Mongolia’s dollar bonds and currency sank to record lows this month as a slide in commodity prices and a dispute with Rio Tinto Group (RIO) over developing one of the world’s largest copper and gold mines kept foreign investors away.
The yield on sovereign notes due January 2018 surged 190 basis points, or 1.90 percentage points, from Dec. 31 to an unprecedented 9.79 percent on Jan. 21 and was at 8.78 percent as of 9:54 a.m. in Hong Kong Tuesday, data compiled by Bloomberg show. The tugrik has weakened 2.8 percent to 1,942 a dollar in January and reached an all-time low of 1,944 on Jan. 22.
The drop in commodity prices is adding to the woes of the resource-dependent economy, where growth has slowed to about 7 percent from 17.5 percent in 2011 and overseas investment plunged 71 percent in the first 11 months of 2014. The lack of progress in talks between the government and Rio, Mongolia’s top investor, has held up funding for the Oyu Tolgoi mine’s underground phase, where most of the copper and gold is.
“Policy indecision around Oyu Tolgoi phase two is likely weighing on Mongolian bond prices,” Nick Cousyn, Chief Operating Officer of Mongolian brokerage BDSec in Ulaanbaatar, said in an e-mail. “The collapse in commodity prices, particularly oil, has created a perfect storm in emerging and frontier credit markets, and Mongolian credit is also caught in this storm.”
Three-month copper futures fell 3.4 percent last week and are down 11 percent this month amid concern that China’s economy is slowing. The metal’s price has dropped 22 percent in a year, while crude oil has slumped more than 50 percent. China’s economy grew 7.4 percent in 2014, the least since 1990.
Mongolia’s foreign reserves stood at $1.35 billion at the end of November, down 42 percent from a year earlier, according to the central bank’s website.
The price of Mongolia’s 2018 bonds slid to a record low 85.82 cents on the dollar on Jan. 21 from 92.64 at the end of 2014. Dollar notes due December 2022 fell to 78.51 the same day, from 86.47 on Dec. 31, pushing the yield to an unprecedented 9 percent.
The Bank of Mongolia raised its policy rate this month to 13 percent from 12 percent, citing high inflation and low foreign investment. In December, the World Bank encouraged the nation to tighten policy and start preparations to repay $1.08 billion of debt due in 2017 and 2018.
“The central bank’s decision to raise rates also underscores the fragile outlook for Mongolia’s balance of payments,” Ben Shatil, an analyst at JPMorgan Chase & Co. in Singapore, said by e-mail. “There’s recognition that Mongolia’s fundamentals are being seriously challenged by the decline in commodity prices, as well as the expectation for slower, and less investment-intensive growth in China this year.”
JPMorgan recommends holding less Mongolian bonds than the benchmark it uses to gauge performance, according to Shatil.
A $4.2 billion project financing package for the underground mine at Oyu Tolgoi, involving 15 global banks, has been delayed as the government and Rio wrangle over costs and taxes. Commercial production from the open pit, which began in mid-2013, is helping to plug a shortfall in foreign investment.
An offer from Rio to Mongolia’s government aimed at spurring an agreement includes a proposal to forgo a 2 percent net smelter return, which may be worth as much as $1.6 billion over the mine’s life, The Australian newspaper reported Jan 27, citing extracts of a document posted online by a Mongolian Twitter user it didn’t identify.
“There is an offer on the table, which we believe is beneficial for all parties,” Rio said in an e-mailed statement. “We will continue to work with the government to progress these issues.”
Melbourne-based Rio spokesman Ben Mitchell declined to comment on the content of the offer.
Mongolia’s total copper concentrate exports more than doubled to 1.4 million tons in 2014 from 650,000 tons a year earlier, data from the National Statistical Office show. Revenue from coal fell to $849 million last year from $1.1 billion in 2013 even as the country increased shipments to 19.5 million tons from 18.3 million tons a year.
Agreements on Oyu Tolgoi and the Tavan Tolgoi coal deposit could help Mongolia’s bonds turnaround, according to Cousyn from BDSec. He estimates the two projects account for $10 billion of capital expenditures in the medium term, or 85 percent of Mongolia’s gross domestic product.
Mongolia’s sovereign dollar bonds have lost 5.2 percent this month compared with a 3.7 percent drop in Nigeria’s, according to indexes compiled by Bloomberg.
“Unlike countries such as Nigeria or Iraq, Mongolia has ready projects that can quickly shift the entire economy,” Cousyn said.
To contact the reporter on this story: Michael Kohn in Ulaanbaatar at firstname.lastname@example.org