It is no secret that the fall in global commodity prices and Chinese demand has hurt the Mongolian economy. In addition, the Mongolian government is facing a number of imminent debt repayments and the prospect of having to restructure its sovereign and parastatal debt remains very real.
Copper, coal, iron ore, gold and zinc account for the vast majority of Mongolia’s exports, and nearly 88% of the country’s exports are to China. As such, the Mongolian economy is precariously exposed to the drop in global commodity prices and slump in Chinese demand for these commodities. This is reflected in the projected economic growth figures: Mongolia’s economic growth reduced from 7.8% in 2014 to 3.0% in the first half of 2015. According to the Asian Development Bank, growth is anticipated to bottom out at 2.3% in 2015, before a modest increase to 3.0% in 2016.
What has happened?
Mongolia’s upcoming debt repayment obligations are eye-watering.
Mongolia sold its first international government debt, US$1.5 billion of dollar-denominated Chinggis Bonds, in November 2012 with repayments due in 2018 and 2022. The government has also guaranteed two bonds for Trade and Development Bank of Mongolia, including a US$500 million dollar medium-term-note programme set up earlier this year, which mature in 2017 and 2020. The state-owned Development Bank of Mongolia, which finances social development and commercial projects, and grants subsidised mortgage credits, has a US$580 million bond due in 2017. A CNY15 billion (US$2.4 billion) bilateral three-year swap line with the People’s Bank of China is due to expire in 2017, though this may be extended. A CNY1 billion (US$161.1 million) three-year sovereign dim sum bond was issued in June.
With so many repayments due to fall in the coming years, it is questionable how Mongolia will be able to meet its debt obligations. Moody’s external vulnerability indicator, measuring maturing external debt payments in relation to foreign reserves, stands at 203.7%. Among the nations that Fitch rates, Mongolia has the second highest net external debt to GDP ratio at 129.8% and this burden is predicted to ease slowly to 119.8% by 2017.
Under the Debt Management Law of Mongolia passed earlier this year, the government can guarantee borrowings of the Development Bank of Mongolia in full, or up to 85% of borrowings of other eligible entities. Litigation proceedings, such as those ongoing between Standard Bank and the Mongolian petroleum distributor Just Group, could become a regular occurrence. In this case, a loan, now in default, from Standard Bank to Just Group came with a guarantee from government-backed Erdenet Mining Corporation, which is the operator of a major copper deposit.
That’s the bad news, here’s the good
In addition to the troubling macro-economic worries resulting from the slowdown in the Chinese economy, Mongolia was also the subject of what many commentators considered to be self-inflicted negative publicity, which led to foreign investment paralysis. The most publicised was the long-running dispute with Rio Tinto over the Oyu Tolgoi mine. What is however refreshing, is the resilience of the parties to work out a negotiated solution that both parties, Rio Tinto and the Mongolian government, can be satisfied with. Whereas there are numerous examples of nations acting far slower to correct and restore market confidence, Mongolia deserves credit for working with Rio Tinto on this issue. The hope is that it has not been too late.