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Economy / Featured News / Mongolia News / May 27, 2014

The Spending of a Debt Credited from the Future

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While Mongolia’s debts are getting higher each year, the question of how Mongolia is ever going to pay for all this is becoming a growing concern.

The proceeds of the Chinggis bond are being spent on a number of projects that might not seem economically beneficial. In turn, it has caused concern for how Mongolia can repay such big debt. An initial payment of USD 500 million must be paid in 2018, followed by USD 1 billion in 2022. Mongolia will be liable for USD 71.9 million in 2017 for a half year’s interest. Another bond worth USD 580 million was issued by the Development Bank of Mongolia in 2012, and should also be repaid in full by 2017.

How is Mongolia going to pay for all this?

During a presentation on bond spending held May 2, opposition members of parliament said amendments to the 2014 budget should include bond spending. It is unclear how many companies received loans from bond proceeds for the prime minister’s initiative to finance start ups and expansions for Mongolian industry. The hope is those goods would create exports and replace poor-quality imports. It is also unclear the interest rates commercial banks will have to pay the government to lend that money.
Prime Minister Norovyn Altankhuyag on May 2 said Mongolia would utilise MNT 394 billion for this initiative out of a total MNT 1.267 trillion borrowed.

Spending

Altankhuyag said MNT 570 billion would be spent for the development and construction of 10 road projects and 14 unfinished projects from last year. These projects factor into the larger effort to create a road network that links each of Mongolia’s 25 provinces with the capital.
There is also the “Streets” project for the construction of a highway along the Tuul and Selbe Rivers, as well as the renovation of 33 intersections. Work will also be done to build basic infrastructure for Ulaanbaatar’s ger districts. Last year saw the completion of two roads and the renovation of 16 intersections.

Mongolia’s budgets included MNT 516.7 billion in spending to fund 92 projects in 2013 and 2014. Those funds would also go towards building an engineering pipeline network in Ulaanbaatar. Work has yet to begin on these fronts, however, because the Development Bank of Mongolia last year has only dispersed MNT 200 billion for 66 projects.

Mongolia is also planning the construction of 1,800 kilometres of railway throughout the country. Economic Development Minister Nyamjavyn Batbayar in April proposed the government provide USD 164.2 million for the construction of railway between Energy Resource’s Ukhaa Khudag mine and the Gashuun Sukhait border port rather than the USD 200 million initially planned.
A 450 megawatt power plant at the Tavan Tolgoi coal deposit will receive USD 16 million from bond proceeds. The financing agreement has the option for convertible stock in the plant. Last year the government approved USD 15.98 million to fund prep work at the site. The Eg River Hydropower Plant, too, will receive bond financing of USD 34 million.

Funds will also be allocated for housing projects, including the Buyant Ukhaa 1 apartment block, which will comprise 28 buildings with 1,764 apartments. Bond proceeds will also fund projects for the production of building reinforcements and an iron ore concentration plant. MNT 270 billion will fund projects for cashmere, textiles, green-house farming,
and dairy.

The government has funded around MNT 140 billion for these projects. Also, MNT 12.8 billion was spent to construct a steel mill and USD 14 million was spent on a factory to produce construction  materials.

Exchange Rate Losses

The government has yet to explain how it will repay its debts in 2017, 2018 and 2022. Few of the projects will generate revenue that can be used to repay that  debt.
“The proceeds of the Chinggis bond were meant to be spent on efficient projects from the very beginning,” said D. Khoshbayar, an economic expert for the Mongolian People’s Party. “Since it’s debt, the bond should have been spent on projects that are economically beneficial in the short term. Instead the proceeds have been spent for the construction and renovation of roads, intersections, maintenance, and infrastructure. The proceeds seem to have not hit their target.”

The fact that the debt came in the form of U.S. dollars means currency fluctuations put the country at great risk. Last year, companies that borrowed in dollars saw losses totalling some MNT 570 billion.
Mongolia has a policy council responsible for monitoring bond proceed spending. On the council are representatives from the Ministry of Economic Development, the Ministry of Finance and other policy-making organisations. However, there is no record of who exactly sits on the council.

Bond proceeds have already started making their way to finance projects, but the results have not been impressive. If public officials do not start taking the matter seriously soon, Mongolia will face serious consequences once bond holders look to collect.

 

SOURCE: Mongolian Economy




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