Mongolia: riskier than Belarus?

Mongolia may be the darling of the mining world and a hotspot for investors in developing Asian economies. However as far as the credit markets are concerned, it might as well be a Greece or a Belarus. That’s according to Moody’s, which outlined the risks facing this young, resource-rich democracy in its recent annual report.

In some ways Mongolia’s finances would be the envy of many countries in the West: government gross debt was 43 per cent of GDP in 2010 and according to the International Monetary Fund this will fall to 20 per cent of GDP by 2015. But Mongolian sovereign debt is still risky because the country is so vulnerable global commodities prices.

“The key thing about Mongolia is that it is subject to these boom and bust cycles,” explains Tom Byrne, senior vice president at Moody’s in Singapore and the author of the report. “In the last cycle a couple years ago we saw reserves being run down, there was runaway inflation, a loss of confidence in the system and Mongolians fleeing the tugrik [local currency]. This was very destabilizing.”

The prospect of falling copper prices would be particularly damaging to the economy, according to Moody’s. Extremely harsh winters, known as “dzud” also pose economic risk.

Then there is the question of governance. While Mongolia has seen several successful transitions of power since it became a democracy in 1990, there are concerns that governance may be deteriorating. Moody’s notes:

The World Bank’s governance indicators. . . had previously placed Mongolia in a relatively favorable position for a country undergoing a transition from socialism and poverty. However, these indicators have deteriorated in past years and continue to trend downwards. These factors, along with other considerations, support our assessment of Mongolia’s institutional strength at low. . . . the country’s institutional development has not kept pace with its rapid economic growth in recent years.

Mongolia’s economy is still set to grow strongly this year, with Moody’s forecasting GDP growth at 9-10 per cent in 2011 and 2012. But that’s not to say that it will always be smooth sailing as Moody’s decision to maintain its B1 rating on the government’s bonds suggests.




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