Mongolia’s Daring Debt Dash
Mongolia was lauded for more “durable than anticipated” 3% GDP growth in 2017 in December’s first review of its $400 million IMF program, following an $800 million 5-year external bond return in October where the 5.5% yield was half the previous peak. Since the May rescue commodity exports have picked up to China in particular with mine closures there and its ban on North Korea coal imports, and boosted budget revenue in local currency terms with the weaker exchange rate against the dollar. “Investor confidence recovery” with the successful international issuance will boost the balance of payments and reserves, and fully cover 2018 maturities and refinance more expensive domestic debt.
However both the Fund and frontier market fund managers continue to be wary as political and banking sector complications dilute the upbeat narrative. The new government elected in July lost a confidence vote ousting the Prime Minister, who was then replaced by his deputy while the Fund’s health check was delayed. Bank credit growth is still at a runaway 20% annual pace, with large foreign exchange exposure and 7.5% bad loans pending the results of an overall asset quality audit by the central bank. Despite headline economic strides, on structural reform the IMF report assigned a “mixed” score, as regional peers Azerbaijan and Kazakhstan not under the lender’s thumb likewise have rebounded from crisis but remain ambivalent near-term bond bets.
Mongolia’s coal, copper and gold price jump from Chinese demand stoked 5% first half GDP growth, but construction has been negative for four years with excess real estate inventory. The windfall produced a budget surplus through September, but scheduled social and civil servant handouts will result in a deficit, as the 2018 blueprint adopted by parliament could send the overall gap close to 10% of GDP, according to President Khaltmaa Battulga, who vetoed it as against the Fund arrangement. Growth is slated at 4.2% amid introduction of a progressive income tax, but the President lambasted “inefficient investment projects” pushed by the opposition People’s Party which holds 65 of the 75 seats. A fiscal stability law envisions end-decade balance, but the IMF warns that the government wage bill compromises the target and threatens medium-term sustainability with public debt already at 85% of output.
Inflation was over 8% in October, and monetary policy has reversed course toward easing with a 100 basis point benchmark rate drop to 11%. The Fund urged the central bank to go slowly on cuts as the recent reserve buildup to $2.5 billion on a stable tugrik may not last. The Bank of Mongolia has regularly dipped into the stash for intervention, even though its currency powers are murky and shared with the Finance Ministry. An updated organic law is to clarify the Bank’s independence and regulatory authority more broadly, but in the meantime its hands are full with the asset quality exercise conducted with accountants Price Waterhouse Coopers. It will screen bank business plans and apply stress tests, with capital holes to be remedied by the end of next year when deposit insurance is due to start. Among outstanding challenges the financial sector agenda is “most important” and funding decisions should not tilt to favored shareholders or jeopardize the public sector balance sheet, the Fund evaluation concluded.
Azerbaijan came in for separate caution under a December Article IV survey with stagflation ending as the hydrocarbon and service industries revive, but banking sector restructuring “ still incomplete.” Inflation will be near 15% in 2017 after exchange rate depreciation, and increased fiscal spending should be reined in by clear rules before 2019, it recommended. Privatization has drawn foreign investor interest in real estate, and external debt remains minimal at under 20 % of GDP. Fitch Ratings expects positive growth in 2018 muddied by “continued bank asset quality pressure” despite the bad loan cleanup at IBA. The rater was also skeptical about the Halyk-Kazkommertsbank consolidation as the biggest government-owned lender in Kazakhstan following the initial stage of operations merger in December. Foreign exchange positions may deteriorate as local depositor tenge sentiment continues to swing as measured by dollarization levels, and international bonds were shaken by a New York court ruling freezing central bank reserves in an investor dispute while the overall system is in knots.
