The UB Post-Leading English News

The Mongolian Financial Markets Association recommended to Ministry of Finance that Mongolia could receive benefits from the rising oil price in the international market even the stabilized price of the imported petroleum, and could be free from Russian Rosnepht Company’s price who is the major supplier of the domestic market.

The economy’s aggravation is from the rise in oil price, but the government hasn’t made any recommendations, which is why it is a unique chance to overcome it. The UB Post newspaper is has become open to the recommendation in an interviewed with S.Jalin, Executive Director of the Mongolian Financial Markets Association.ÂÂ

The association had recommended to Ministry of Finance that the government could freeze the rising oil price in the domestic market. How can it stabilize the rising price?ÂÂ
Our proposal is to establish a special fund. On the basis of the fund let’s protect the country’s economy from the risk, which is created from rising oil prices on the international market after the fund’s first capital is centralized. The main principle of the fund should be organized so that the fund benefiting from the rising oil price on the international market and the benefit would stabilize the petroleum price in the domestic market. This should be done by the Government and it should make a deal with international finance institutions due to the finance engineering method. This means the government would operate in the financial market.  ÂÂ

How would the fund get the benefit?
The government would use the financial engineering method and technique. The Government can use one of the Forward and Option deals which are used widely in the international market in order to stabilize the price.
This means you have studied the methods before the recommendation when you determined its suitability for the Mongolian situation? ÂÂ
Yes. Mongolia is importing 400-500 thousand tons of petroleum per year. It is very important that the importing petroleum price should freeze for a stabilized price.

Mongolia can’t influence Rosnepht’s oil and oil production price. Thus we recommend this way. Some capital should be pledged in order to make such a deal. The Forward deal is to set a price different from the price meant to benefit the fund. For example: if the price of the oil imported to the country is US$100 per barrel and the price of the international market reaches US$120 per barrel the benefit into the fund is US$20. The benefit of US$20 would be the subsidy for the importing companies of the country. But the Forward deal’s weak point is if the oil price drops sharply, the benefit from the different price does not enter the fund. The government’s main goal is to protect the economy from the rising price of oil. As for the Forward deal, the Mongolian government will assume obligations under the deal. As for another method, the Option deal, the Government would take a right to buy oil at a fixed price.

If the rate of the oil reaches US$ 120 per barrel, the Mongolian government would buy it at US$ 100 and it is the government right under the Option deal. If the rate drops, the government has a right to stop the deal. The Option deal’s advantage is the government has an opportunity to take a profit as a result of the raised oil price even through it dropped. But this is a difficult part as for the government to pay more expenditure. It is the same as the insurance system. The Government could use either of those deals and it is the government’s business. The specialists can recommend which one is better for our country’s position.

What methods are being used in the market to stabilize prices?
In general, there are three ways. One is to effect the demand of the market. Another is to influence the supply and the third way is to freeze the price in force. The Government can’t influence the oil demand because it is dependent for economic growth. The Government should establish a large petroleum reserve in order to influence the supply of the petroleum. Thus the government needs a lot of money to create the petroleum reserve, and on the other hand, the government needs to establish a container or storeroom for keeping such a large amount of petroleum on reserve. The third way is to freeze the price. If the government controls the price strictly like in the socialist period, a product shortage would occur in the market.

It would originate in the hidden economy, in the black market. Therefore we are considering our recommendation as the accurate way. The advantage of our recommendation is the government could decide on the big issue with very small capital and it will not break the market’s system.ÂÂ

Domestic petroleum price is dependent on Rosneph’s price which is set by the company set according to your study?ÂÂ
We studied the dependence of oil price in the international market and the price of petroleum imported into Mongolia. We have determined the price of the crude oil in the New York stock exchange has total dependence on the price of petroleum in the Mongolian market. Therefore, we are seeing that it is possible to protect the price of the imported petroleum against the risk of the price fluctuation passing with the price of the crude oil in the New York stock exchange.

How do you determine that the price of oil in the international market will rise?
In less than a month, the oil price rose by ten percent in the international market and reached US$ 110 per barrel. Two years ago, this price was US$ 50 per barrel and it rose two times more. The rising oil price was measured by the amount and was expressed by percent. In general, the international and local specialists are guessing that it will reach to US$ 150 per barrel on the international market. The current financial crisis in the USA, and the world financial crisis influence the rising oil price.

When do you think the oil price on the international market will drop? Are you and the specialists observing the financial market everyday?ÂÂ
The world economic growth is running energetic and the main improvement of it is the demand. The demand is also increased. Utilizing the source of energy, 80-90 percent consists of the products of produced by carbon. These are oil, coal and natural gas. The most effective of them is oil. The oil reserves across the world are limited and reserves will probably not rise. But the demand for oil has risen much. The oil price will probably increase more until another resource for power because of the imbalanced situation for supply and demand over a long period of time.ÂÂ

Are other countries using this method for stabilizing the price of oil?
Countries which have large reserves are regulating the supply in this way. As for the financial engineering method, the countries who have a big demand find it very difficult to use this method. As for the Mongolian advantage, the economy of our country is very small and our domestic consumption covers a very small piece compared to the world consumption of oil. Thus our country’s use of this method is very suitable. In 2005, France used to this method in order to protect the rising price of the army’s petroleum expenditure. In the international market, there are very few methods for protecting against the oil price risks. Mongolia can use this method for rising prices of other products such as wheat and raw materials.
We are talking about the crisis of the world financial market. How is it influencing Mongolia?
We are paying close attention to the market. It is too early to say how the world financial crisis will influence Mongolia. ÂÂ
It has been observed that people are trying to protect the togrog against the risk of the rate lost under the unofficial information, because of the shortage of information about the economy and financial market in Mongolia. For example, people keep US$ and as soon as possible buy realestate because the togrog’s rate is dropping month by month.

How we can understand why the US$ rate is raising in Mongolia and why the togrog’s rate is losing? ÂÂ
It is seen by specialists the direct loss of the togrog is not observed. The price of our country’s copper and gold are high on the international market. Foreign investors are coming to Mongolia. Thus the US$’s supply is increasing and it is an opportunity to keep the togrog’s rate and the Central bank’s currency reserve so as not to drop the togrog’s rate. It has been observed that inflation is increasing and the US$’s rate rising by small percent caused the many amount togrog entering into the economy, but we are not seeing the reason for the drop in the togrog’s rate by much percentage.

Who is working and enlisted in your association?ÂÂ
The association was founded four years ago and enlisted specialists of the financial market domestically and abroad. The association is a non-profit organization.

Which operation runs your association?ÂÂ
In previous years, we were running a more professional operation. We organized the Investment Forum last year and invited Hong Kong Stock Exchange specialists to Mongolia to give the opportunity to Mongolian entities to be listed in the HKSE and to give detailed information and knowledge about HKSE. We organized the forum together with Bloomberg and Reuters.    ÂÂ

One of the professional big works is to penetrate UBIBOR (Ulaanbaatar interbank offered rate) together with Reuters as it is the most widely used benchmark or reference rate for short term togrog’s interest rates. Mongolian financial markets association was founded to promote international professional standards and provide development guidelines in domestic markets. The association covers domestic money markets, capital markets, and foreign exchange and gold markets in addition to treasury and risk management issues.