IMF Reaches Staff-Level Agreement on the First and Second Reviews of Mongolia’s Extended Fund Facility

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.
  • Mongolia’s economy is recovering and GDP growth is now projected at 3.3 percent this year and 4.2 percent in 2018, reflecting buoyant external conditions and improving confidence. Key targets have been achieved.
  • Important structural reforms are underway to lay the foundations for long-term growth and break the boom-bust cycle. The key near-term focus is supporting the authorities’ policies to strengthen the banking sector and enhance fiscal policy making.
  • The IMF welcomes the authorities’ commitment to continue the reform momentum to cement the long-term benefits.
An International Monetary Fund (IMF) staff team led by Mr. Geoff Gottlieb visited Ulaanbaatar from October 18-30, 2017 to conduct discussions on the first and second reviews of the three-year Extended Fund Facility (EFF) arrangement approved on May 24, 2017, in an amount equivalent to SDR 314.5054 million, or about US$434.3 million (see Press Release No. 17/193).
At the conclusion of the visit, Mr. Gottlieb made the following statement:
“The economy is growing more strongly than expected, with GDP growth likely to reach at least 3.3 percent this year on the back of strong coal exports, a robust recovery in services, and a return of confidence following the approval of the $5.5 billion IMF-supported package. Growth is expected to become more broad-based in 2018 as the domestic economy revives, but there are downside risks to the coal sector.
“Performance under the program has been positive, with all quantitative targets met. Fiscal results have been better than expected, supported by stronger revenues and tight expenditure control. The overall fiscal deficit is likely to be 7.5 percent of GDP this year compared to 17 percent in 2016. The authorities’ proposed 2018 budget is in line with the revised program that envisages a deficit of 6.5 percent of GDP. The authorities have committed to save half of any revenue overperformance should it materialize, thus helping to reduce borrowing and ensure debt sustainability. The remainder would be used to fund productive one-off spending in line with the government action plan. Both this year and next, the authorities have allocated a one-time bonus to civil servants. Net international reserves have improved, and the authorities have rolled over the sovereign bonds maturing in 2017 and 2018 at attractive interest rates, removing a key risk to the external position.
“The authorities have moved ahead with their ambitious structural reform agenda, which will help to sustain growth over the medium term, promote diversification and competitiveness, and mitigate the boom-bust cycle. The rehabilitation and strengthening of the banking system is underway: the results of the comprehensive Asset Quality Review are expected in mid-December; important legal reforms are being drafted to strengthen the financial system; and improvements to the regulatory and supervisory framework are under way.
“On the fiscal side, steady progress is being made in strengthening tax administration, tax policy, and budgetary controls, including through the establishment of a fiscal council and a high-level working group on tax policy. It is important that the reform momentum is maintained in 2018 to cement the long-term benefits of such policies on promoting inclusive and sustainable growth. In this regard, it is encouraging that the commitment of the new government to the program policies remains strong.
“The authorities and the team have reached staff-level agreement on the completion of the first and second reviews under the EFF arrangement, which is subject to the approval of the IMF Executive Board.
“The team thanks the authorities for their cooperation, constructive dialogue, and hospitality during its stay in Mongolia.”
IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: TING YAN
PHONE: +1 202 623-7100EMAIL: MEDIA@IMF.ORG
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Mongolia to tidy up debt profile

By Frances Yoon
HONG KONG, Oct 20 (IFR) - The Government of Mongolia (Caa1/B-/B-) plans to buy back foreign debt due next year and issue new bonds to address its short-term maturities and complete a turnaround from last year's economic crisis.
The sovereign has announced tender offers for its US$500m 4.125% January 2018 bonds and Rmb1bn (US$152m) 7.5% June 2018 Dim Sum notes. If completed, the buybacks will leave it with no major foreign debt maturities until 2021, according to Thomson Reuters data.

If successful, the plan will leave Mongolia in better shape than last year, when government overspending and declining commodity exports left it at the risk of default. The country was forced to pay 10.875% to issue a US$500m five-year note in March 2016, at the time the highest yield on any sovereign bond since 2011.
The latest buyback comes amid a much-improved economic backdrop. The International Monetary Fund earlier this year approved a US$5.5bn bailout to relieve debt pressures and maintain stability in the local currency, the tugrik.
A recovery in coal exports also helped drive demand for its US$600m sovereign bond this March, allowing the new-money component to price more than 300bp inside the 2016 deal.
As of the end of September, export revenue more than doubled from the same period in 2016, National Statistics Office data showed.
Moody's expects higher real GDP growth and for foreign reserves to recover to US$1.7bn this year from US$1.2bn at the end of May.
The IMF estimate for the overall fiscal deficit is 10.6% of GDP this year, and the actual deficit will likely be lower than this, according to Moody's.
"Mongolia has emerged from the brink of default," said Anushka Shah, a credit analyst at Moody's. "Government revenues are materially up. It's been a good year for them. They are also likely to surpass some of the targets set by the IMF after the loan. What might happen is that the government will have to revise targets based on the performance so far."
MARKET PERSPECTIVE
The proposed issue comes amid a rally in Mongolia's outstanding bonds. Mongolia's 8.75% 2024s were trading at 112.958/113.625 to yield 6.26%, near their tightest level since issue, while its US$1bn 5.125% December 2022s, its largest outstanding issue, were also trading at a record low 5.58%, according to Tradeweb.
"Mongolia's bonds have tightened across the curve, reflecting the demand for emerging-market debt which continues to be strong," said another banker on the deal. "There have been some investors sitting on the sidelines and missing out on the rally, who are now quite keen to pick up bonds."
The banker added that demand was expected to be healthy, given that the curves of emerging-market peers, such as Vietnam, Pakistan and Sri Lanka, have become very tight.
Still, Mongolia has a long way to go to improve its fiscal position. The resignation of the cabinet last month reflects the country's political instability, which does not bode well for the IMF's requirements to implement policies to improve its fiscal position and structural reforms over a three-year period.
Newly appointed Prime Minister Ukhnaa Khurelsukh has asked the IMF to disburse about US$38m in funds after the programme's suspension in mid-September.
"External fragilities remain. Their external borrowing needs are still one of the highest. So, when rates rise, there's a risk that they face limited market access and this could raise debt servicing needs because of its material portion of external debt," said Shah.
The proposed 144A/Reg S notes have initial ratings of B-/B- (S&P/Fitch).
Credit Suisse, Deutsche Bank and JP Morgan are joint lead managers and joint bookrunners for both the tender offer and proposed new issue.

Source:Reuters
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