Mongolia’s Roughshod Rescue Refrain
A year after the international community assembled a $5.5 billion emergency package, Mongolian stock and bond performance reflected debt crisis escape, but “more downside than upside risks” persist according to the IMF’s July program review. The lender released another $35 million of its $435 million 3-year facility on “good progress,” as it urged further steps to strengthen fiscal, balance of payments, banking sector and investment climate positions. The stock exchange index is down 5% to outpace MSCI-tracked frontier markets, and external bond yields at 400 basis points over US Treasuries were firm against general asset class selloff as Fitch Ratings upgraded the sovereign to still speculative “B.” It also elevated two state-owned banks, while noting lingering weakness with the reported 8.5% bad loan ratio as comprehensive asset quality and stress testing unfold.
Ulan Bator was briefly in the geopolitical limelight as a possible host for the inaugural US-North Korea summit, but was sidelined by Singapore’s all expenses paid bid with state of the art infrastructure. The Fund report too seized upon positive headlines, including 6% first quarter growth and a 10% international reserve increase to $3.25 billion, but pointed to “core vulnerabilities” such as high commodity reliance, public debt and bank recapitalization needs. The next parliamentary elections are in 2020, when corruption accusations between the main parties and runaway voter spending are also likely to intensify, the analysis suggests.
The World Bank predicts 6% growth this year on construction and manufacturing around the Tavan Tolgoi (TT) coal project, while agriculture has yet to recover from the harsh past winter. Another phase of the giant OT copper mine will go on line in the medium term to further expand exports, as the Bank recommended greater economic diversification and productivity gains. Foreign direct investment was $400 million in the first quarter, but strong domestic demand worsened the current account deficit and inflation, now at 8%. The central bank regularly cut rates the past year but may turn more cautious, especially as it applies more stringent loan provisioning rules to identify bank capital and liquidity gaps. Corporate credit extension was flat in recent months, following years of double-digit upticks.
Fiscal policy was mixed in Fitch’s view, as “rapid improvement” with revenue up 25% through May is offset by “structural reform delays” leaving government debt at 85% of GDP. Fuel subsidies and family social transfers have not been adjusted, and infrastructure concessions and discount mortgages are large liabilities. The Development Bank’s portfolio has not been audited and fully incorporated into the budget, and non-political oversight is lacking. Its overseas borrowing can repeat depreciation pressure on the currency, which has steadied the past year.
Both Fitch and the IMF argue that bank cleanup over the next six months will determine the vitality of policy and practical turnaround. Officials will present a detailed bad loan resolution strategy and introduce new collateral enforcement and bankruptcy procedures. They may propose a central disposal agency and macro-prudential curbs on household credit, with almost half in default danger at debt-service to income ratios above 60%. The Financial Action Task Force also criticized lax anti-money laundering practice, and without action the country could be “grey listed” and cut off from overseas correspondent relationships.
The threat comes as Prime Minister Ukhnaa Hurelsukh broke ground on an oil refinery financed with a $1 billion soft loan from India under a campaign to forge links beyond traditional international mining company and China-Russia partners. The project was broached during a 2015 visit by Prime Minister Narendra Modi, and follows decades of aborted domestic building efforts. The Indian delegation in pointed reference to regional rivals described a “spiritual alliance,” and the plant will eventually boost national output 10% according to government estimates.
In June Mining Minister Sumiyazabar Dolgorsuren proposed an initial public offering on local and overseas markets for up to one-third of state company TT shares, reprising previous attempts which valued the transaction at billions of dollars. Underwriters were originally named, but the deal was abandoned when both the government and coal prices collapsed in 2016. Canadian-owned operator Erdene at the same time became the first cross-listed play on the Mongolian stock exchange with a small $1.5 million capital raising, as more modest feats may have to satisfy fund managers into the IMF program’s second anniversary.
