Mongolian Stock Exchange fights to retain position on frontier market watchlist

Mongolian Stock Exchange fights to retain position on frontier market watchlist
By Kanat Shaku in Almaty April 26, 2017

Officials from the Mongolian Stock Exchange (MSE) have held a meeting with FTSE Russell London at which they promised to make efforts to prevent the bourse’s removal from the Frontier Market Watch list, the MSE said in a statement

Of the approximately 150 countries with stock exchanges worldwide, 26 countries are classified as Developed, 22 as Emerging and 26 as Frontier. The watchlist includes countries likely to be considered for promotion, and inclusion gives investors a transition period to carry out due diligence and decide whether or not to invest.

The MSE was first placed on the watchlist in 2012 after the country hit a 17.3% GDP growth rate thanks to a boom in foreign investment. However, delays to the development of Rio Tinto’s giant Oyu Tolgoi gold and copper mine and a freefall in commodity prices have badly hit an economy so reliant on mining coal, copper and gold. The MSE has thus failed to meet expectations since being added to the watchlist. 

“In order to remove the obstacles to meet the criteria for Frontier Market status, MSE has formed a working group consisting of the Clearing House, Central Securities Depository and Mongolian Association of Securities Dealers, and is actively working towards the readoption of the T+3 settlement cycle and the introduction of Delivery versus Payment (DvP) mechanism,” the MSE said.

“During the meeting with FTSE Russell, MSE representatives requested their consideration for retaining Mongolia on the Watch List at the September 2017 Annual Review and voiced our commitment to adopting an action plan for meeting the criteria and continuously reporting the progress of its implementation,” the MSE added.

The two specific issues of concern for FTSE Russell regarding the MSE are the lack of global custodians in Mongolia and difficulties in meeting the requirement that all trades are fully pre-funded.

In addition, the MSE Top-20 Index has fallen 37.6% since end-2013, while the International Monetary Fund (IMF) expects GDP growth to contract by 0.2% this year. The IMF and other financing partners are expected to go ahead with a Mongolia bailout based on a $5.5bn deal reached in February.

Frontier markets are typically those in developing countries with high rates of economic growth, but small and relatively illiquid stock markets, according to a FTSE Russell report. “Classification criteria include the depth and breadth of financial markets, legal and regulatory infrastructure, and general ease with which foreign investors can do business,” the report says. 

Achievement of frontier status sends out a positive signal to investors, and typically results in a hike in investment volumes on the local stock exchange. 

The list of Frontier markets comprises several CEE countries, including Bulgaria, Croatia, Lithuania, Romania (which is pursuing an upgrade to Emerging market status), Slovakia and Slovenia.