bne IntelliNews – BLOG CENTRAL ASIA: Mongolia concerned about possible default
When the Economist Intelligence Unit (EIU) recently focused on sovereign debt challenges in Asia, it concluded that Mongolia is one of the emerging markets clearly at risk of default in the near future. News of Sri Lanka’s default jolted and angered some Mongolians as warnings of possible sovereign defaults in Asian frontier markets began to sound.
Mongolia’s finance minister, Javkhlan Bold, moved quickly, reassuring the public via the media that Mongolia was not in danger of defaulting anytime soon.
His talking point was that Mongolia had gone through the “most dangerous period” of 2016-2017 when global commodity prices were at historic lows, putting pressure on the country’s coal exports. “At that time, Mongolia’s government debt was 78.8% of GDP, but it was reduced to 55.1% in 2019 and 50.8% in 2021,” the minister noted. However, Bold overlooked the financial burdens brought about by the pandemic and the war in Ukraine, two harsh realities that have been pivotal points in Sri Lanka’s decline and failure.
Also, unlike 2016-2017, when there were no widespread protests in Mongolia, in 2021 a large group of protesters ventured out into the cold to protest the mishandling of the pandemic, while this year, the streets have seen large protests by young people against economic hardship exacerbated by the coronavirus border closures in China and the economic impacts of conflict in Ukraine.
External debt of Mongolia from July 2019 to January 2022 in thousands of dollars (Credit: TradingEconomics.com).
The EIU’s observations included this sobering passage: “Mongolia will depend on further debt inflows in 2022-23 to meet interest payments on external public debt and to offset a persistent current account deficit. Access to sufficient financing is compromised by high domestic inflation and the possibility of further currency depreciation.
“The Bank of Mongolia (BoM, the central bank) resisted a decline in the value of the currency, the togrog [or tughrik], against the US dollar throughout 2021, to the detriment of its foreign exchange reserves. Although the BoM authorized a correction in February-May, the local currency still appears overvalued on a real effective basis. With inflation in the double digits before the recent depreciation, any further decline poses the threat of politically destabilizing levels of inflation; large protests have already taken place in the capital, Ulaanbaatar, in April. »
Jeopardy of public finances
As observed by the EIU, under these conditions there is a strong likelihood that the government will provide additional tax relief. “The authorities,” he advised, “are already adding to inflationary pressure and undermining the long-term stability of public finances through an off-budget mortgage subsidy program (financed by the central bank) and the redirection of funds from the future Heritage Fund (a sovereign wealth fund) to untargeted social initiatives The possibility of a loss of investor confidence coinciding with a depletion of foreign exchange reserves, as commodity prices fall, means that the risk of repayment difficulties from 2024 onwards is high, even in the absence of significant principal repayments to come.
As Mongolians grow increasingly nervous over the gathering dark economic clouds, it’s time to recap how, since 2012, Mongolia has issued seven international bonds worth $5.2 billion. dollars, with all but the first sovereign bond, the Chinggis Bond, named after the founder of the Mongol Empire, Chinggis Khan or Genghis Khan – used to finance state budget deficits. It is also an opportunity to note once again that the Chinggis Bond, the only bond used to finance projects, has been mismanaged. Released in part to address the drop in coal exports in 2013, it did not yield positive results.
The government of Mongolia, it seems, is relying on old-model approaches to turn the economy around, models that Sri Lanka was also relying on to restore its economy. Economist Paul Kruger, meanwhile, noted in a New York Times op-ed the mistakes made by global economists in using old economic models. Used during the global financial crisis year of 2008, they should, in theory, work. But they do not take into account the current situation caused by the pandemic and the invasion of Ukraine; it is wrong to rely on these old models.
Kruger’s sentiments were echoed by Mongolian economist Lakshmi Boojoo. For Lakshmi, the Mongolian government not only faces a different situation, but also applies strategies that are not long-term solutions. The fear is, Lakshmi says, that Mongolia will face a much harsher reality amid its collapsing economy, just as it did in the 1990s after the collapse of the USSR, the main economic benefactor of Mongolia.
“If we look at our basic situation, we have entered a very difficult situation: economic growth has slowed down, there is no [economic] diversification, the amount of debt is high, the currency has weakened. To put it bluntly, when the economy is so fragile, I think it would be good to start working with the IMF and start implementing projects and programs as soon as possible. The implementation of the IMF program will bring some control over the budget,” she told the Daily Newspaper, a Mongolian publication.
China holds most of the cards
Mongolia’s coal exports, so vital to the national economy, have slowed dramatically over the past two years in the face of strict Chinese controls on the spread of the coronavirus causing border closures. Fortunately, unlike 2016, the demand for coal and other mineral raw materials is at an all-time high. Nevertheless, most of Mongolia’s coal mining companies have seen their profits and production decline significantly.
When China began to relax its “zero COVID” policy, coal and other exports began to pick up. But mining companies were reluctant to rejoice, fearing that Beijing, at the first sign of new coronavirus infections, could move again to close border points, causing further losses.
Mongolia, another border market depending on external events. Pictured is the trading room of the Mongolian Stock Exchange (Credit: Billymse, cc-by-sa 3.0).
Since 2013, Mongolia has drawn nearly $3.7 billion in loans in the form of a swap agreement from the Chinese central bank. By 2020, it had repaid $1.5 billion of the loaned capital, while receiving another debt repayment extension extending through the end of 2023.
This loan is one of the first that Mongolia has to repay. Batsuuri Khaltar, an economist, sees the debt as a way for China to better control Mongolia. In his interview, economist Lakshmi also suggested that if China invaded Taiwan, Mongolia’s economy would crumble and collapse. Chinese Foreign Minister Wang Yi recently visited Ulaanbaatar and pledged to help Mongolia with major infrastructure projects and keep the border open as much as possible.
In these uncertain times, it seems appropriate for Mongolia to ask China for economic help, but China should be kind. Wang said during his visit that Mongolia has demonstrated that it reaffirms the “one China” policy and that China stands ready to support the stability and development of the Mongolian state.
No Liability Means Inevitable
When Mongolia was on the brink of a mining boom in the early 2010s, big profits were expected. But they never materialized. With the exception of 2018, the annual budgetary expenditure of the Mongolian state has exceeded its income throughout the past decade.
International donors have frequently claimed that Mongolia has failed to benefit from foreign investment due to mismanagement of funds and a lack of accountability. The merits of the Chinggis bond, for example, are now being seriously questioned because the debt was used to fund the bulk of the Development Bank of Mongolia’s (DBM) shockingly large non-performing loan (NPL) portfolio. ), which amounts to 1.5 billion dollars.
Finance Minister Bold announced that he would form a task force to investigate all liabilities stemming from the Chinggis document. Mismanagement and favoritism in the DBM loan selection process were identified by a parliamentary inquiry, but investigations into the obligation over the years cannot be said to have yielded meaningful and successful results. Economist Jargalsaikhan Dambadarjaa described the probes as merely symbolic.
Mongolia has not been able to repay the Chinggis bond in full since 2013. Delays in the payment schedule have necessarily been introduced on $1 billion outstanding. Batsuuri concludes that an independent body of economists and researchers would be needed to resolve such acute financial difficulties; without such a body, nothing will change – and that implies that the country will inevitably face imminent default within a few years and possibly sooner.