Is Capital Market a Development Gateway?

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Is capital market a development

gateway?

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MONGOLIAN ASSOCIATION OF SECURITIES DEALERS

Current situation of Mongolian financial market

• Financial sector accounts for 4.7 percent of GDP, of which banking sector accounts for 4.0 percent, while remaining 0.7 percent comprises of other financial sectors. /“Development of Financial market” National forum/

• Bank loans- the sole source of funding

• Limited liquidity - when banks stop giving loans in times of economic difficulty

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According to the 2015 performance result /in bln. MNT/

*BDSec LLC, Binse JSC, Erchim bond, MMC Holding

Source: Bank of Mongolia, MSE

11,695.7

546.4 510.3 20.4

0

4000

8000

12000

Outstanding

bank loans

Trade on

MSE

Government

securities on

primary

market

Capital

raised on

MSE*

0

4000

8000

12000

0 1

Outstanding bank loans Trade on MSE

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Trade structure /in bln. MNT/

Source: MSE

12.3%

87.7%

Share trade

Other trade

24.2 30.5 42.6 36.2

515.9

304.6

0

200

400

600

2014.12 2015.12 2016.12

Trade structure /in bln. MNT/

Share trade Other trade

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Comparison of Mongolian financial market development with other

countries

144 148

144 140

100

110

120

130

140

150

2012-2013 2013-2014 2014-2015 2015-2016

Pillar 8: Financial market development

127 129

125 124

Source: The Global Competitiveness Report

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Stock exchanges

No. Country Name Established

year Market cap

1 Mongolia Mongolian Stock

Exchange 1991 USD 0.7 billion

2 Vietnam Ho Chi Minh City

Stock Exchange 2000 USD 51.0 billion

3 Taiwan Taiwan Stock


4 Singapore Singapore Stock


5 Poland Warsaw Stock

Exchange 1991 USD 283 billion

6 Myanmar

Yangon Stock

Exchange /Хуучнаар

Myanmar Securities

Exchange Centre/

1996 USD 19.2 billion

7 Philippine Philippine Stock


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Importance of capital market in overcoming Mongolian economic difficulty

• It decreases systematic risk of financial market and shares risk.

• It improves liquidity of financial market.

• It attracts foreign investment. Foreign investors tend to prefer investing in regulated

market, because certain risks are prevented.

More variety of investment is offered.

Amount of investment can vary.

• It properly distributes capital sources using local resources.

• It encourages wealth distribution.

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The Government policy on using capital market opportunities

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I. Attractive tax condition

Exemption of certain taxes:

1. Tax on capital gains;

2. Tax on dividends;

3. Tax on interest of corporate bonds (fixed income)

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Dividend tax

30.85

74.25 79.1

11.4

52.2

7.4

0

30

60

90

2010 2011 2012 2013 2014 2015

Total amount of dividend

/in bln. MNT/

3.09

7.43 7.91

1.14

5.22

0.74

0

3

6

9

2010 2011 2012 2013 2014 2015

Dividend tax/ in bln. MNT/

Source: MSE

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Tax on dividend

• List of countries that have no withholding taxes on dividends:

• Brazil

• India

• Malaysia

• Singapore

• Vietnam

• United Arab Emirates

• Hong Kong

• China /P, Red Chips/ etc.

Source: Research of NYSE

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Why some countries do not withhold taxation on capital

gains? • There is no certain method for tax calculation.

• There is a change in currency value (NPV).

• Stock rate will not increase. Consequently, market cap will not increase as well, which is a main indicator if capital market.

• It will lead to hidden payment methods.

• List of countries that have no withholding taxes on currency exchange gains:

•Belgium

•Czech

•South Korea

•Luxembourg

•Netherlands

•Slovenia

•New Zealand

•Switzerland

•Turkey

•Hong Kong

•Vietnam

•China etc.

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Taxation on interest of corporate bonds

/in bln. MNT/ MNT

Foreign

currency

Interest income 2,655.4 681.6

Income tax 266.5 68.2

Source: Bank of Mongolia

Bond interest is same as deposit

interest.

Bond issuer pays interest to bond

holders after fixed period of time. 0.22

0.32 0.38

0.54 0.60 0.60

0.06 0.08 0.11 0.12

0.16 0.16

0.0

0.2

0.4

0.6

0.8

2010 2011 2012 2013 2014 2015

Interest of deposits

/in trln. MNT/

Deposits in local currency /11%/

Deposits in foreign currency /8%/

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II. Privatization on capital market

1. Privatization process will become open and transparent.

2. Operation of privatized company will be open and transparent.

3. In particular, operation of utility companies including thermal power stations and distribution companies, will be open and transparent.

4. Wealth distribution.

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III. To conduct Government funding on capital market

• Conducting funding of Chinggis bond, DBM and special funds of the Government by MSE, has following advantages:

1. The Government funding will become open and transparent.

2. The Government funding risk will decrease. /Every public company goes through legal and capital assessment, audit review, while underwriting company provides a guarantee./

3. The Government funding will go to the companies that are open and transparent to public, as well as share their profit with public.

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IV. To promote public companies with policy

• To provide public companies privilege in the Government funded tender.

• To provide them with tax incentives.

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V. Foster local institutional investors

Mongolia Poland

•Pink and blue vouchers were

distributed.

•Institutional investors were not

prepared.

•15 Government funds were

established.

•Today, Warsaw Stock Exchange is

considered as the second largest stock

exchange in Europe after London

exchange and 5th largest based on the

IPO issuance. East European

companies prefer issuing IPO on

Warsaw Stock Exchange.

•Instead of distributing cash, fund should be established.

•Condition which allows IPO issuing companies to raise capital from funds, instead

of individuals ought to be formed.

•Potential: Savings and credit cooperatives, non banking financial institutions,

insurance funds

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VI. To implement policy aimed at improving the skill of professional participants of the market

VII. To widen the financial knowledge of public and prepare national investors

Is Capital Market a Development Gateway?

Business

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