Mongolia’s Hortatory Herd Behavior

Following its development bank deal several months ago, Mongolia debuted on the sovereign scene with a gangbuster 1.5 billion dual tranche offer at a 5 percent yield for the 10-year instrument that again turned away buyers despite the BB credit rating and a critical Article IV report from the IMF which ended a post-crisis standby in 2010. Political risk has also intensified after the nationalist Democratic Party won the most seats in parliamentary elections and spurred coalition partners to review foreign investment projects and rules in the mining sector, as a Chinese state company coal producer takeover was rejected on corruption suspicions. Through September GDP growth was 10 percent on credit surging at three times that clip, which along with rising food prices spawned 15 percent inflation. The central bank has tightened but real interest rates remain negative, as the fiscal position likewise blew out to a deficit of 5 percent of GDP on a 40 percent spending increase for wage hikes and cash transfers. The trade gap is quadruple that level and the currency is down over 5 percent against the dollar as authorities have tapped a swap line with China to bolster net international reserves at a 2-year low of $1.5 billion. As giant new mines go operational next year export earnings will jump $2 billion according to the Fund, and Tavan Tolgoi is expected to list a 20 percent stake on the stock exchange in the first half. The Development Bank has an off-budget medium-term external borrowing plan of up to $5 billion that circumvents fiscal stability legislation, and a sovereign wealth fund that can accumulate savings has yet to be launched. One-third the banking system is dollarized as tougher 14 percent capital adequacy ratios go into effect in 2013 and unhedged exposure poses a threat. The government bond market is undeveloped despite technical assistance from multilateral institutions, and the World Bank’s Doing Business rankings leave “ample scope” for regulatory improvement as the overall minerals investment regime is revised, the analysis adds.

In South Asian frontier market Sri Lanka which joined JP Morgan’s debt benchmark, local bond access for non-resident has improved as the rupee stabilized following a shift to a free-float. Equities are off slightly on the MSCI index on credit limits slowing GDP growth to 7 percent as the fiscal deficit is the lowest in decades. Drought has propelled inflation to near double-digits, and reconstruction aid is under donor scrutiny from continuing unease over Tamil treatment post-civil war and family dominance of government positions, although a former defense minister accused of coup plotting was released from prison. Shares in Bangladesh worsened to a 15 percent loss after a textile factory fire killed 100 workers and highlighted unsafe low-wage practices. The main political parties have traded blame for the tragedy as they prepare for upcoming elections with the military again ready to charge in to preserve its domain.