to trade finance sector development

24. Short Term (ST) Debt / LT Debt Economies should maintain a good mix of ST and LT debts Less short-term debt is favorable

25. Exchange Rate Policy and Availability Foreign Exchange Rate Arrangement [Foreign Exchange Availability] Exchange Rate Volatility [Real Effective Exchange Rate]

26. Exchange Rate Arrangement

27. Exchange Rate Volatility Variance of exchange rate over 5 year Volatility increase trade transaction risk

28. Monetary and Financial System Deposits as a percentage of GDP Financial deepening I:Monetisation of Economy Financial deepening II:Broad money as narrow money Market capitalisation as a percentage of GDP

29. Deposits as a Percentage of GDP Lending is possible only if there is money in the banks Availability of international credit lines?

30. Financial Deepening I:Monetisation of Economy [narrow+quasi money] / GDP Increased use of monetary instruments is favorable

31. Financial Deepening II: Quasi Money as Narrow Money [Quasi Money] / [Narrow Money] More quasi money = more developed financial sector

32. Market Capitalisation as a Percentage of GDP Existence of a stock market as an alternative way for company to raise capital is favorable

33. Credit Market Crowding out of private Investment Sovereign LT Debt Rating [Forfaiting rates (6 months over libor)] Export credit risk

34. Crowding out of private Investment [Government Deficit]/GDP 2 ways to finance a deficit: print money OR borrow money

35. Sovereign LT Debt Rating

36. Export Credit Risk Rating

37. Legal Environment Aptitude of the legal system in solving trade dispute dispute solved < 3 months Level of legal costs cost of preparation of loan agreement < 4% of loan value Effectiveness of bankruptcy law International auditing standards

38. Macroeconomic Environment: TFP Indices Summary for Mongolia

39. Conclusion The trade finance infrastructure cannot develop without a Macroeconomic environment characterized by: trade openness sustainable debt management availability of a domestic deposit base for private investors

40. Conclusion Mongolia’s macroeconomic environment analysis reveals that policy makers should focus attention on: increasing the depth of the monetary and financial system improve the credit market situation

41. Conclusion Aside from improvement of the macroeconomic environment, a lot remains to be done to improve the financial institutions and their capacity more directly… (see “food for thoughts”)

42. Food for Thoughts...

43. Contacts