Mongolia Tugrik Rivals Syria as Biggest Exotic Loser: Currencies

After Syria and Iran, Mongolia is delivering the world’s worst currency returns this quarter as tumbling international investment and coal revenue starve the country of the foreign exchange needed to fund imports.

Mongolia’s tugrik sank 12 percent to 1,637.25 per dollar since June 30, the third-biggest loss among more than 100 foreign-exchange rates tracked by Bloomberg and the largest drop of about 80 exotic currencies. The former Soviet satellite’s tender weakened in all but three of the last 19 years and sank to a record 1,728 on Sept. 10.

Currencies of some of the smallest developing economies are taking a hit as the prospect of the Federal Reserve announcing a withdrawal of monetary stimulus reduces the cash pursuing higher-yielding assets. A 15 percent drop in coal prices this year eroded earnings from Mongolia’s biggest export by 47 percent, while foreign direct investment to the nation slumped 46 percent, both weighing on the tugrik.

“There’s no foreign-currency revenue right now, it’s simply not coming in,” Norihiko Kato, the Ulaanbaatar-based chief executive officer of Khan Bank LLC, one of Mongolia’s two biggest lenders, said in a Sept. 11 phone interview. “We may end up with a dollar crunch.”

Exotics Boom

Trading in exotic currencies is limited. The tugrik didn’t make it to the list of the 35 most-traded currencies in the world, according to a Bank for International Settlements survey published on Sept. 3. The Peruvian sol, the least traded currency on the list, accounted for about 0.1 percent of the global daily trading of $5.3 trillion, according to the survey.

The pullback from exotic currencies is a reversal from the trend up until a year ago when foreign-exchange traders, faced with lower volatility and record-low interest rates in the U.S. and Europe, poured cash into countries rich in commodities or with high growth rates.

JPMorgan Chase & Co.’s Global FX Volatility Index tumbled 80 percent in the four years through 2012, reducing money managers’ ability to exploit price moves. The gauge was 9.17 percent today, up from a five-year low of 7.07 percent reached on Dec. 17.

Papua New Guinea’s kina, is the second-worst performing exotic currency this quarter with an 8.5 percent drop, data compiled by Bloomberg show. Uruguay’s peso weakened 6.7 percent since the end of June, after climbing 25 percent in 2009, while Mongolia’s tugrik rallied an unprecedented 15 percent a year later.

The Iranian rial weakened 50 percent this quarter and the Syrian pound dropped 26 percent, the biggest losses among currencies tracked by Bloomberg. They fell amid speculation that the U.S. was readying a strike against Syria’s government following a chemical weapons attack.

Emerging Markets

Until last month, developing-nation currencies were in the midst of their biggest slide in five years, and Goldman Sachs Group Inc. and UBS AG say those declines will continue as the Fed prepares to taper stimulus. This quarter’s losses in exotic currencies compare with a 12 percent decline in Indonesia’s rupiah and a 6.3 percent drop in the Indian rupee, which touched a record-low of 68.845 per dollar on Aug. 28.

Mongolia’s central bank has intervened in the currency market since November to stimulate business, promote growth and stem accelerating inflation, according to Sandagdorj Bold, the bank’s chief economist.

“We have a variety of open-market tools for influencing the foreign-exchange market,” Bold said in a Sept. 6 e-mailed interview from Ulaanbaatar, Mongolia. Policy makers are “fully capable of influencing the market,” Bold said.

Tugrik Rallies

The tugrik rallied 2.3 percent today in its biggest gain since April 2009. The currency is seeing a correction from oversold levels, Bold said in a separate interview today.

Foreign-exchange reserves fell 27 percent to $3 billion in July from a year earlier, according to the Bank of Mongolia’s website. That compares with $19 billion in oil-rich Kazakhstan, whose tenge is another frontier currency, data compiled by Bloomberg show.

