Mongolia Faces a Debt Crisis

The mineral-rich country’s prospects were so bright only a few years ago, until the government went on an ill-advised spending spree.

The only way the government could finance the resulting large budget deficit was by borrowing. For the first time, Mongolia became a significant global issuer of commercial paper. Between 2012 and June 2016, the government raised $3.6 billion, roughly one-third of GDP, on global bond markets, paying high interest rates. Adding in the swap arrangements with the Chinese central bank and other loan guarantees, Mongolia’s external debt position by 2015 became highly precarious, with total debt of more than 70% of GDP.

There was also a massive buildup of domestic debt. In a throwback to the planned-economy era, the banking sector once again became a major financier of government programs. Total loans in the economy doubled in the first two years of the 2012 government’s term, and the money supply expanded at an extraordinarily rapid pace. Nonperforming loans began to build up.
The state-owned Development Bank of Mongolia, established in 2011, tapped international bond markets to finance infrastructure projects and other programs whose capacity to generate an adequate financial return was far from clear. At the same time, the central bank launched two large direct-lending initiatives through the commercial banks. A “price support program” offered low-interest loans to businesses, while a subsidized mortgage-lending program propped up Mongolia’s real-estate and construction sectors.
As a result, direct central bank claims on commercial banks, which had long been near zero, soared to more than four trillion Mongolian togrog, or more almost $2 billion, by the end of 2013. These programs have been kept off the government’s budget, another throwback to the planned-economy days.
By 2014, international financial institutions expressed measured but clear concern about the deteriorating economic situation. The central bank slowed monetary expansion and budgets were tightened somewhat. This coincided with a continued collapse in foreign investment and a steady decline in global mineral prices due to China’s slowdown. As a result, Mongolia’s growth slowed sharply to 2.3% in 2015 and is likely to be zero or negative in 2016.
But the current economic downturn isn’t primarily due to a decline in global commodity prices. It is the result of the government borrowing heavily against future export earnings while taking actions that deferred the day when those exports would materialize. Instead of preparing for an inevitable cyclical downturn in commodity prices, the government took steps that magnified that downturn’s impact.
One alarm bell sounded in May when the Mongolian Mining Corporation, a 100% private company with a large stake in the Tavan Tolgoi coal mine, defaulted on the $500 million bond it issued in 2012. Although not unexpected, this default is a harbinger of more trouble to come. In the next two years, Mongolia’s cash-strapped government must repay $1.2 billion in commercial debt.
Just two years ago there was still active discussion in Mongolia about creating a sovereign-wealth fund to manage the big foreign-currency surpluses mining would generate. Now the country faces the real possibility of an external debt crisis and sovereign default.
Having borrowed irresponsibly and enjoyed an unsustainable increase in its standard of living, Mongolia has no choice now but to tighten its fiscal belt for the next few years, while encouraging a rebound in sustainable sources of growth. The country must rebuild trust with foreign investors by creating fair and transparent bidding procedures and honoring past contracts, while avoiding the well-known environmental and economic traps that commodity exporters face.
Mongolians elected a new government in June, with a clear mandate to turn the economic situation around. The opportunity is still there, but time is running out. Everyone in the country should be clear that tough steps are needed and the cost of failure could be years of lost growth.

Source: The Wall Street Journal


Post a Comment

Facebook page

Powered by Blogger.


Advertising in Mongolia An Asian Development Bank Culture Editorial of the Mongolianviews education Environmental protection Famous Mongolians Foreigners in Mongolia Inner Mongolia Ivanhoe Mines Mongolia agriculture Mongolia analysis Mongolia and Armenia Mongolia and Asian Development Bank Mongolia and Australia Mongolia and Azerbaijan Mongolia and Belorussia Mongolia and Cambodia Mongolia and Canada Mongolia and central Asia Mongolia and China Mongolia and Cuba Mongolia and Czech Mongolia and donors Mongolia and EU Mongolia and Germany Mongolia and Hongkong Mongolia and Hungary Mongolia and IMF Mongolia and India Mongolia and Indonesia Mongolia and Inner Mongolia Mongolia and Iran Mongolia and Israel Mongolia and Italy Mongolia and Japan Mongolia and Kazakhstan Mongolia and Korea Mongolia and Kuwait Mongolia and Kyrgyzstan Mongolia and Malaysia Mongolia and Nato Mongolia and North Korean Mongolia and Poland Mongolia and Russia Mongolia and Singapore Mongolia and South Korea Mongolia and Taiwan Mongolia and Thailand Mongolia and the world Mongolia and Tibet Mongolia and Turkey Mongolia and UK Mongolia and Ukraine Mongolia and UN Mongolia and US Mongolia and USA Mongolia and Vietnam Mongolia Banking Mongolia blind Mongolia civic society Mongolia Corruption Mongolia crime Mongolia diplomacy Mongolia Economy Mongolia Education Mongolia Energy Mongolia environment Mongolia Finance Mongolia Health Mongolia History Mongolia holiday Mongolia in international media Mongolia Industries Mongolia Joke Mongolia law Mongolia LGBT Mongolia medical Mongolia military Mongolia Mining Mongolia Mining Developments Mongolia Mortgage Mongolia natural disaster Mongolia Petroleum Mongolia public announcements Mongolia railways Mongolia Religion Mongolia society Mongolia Sports Mongolia Stamp Mongolia telecommunication Mongolia tourism Mongolia Urbanization Mongolia Wild Life Mongolian Agriculture Mongolian Archeology Mongolian Food Mongolian Gay Mongolian Government news Mongolian History Mongolian Meat Mongolian Military Mongolian Mining Development Mongolian Movie Mongolian News Mongolian Parliament Mongolian Political news Mongolian Press Mongolian Songs Mongolian Women Mongolian Youth Mongolians abroad Moninfo Opinion Oyu Tolgoi Investment Agreement Photo news Press Release Rio Tinto Tavan Tolgoi coal mine Ulaanbaatar development Weird expatriates in Mongolia

Blog Archive