Global Financial Crisis Hits Mongolia's Grasslands

RENEE MONTAGNE, host:

We're taking you to Mongolia all this week, a remote country we don't often hear much about. But in the global economy, the worldwide recession has hit there, as well. That's because Mongolia is a nation of herders and also miners, so the global plunge in prices for wool, cooper and other metals is having a huge impact. NPR's Louisa Lim has been in Mongolia for our stories, and she joins us now to talk about this economic impact. Good morning, Louisa.

LOUISA LIM: Good morning, Renee.

MONTAGNE: You know, according the World Bank, Mongolia is one of the hardest-hit countries in East Asia. But let's talk a little about Mongolia and its economy for the many of us who don't know that much about it.

LIM: Well, Renee, it's about the size of Western Europe, but its population is just under three million people, and unofficial estimates put one in four people out of work. So to put that in context, that's similar to the situation in the U.S. at the height of the Great Depression.

And in the capital city, Ulan Bator, figures from the labor market indicate that wages are down by 60 percent. And in the rural areas, which make up most of the country, herders are barely able to get by. To get a better understanding of why things are so bad in the countryside, I paid a visit to one Mongolia herder.

Delantai Khatanbaatar and his seven-year-old son canter across the windswept Mongolian plain, rounding up their animals. Along with 40 percent of Mongolians, Khatanbaatar is a herder.

With 250 sheep, 80 cashmere goats and 50 horses, he regards himself as middling-poor. Cashmere is his main source of income, and he had depended on prices staying high, driven up by the seemingly insatiable desire for the luxury wool in the West.

But after the financial crisis hit, cashmere prices halved. And facing illness in the family, Khatanbaatar was in financial trouble. He's just taken out a $350 loan.

Mr. DELANTAI KHATANBAATAR (Animal Herder): (Through Translator) I wouldn't have to ask for a loan in normal circumstances. Normally, when raw cashmere sells at $28 a kilo, I can easily raise $700. But now it sells at half that. It's really affecting our everyday lives.

LIM: On average, Mongolians in rural areas have taken out two loans per household, and many are struggling to pay them back.

It's perhaps a sign of the times that Peter Morrow, the American CEO of one of the most popular banks, Khan Bank, is a household name across Mongolia, and particularly in Khatanbaatar's tent, in Rashaant, 160 miles from the capital, Ulan Bator.

Mr. KHATANBAATAR: (Through Translator) Do you know Peter from Khan Bank? I borrowed money from Peter. If you meet him again, tell him I'm thankful.

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LIM: The man himself, Peter Morrow, says his bank is doing all it can to help herders pay back their loans. But many are unable to do so right now.

Mr. PETER MORROW (CEO, Khan Bank): Our policy has been to restructure every loan we possibly can, so that's what we're doing. We're doing a lot of restructuring. In the first six months of this year, we restructured about 12,000 loans, a little over 12,000, which is about 23 percent of all of our herder loans.

LIM: Subprime herder loans are only a small proportion of the bad debts held by Mongolia's banks. Now, 18 percent of all loans are non-performing, or bad debts, according to the World Bank.

In Ulan Bator, the impact is clear. Construction projects are stalled. Day wages for laborers are down by 60 percent. Government revenues slumped because of the collapse in mineral prices, leaving a budget deficit of more than $200 million U.S. dollars over 18 months, equivalent to 12 percent of GDP.

This has been filled by loans international institutions. But Arshad Sayed from the World Bank is gloomy.

Mr. ARSHAD SAYED (World Bank): It's likely the worst is still ahead, largely because Mongolia has a seasonal economy. So the summer feels good and everybody's out, and the animals will be, you know, fed and sold in the market, and there will be cash coming in. But as soon as winter starts hitting, that's when you will see, I think, in my view, the full brunt of this crisis.

LIM: The International Monetary Fund also says the chances of a near-term recovery in Mongolia are weaker than previously foreseen. But Khan Bank's Peter Morrow says Mongolia is in a unique position.

Mr. MORROW: But Mongolia is perhaps the only country in the world that has a fix for its economic problem, an immediate, available fix in the form of very large mining projects.

LIM: One particular project, the Oyu Tolgoi copper and gold mine, would bring investment roughly equivalent to the country's entire economy. But the deal has been tied up in parliament for the best part of a decade.

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Out on the vast Mongolian grasslands, far away from talk of mineral deals, the crisis has already hit Munkhbat Dashtseren. Watching his wife ladling hot milk, he's worrying about the present.

Lured in by low interest rates, the 59 year old took out a $700 bank loan to buy a motorcycle and a new tent, or ger for his son. But then came the financial crisis, and interest rates and his repayments went up. Meanwhile, commodity prices plummeted, and food prices rocketed, leaving his family of six struggling.

Mr. MUNKHBAT DASHTSEREN: (Through Translator) Tomorrow, I have to go to pay money to the bank. I've had to sell 20 sheep to do this. It affects me a huge amount. Before, I used to buy lots of bags of flour and rice to stockpile over there. Now you see it's empty.

LIM: As his family milks its diminishing herd of sheep, Munkhbat is yet another victim of easy credit. He now thinks the bank cheated him, remembering the visits to his ger by bank officials offering loans at unbelievably low interest rates.

Here, like in the U.S., many of those affected are the worst off, those who didn't or couldn't read the small print. Munkhbat has calculated his family can survive for another year or so, but at this rate, they'll end up with no sheep and no source of income for the future.

LIM: Louisa Lim, NPR News, on the grasslands of Mongolia.

MONTAGNE: And Louisa, you're back in Shanghai now. And looking to the future, it appears pretty bleak for these herders.

LIM: Yes, indeed. I mean, not only have they got these immediately economic worries, but they're also facing a lot of long-term worries, as well. And the biggest one is really about the desertification of the grassland. Now the Mongolian government just did a survey, which they released, which found that seven percent of the grassland is already desert, and that one really big reason for this is the overgrazing by cashmere goats. They're really bad for the grasslands because they tear up the grass by its roots.

And traditionally, Mongolia herders have flocks that were 30 percent goats, 70 percent sheep. But when cashmere prices started going up, driven by demand from Chinese buyers, herders though of changing the balance of their flocks, and that's worse for the environment. They might seem very far away to you, but those Chinese buyers are making low-cost cashmere sweaters of the type that you might buy in Wal-Mart and Costco. So every one of those sweaters in your closet may have contributed in a tiny way to the desertification of the Mongolian grasslands.

MONTAGNE: And we'll be hearing from Louisa all this week. You can also go to our Web site, npr.org, to get a look at the herders and more of our stories in our series on Mongolia.

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MONTAGNE: This is NPR News. Transcript provided by NPR, Copyright National Public Radio.