TUGRUG STRENGTHENS AS MONGOL BANK LOWERS PRESSURE ON EXCHANGE RATE

The Mongolian tugrug has strengthened nearly 7 percent this year due to a combination of tightened monetary policy, Central Bank intervention in the forex market and strong capital flows, reported the source. The source had a bullish outlook on the Mongolian currency for the long-term, while making exception for short-term volatility in the second quarter of 2012. The tugrug hit the target exchange of MNT 1,300 against the U.S. dollar last week compared with MNT 1,396 on 31 December 2011. On 19 March the Bank of Mongolia raised the policy rate by 50 basis points to 12.75 percent and on April 18 another 50 basis points to 13.25 percent, saying it intended to slow down inflation and lower pressures on the exchange rate with the increase. The Central Bank reported that it had sold USD 242.75 million to commercial bank year-to-day as part of its efforts to avoid the downward pressure on the currency caused by surging imports. It allowed gradual depreciation in 2011, from its peak MNT 1,195 to MNT 1,396 by the end of last year. Amid strong political pressure to control inflation and contain the currency's depreciation, the Central Bank became active in the forex market, beginning in November last year, to ease tensions before the June 2012 parliamentary elections. The Central Bank spent at least USD 200 million to bolster the tugrug last year. The bank said its policy is to intervene only to prevent sudden swings in exchange rate in either direction. The recent agreement between the Bank of Mongolia and the People's
Bank of China to expand swap agreements to CNY 10 billion to MNT 2 trillion provides additional support. The bank sold CNY 269 million (USD 42.7 million) to commercial bank year-to-day. The tugrug also received support from strong foreign investment this year worth USD 395 million, offsetting the current account deficit of USD 474.1 million. Finally, the bond offerings issued by the Development Bank of Mongolia and Mongolia Mining Corp. (MMC) raised nearly USD 1.2 billion in international debt markets, providing even greater criteria for strength. Extensive capital raising in international markets by Mongolian banks would provide further support.