By Terrence Edwards

ULAANBAATAR (Reuters) - Making money amid Mongolia's deepening economic crisis, currency dealers thronging the black markets of Ulaanbaatar wave wads of American dollars and Chinese yuan, warning desperate customers that foreign banknotes are becoming scarcer by the day.

The Naiman Sharga market, close to the Mongolian capital's cluttered and impoverished "ger" or tent districts, has become a daily destination for residents panicked by a precipitous decline in the currency, the tugrik.

"Now I can't find any more dollars," said Ganbold, a currency trader, sporting a white, brimmed hat and galloping-horse belt buckle.

Ganbold has traded currency since the fall of communism in 1990 and up until now he’s been able to rely on the network of traders whenever he needed more cash.

But if a shipment of dollars doesn’t arrive from overseas as he hopes, Ganbold will have to close shop until more arrives.

Mongolia's government, elected in a landslide at the end of June, has been plunged into turmoil after years of collapsing foreign investment, unsustainable fiscal expansion and a decline in demand for commodities like coal and copper.

Last week, the central bank hiked interest rates by 450 basis points to a record 15 percent, stabilizing a currency whose 9 percent fall against the dollar from the start of August made it the world's worst performer. <MNT=>

Dollar supplies have dwindled, and commercial banks were severely restricting currency transactions, with one bank refusing to convert any dollars, Ganbold told Reuters as frustrated buyers milled around him.

Finance Minister Battogtokh Choijilsuren said earlier this month that the central bank's foreign exchange reserves stood at $1.3 billion. But, he added that after stripping out a 15 billion yuan currency swap agreement with China, reserves would show a deficit of $46 million.

An International Monetary Fund team was in town last week to meet members of Prime Minister Jargaltulga Erdenebat's new government, but some analysts suspect Mongolia might turn to China for another swap agreement rather resort to the IMF.

"There is a good chance China asserts its regional influence and offers Mongolia a bigger and better deal than the IMF in a bailout,” Nick Cousyn, chief operating officer of brokerage BDSec in Ulaanbaatar, commented.

“Mongolia is highly strategic for China, given Mongolia’s vast natural resources and potential as an economic corridor with Russia.”


The government, which promised to cut debt and lure back foreign investors, has introduced austerity measures like cutting senior employees' salaries and cancelling monthly student allowances.

Economic growth slowed to 1.4 percent in the first six months of 2016, down from an all-time high of 17.3 percent in the mining-driven boom of 2011.

Anxiety over the tugrik has driven many people to switch their savings into dollars, and the black market is cheaper than the official rate, with commercial banks restricting the amount that can be converted per day.

Nearly half of Mongolia's three million population live in Ulaanbaatar, and these are desperate times for those aspiring families sending their sons and daughters for a university education overseas.

"My son is going to America for university tomorrow, but dollars are expensive and it's hard for us," a woman, who gave her name as Enkhmaa, said as she, and many other parents, hunted for the best rate among Naiman Sharga's dealers.

On Tuesday morning, traders were offering around 2,247 to 2,250 tugrik per dollar, which was still better than the official rate of 2,260 tugrik and the all-time low of 2,265.28 that was hit last Thursday.

Bank of Mongolia Governor Nadmid Bayartsaikhan told local media on Friday that he expected a tough two years, renegotiating terms on foreign debt which had totaled $23.5 billion in the first quarter of this year.

In a transcript published on the bank's official website, he called the appreciation of the dollar "artificial", and said it would eventually reverse course.

"That's why I would like to tell people not to be tricked by today's dollar exchange rate," he said. "Don't panic."

(Editing by David Stanway and Simon Cameron-Moore)