Mongolia is determined to reduce default risks on its international debt by resuming a long-stalled $4.2bn copper mine project by the end of this year, bringing government debt levels to within legal limits and cutting back on welfare payments, a senior government official said.
Risks associated with the north Asian country surged in July after Moody’s, the credit rating agency, downgraded its bonds by one rung to B2, a rating that signifies “high credit risk”. The reasons for the downgrade included plunging foreign exchange reserves, expansionary monetary and fiscal policies and an unpredictable environment for foreign direct investment (FDI).
But Chultem Ulaan, finance minister, told beyondbrics that Mongolia is taking a series of measures to boost its foreign currency reserves by attracting more FDI and boosting exports, while reducing fiscal outlays by cutting back on welfare payments and capping government debt at 40 per cent of GDP.
“There is no risk that Mongolia will default on its international bonds. Mongolia has never defaulted on its debts and it will not in the future,” Ulaan said.
Mongolia issued $1.5bn in two “Chinggis bonds” to international investors in 2012 and faces repayments of $500m and $1bn at their maturities in 2018 and 2022. However, an earlier test comes in late 2015 at the maturity of two Trade and Development Bank bonds worth a combined $325m. The bonds form part of the total external debts (see chart).
“The total volume of our obligations through international bonds and foreign debt is not excessive compared to our fiscal and export revenues,” Ulaan said. “About 5 per cent of total exports is the annual cost of international bond servicing.
”Moody’s estimates that total external debt was close to $20bn in the first quarter of this year, equivalent to 167 per cent of GDP, up from 158 per cent of GDP in 2103. As a share of current account receipts, the external debt rose much more steeply to 325 per cent in 2013, up from 162 per cent in 2011.
At the same time, foreign direct investment to GDP has plummeted (see left hand chart above) to $402m in the first five months of 2014, from $1.1bn during the same period of last year.”
Much of the slump in FDI inflows has stemmed from the stalling of the $4.2bn Oyu Tolgoi copper mining project, which once fully operational is expected to produce some 30 per cent of Mongolia’s annual GDP, mostly through exports to China.
Getting Oyu Tolgoi back on track
Ulaan said it is crucial to get the Oyu Tolgoi project back on track, partly because the ensuing FDI inflows would strengthen Mongolia’s ability to service its external debts and partly because of the restorative effect a resolution would have on Mongolia’s reputation.
The project has been bogged down in a dispute between Mongolia’s government and Rio Tinto, the major shareholder, over cost overruns in the mine’s first phase and a lack of transparency in financial details, Ulaan said. Audits into the cost overruns by both the Mongolian government, a minority shareholder in the mine, and Rio Tinto have now been completed, he added.
Mongolia now hopes, Ulaan said, that the project can move into its second phase even while the dispute remains unresolved. “The government’s approach is that we should go ahead with the second phase as soon as possible. There has been no need to tie the second phase with the first phase resolution. We are going to go ahead with the second phase this year,” he said through an interpreter.
Asked if a September 30 deadline to agree the second phase’s implementation could be met, he said: “There are no issues and no problems from our side. We hope the second phase will go ahead at that time.”
Limiting government debt
Mongolia’s Fiscal Stability Law stipulates that government debt to GDP cannot exceed 40 per cent of GDP from 2014 and Ulaan said the government is working hard to meet that target.
“At the start of the year (government debt to GDP) was 50 per cent and now it is down to 44 per cent,” he said, adding that it was Ulaanbaatar’s goal to bring the ratio to beneath 40 per cent.
Part of the restraint required by the law would come in the form of pared back welfare spending, so as to forward a “goal to change the welfare system in which a lot of wealth collected is paid out to the public”. He did not provide further details on the welfare spending plans.
Mongolia is fully open to Chinese investment
A windfall from a visit to Mongolia in August by Xi Jinping, the Chinese president, was the increase in the value of a currency swap agreement between central banks to Rmb15bn ($2.4bn) from Rmb10bn previously. Moody’s said that the facility would bolster Mongolia’s weak external position:
The extension of the bilateral facility is credit positive for Mongolia (B2 negative) because it will help address the country’s rapidly dwindling foreign reserves, stem downside pressure on the tugrug currency and bolster a weak external payments position.
But Chinese largesse did not come without a price. Moody’s again:
(The swap) agreements suggest a fundamental shift in Mongolia’s previously hostile stance toward Chinese participation in its economy. In May 2012, Mongolia’s parliament tightened restrictions in its foreign investment law, enactment of which blocked Chinese state-owned Aluminum Corporation of China Limited (unrated) from acquiring majority ownership in a coal mining company.
Ulaan reiterated Mongolia’s welcoming stance toward Chinese investment. “Of course, China’s help (in the currency swap) is important,” the minister said. “The Mongolian economy is an extremely open economy. Upto 80 per cent of our total trade is with China and there are no such restrictions in terms of investment (from China),” he said.SOURCE: FT