Mongolia is considered an emerging marketplace with big economic potential in the worldwide economic system. It is considered one of the fastest growing economies. The Mongolian government has passed policies to address their challenges and to diversify their economy.
In developed countries the capital market provides long-term financing for economic development. This is one of the challenges they are confronting. The capital market in Mongolia is underdeveloped, with few registered entities that are publicly listed on the Mongolian Stock Exchange. Making it more difficult is the absence of corporate and high yield bonds. As a result, the bond market is dominated by government bonds, but commercial banks play a significant role in the economy by the financing of businesses.
Investors can look at the legislative environment and find that Mongolia wants to be a major player in the world economy. For instance, in 2006 the Financial Regulatory Commission was created to oversee all the non-banking financial institutions which includes insurance and brokerage companies with the overall objective of ensuring market stability and accountability.
The Mongolian Stock Exchange was created in 1991 and by the enactment of securities and corporate laws a secondary market was established. It was in 2011 the Mongolian government signed the “Masters Service Agreement” with the London Stock Exchange has an objective of launching a trading system, improve legislation and their legal environment. Part of this agreement included the use of the “Millenium IT” operating system in 2012. This is the fastest cash trading platform globally and this was to help meet investors, professional brokers, and dealers needs. The primary and secondary markets are still in their infancy and shows with the lack of private equity funds, insurance companies, and pension funds. However, with the introduction of new laws on investment funds it has opened up the market for institutional investors for participation in the Mongolian Stock Exchange.
In most countries participants in the capital market are classified as a stock market specialist, listed companies and investors. Participation in the capital market is dependent on acquiring the proper license from the Financial Regulatory Commission. The capital market organization in Mongolia consists of 120 licensed companies and/or organizations with 500 market specialist working in the market. Included are a trading organization, a securities and deposit organization, 66 brokerage and dealer companies, 11 investment companies operating in both markets, 5 commercial banks for securities transactions, 2 investment management companies, 24 companies with underwriting licenses, 15 consulting firms and 2 custodian banks. However, because of the economic downturn and slowdown the number of specialists declined to 75.
It is not common for business in Mongolia to be a listed company, less than 1 percent, or 303 companies out of 39,000 registered entities. Eight out of the top 100 companies are listed. The listed companies include 30 that are state-owned, 11 companies have state participation, and the remaining companies are private. Many of the listed companies on the Mongolian Stock Exchange were established as a result of the privatization that occurred in Mongolia in the early 1990’s.
After privatization the Mongolian government issued two types of investment vouchers to their citizens while privatizing the majority of state-owned enterprises. This action by the Mongolian government found stock concentrations occurring in most companies. There were many unknown variables that caused stock concentration, such as lack of knowledge of the stock market and how it works, low purchasing power which led many individuals to sell their investment vouchers at a low price, undeveloped market infrastructure, and fraud. This was evident when 193 companies had a stock concentration of 75% in 2014. Stock concentration has a negative effect on stock trading, dividend distribution and market growth.
It is important for Mongolia’s future to play a significant role in the world economy. However, like other countries, there remains many challenges, none of them ours insurmountable. Passive trading is a significant characteristic of the Mongolian Stock Exchange and because of this the equity in the stock exchange is weak, stock concentration is high, lack of institutional investors, lack of skilled specialist and the knowledge that is lacking among the public and private companies regarding the benefits of the capital market and the opportunities to raise capital on the market. Although there are challenges that lie ahead for this emerging capital market, investors may want to give the MSE a second look.