Mongolia’s Steppe Change Struggle
Mongolian stocks were flat on the local index as Moody’s knocked the sovereign outlook to negative on a combination of external debt and domestic credit imbalances and mining policy “unpredictability” as evidenced by the $4 billion funding standoff over the next phase of the Oyu Tolgoi copper project. The Development Bank which has also issued global bonds and is in the JP Morgan benchmark gauge was downgraded at the same time, and was criticized by the IMF at a recent high-level economic forum as a conduit for evading the 2 percent of GDP Fiscal Stability Law deficit limit now estimated at 10 percent. According to the rating agency foreign debt has doubled the past two years to $19 billion or over 150 percent of GDP as of end-2013. As a portion of current account receipts it is 350 percent and private sector accumulation has been “equally sharp” with intercompany lending. Domestic borrowing has “ratcheted up” with loose monetary policy in a credit boom where it rose 80 percent last year. International reserves have halved from over $4 billion in 2012 on trade and FDI falls with weaker global commodity prices and Chinese demand. The central bank has intervened as the currency hit new lows past 1800 to the dollar as a gold tax was revised diverting appetite into foreign exchange. Anglo-Australian group Rio Tinto remains at loggerheads with the government which has a one-third stake over profit and cost-sharing at the OT mine expected to generate one-third of economic activity over the medium-term. Both official and commercial lenders are willing to back the venture once agreement is reached, but international investors remain wary despite 2013 overhaul in the basic law as anti- corruption and regulatory roadblocks regularly feature. Business executives have been detained indefinitely over alleged crimes and contract disputes, and South Africa’s Standard Bank has pressed Ulan Bator for $125 million in unmet payments. Although Oyu Tolgoi is unlikely to resume production before 2015, growth should still be almost double-digits this year, and the stock exchange’s trading and technical assistance tie-up with London could bring MSCI frontier roster consideration.
In contrast Cambodia with its two listings does not yet enter the frame as Prime Minister Hun Sen’s 30-year reign may be nearing a close after worker strikes and opposition claims it won 2013 elections. He has agreed to labor and political dialogue to end protests as commodity, garment and tourism exports sustain 7 percent GDP growth. Income inequality has alienated swathes of the young and poor population as luxury retailers and resorts proliferate around Phnom Penh. Relations with China are also sensitive as it is a big donor and infrastructure investor but has not nudged the authoritarian regime toward greater environmental and social awareness. The IMF has noted the banking system’s 90 percent dollarization as a lasting fragility barometer after the recent history of the Khmer Rouge and coups. Tentative progress there may be a marker for the latest Mekong opening in Myanmar after commercial embargoes were relaxed as the military consented to civilian power-sharing and ethnic rebel reconciliation which have encountered setbacks. The first foreign bank licenses will soon be granted with most of the 40 mainly Asian competitors with representative offices due to bid for the swaying single branch award.
