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Mongolia downgrade weighs on ‘Genghis bond’

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Mongolia has been downgraded by Standard & Poor’s, further dimming the allure of one of the more eye-catching bond market debutantes of the emerging markets debt boom.

The US rating agency cut Mongolia’s credit rating by one notch to B+, deep in junk territory and just three notches above grades that are sometimes called “extremely speculative”. In the statement S&P’s said:

Mongolia’s external risk is high. We project the country’s external financial needs to be about 119% of the sum of current account receipts and usable reserves on average over 2014-2016. Mongolia’s volatile terms of trade add another layer of external risk to this country, where minerals dominate exports.

In 2012 Mongolia issued its first Eurobond – dubbed a “Genghis bond” by wags – raising a whopping $1.5bn for 10 years at below Spain’s borrowing costs at the time. The country has been rescued by the International Monetary Fund five times in the past two decades or so, but investors still placed $15bn of orders – equal to 150 per cent of its annual economic output.

However, since then investors have become more discerning on emerging market bonds, and Mongolia in particular. The yield of the international bond maturing in 2022 has climbed from 5.62 per cent last May to 7.55 per cent today.

Economic growth is strong and government debts relatively weak, but Mongolia’s macroeconomic vulnerabilities – particularly its dependence on foreign finance – are significant, and government policy has been erratic.

Last year the authorities cancelled 106 mining licenses, and is still locked in a dispute with Rio Tinto over the Oyu Tolgoi copper mine, one of the biggest projects in the country’s history.

Still, one big international investor has kept faith with Mongolia. Franklin Templeton funds – mostly controlled by Michael Hasenstab – own over 14 per cent of the “Genghis bond” according to the most recent filings.


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