Consumer prices in Mongolia rose 9.4 percent in August from a year earlier, compared with 8.3 percent in July, the National Statistics Office said Sept. 10. The last time the annual rate was below 10 percent was 2009, when it averaged 4.2 percent.

Slowing Growth

China buys more than 86 percent of Mongolia’s exports, leaving the country exposed to a slowdown in Asia’s biggest economy. China’s government is targeting growth of 7.5 percent in 2013, which would be the worst performance since 1990 and compares with 7.7 percent last year.

While Mongolia’s $10 billion economy is growing at almost double the pace of China, the expansion is starting to slow. Gross domestic product increased 11.3 percent in the first half of the year, down from 12.4 percent for all of 2012 and a record 17.5 percent in 2011. The World Bank cut its 2013 growth forecast in April to 13 percent, from 16.2 percent.

Mongolia’s exports dropped 5.9 percent to $2.7 billion in the first eight months of 2013, while imports fell 8.6 percent to $4.3 billion, the government said Sept. 10.

Coal exports declined to $693 million from $1.3 billion and accounted for 26 percent of total shipments. The nation ranked seventh among the world’s top 10 coking coal producers last year, according to the statistics office.

Bernanke Effect

Investors interested in the commodity-rich economy aren’t “running for the hills,” Howard Lambert, the chief representative at ING Groep NV’s Mongolia office, said in a Sept. 11 phone interview from Ulaanbaatar. The country has attractive features such as a democratic political system, a convertible currency and a well-educated population, he said.

Speculation that the Fed has been preparing to taper its $85 billion of monthly bond purchases has weakened assets that investors consider higher-risk. The U.S. central bank unexpectedly refrained from reducing the $85 billion pace of monthly bond buying today, saying it needs to see more signs of lasting improvement in the economy.

The tugrik has slipped 12.1 percent since Fed Chairman Ben S. Bernanke signaled the central bank may trim bond purchases on May 22, while the Uruguayan peso and Nepalese rupee both fell more than 12 percent. The tugrik climbed 3.7 percent this week after former U.S. Treasury Secretary Lawrence Summers, considered by investors to be less in favor of maintaining stimulus, withdrew from the race to replace Bernanke as Fed chief in January.

‘Global Context’

Fed policy makers have kept their benchmark interest rate in a range of zero to 0.25 percent since December 2008, while the European Central Bank’s key rate is at a record 0.5 percent.

The Bloomberg U.S. Dollar Index, which tracks the greenback against the euro, yen, pound and seven other major counterparts, fell 0.4 percent this week to 1,019.70 after Summers’s announcement, from a three-year high of 1,054.4 in July. The measure rose 5.4 percent in the first six months of this year, the most since 2011, on speculation that the Fed would pare money printing.

“The tugrik’s weakness needs to be seen in the global context,” Michael Preiss, managing partner at Mongolia Asset Management Ltd., said in a Sept. 10 e-mailed interview. “The story for most of this year was dollar strength across the board, not just against other major currencies, but in general against emerging markets and in particular frontier-market currencies.”

Rio Tinto

Prime Minister Altankhuyag needs to reverse a May 2012 law restricting foreign ownership in businesses that prompted capital flight and hurt the currency, Chuluun Gankhuyag, a member of the opposition Mongolian People’s Party and a former vice finance minister, said in a Sept. 10 interview from Ulaanbaatar.

Investor sentiment has also soured amid a dispute over fees, royalties and funding of the Oyu Tolgoi copper and gold mine controlled by Rio Tinto Group, the world’s second-largest mining company.

Concern that the current-account deficit will widen is also leading the tugrik to depreciate, Bold of the Bank of Mongolia said. The shortfall in the broadest measure of trade and investment increased 8.5 percent to $2.1 billion in the first seven months of 2013, the central bank’s website shows.

“The weakness we’ve seen in the tugrik has to do with the drop in coal prices,” Eddie Cheung, a currency strategist at Standard Chartered Plc in Hong Kong, said in a Sept. 16 phone interview. “Mongolia still has a big current-account deficit.”

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