December 2013
Two new terms were introduced into the Mongolian economic discourse this year: ‘Crawling depreciation’ and ‘Expansionary policy’. The first was used to define the economic trend and the second to describe the nature of our monetary policy.
When the weakening MNT finally fell under MNT1700 against $1, the Mongol Bank issued a statement of reassurance, saying there was no need to panic, as the MNT’s fall had been very gradual and actually it had fallen no more than 20 per cent since the beginning of this year. This, the central bank said, was ‘crawling depreciation’. With the economy crawling, how else could we expect the national currency to move?
The Mongol Bank also explained that it had adopted an ‘expansionary policy’ to make sure the crawl did not stumble into paralysis. The central bank released MNT 3 trillion into the market in 2013. When the world economy was fumbling and China’s boom lost its sheen, the only way for Mongolia to survive was to pour in money to save businesses and jobs. In fiscal terms this was the year of great loans in Mongolia.
So far, 70 per cent of the $1.5 billion of Chinggis Bonds sold has gone into financing projects. Another $300 million will come by the beginning of 2014 from sale of Samurai Bonds. The President of the Mongol Bank and the Minister of Economic Development agree that Mongolia’s economy would have been in worse crisis if all this cash was not there to be injected into the economy. The flip side of this way to stave off crisis is that the country’s debt level now stands at 50 per cent of the GDP, teetering at the border line set by the Fiscal Stability Law.
What will happen in 2014? The government hopes to raise $3.5 billion from the next offer of Chinggis Bonds. $300 million more will come from Samurai Bond and there is talk of issuing another $300 million worth of MIGA bonds by Japanese investors. An agreement was signed during the Mongolian Prime Minister’s visit to China under which $240 million will be transferred from China Development Bank to the Development Bank of Mongolia, to be used in constructing the railway from GashuunSukhait to China’s Gants Mod border port and single port railways in Sukhbaatar and Dornogovi aimags.
It is apparent that 2014 will be another year of ‘great loans’, to be used, among other purposes, to complete several construction projects begun in 2013. So the expansionary policy will continue in 2014.
Loan or debt
A terminological argument rages around these funds in political circles. The ruling Democratic Party calls them a ‘loan’, while the opposition sees it as ‘debt’. According to the Fiscal Stability Law of 2010, Mongolia’s budgetary deficit should not exceed 2 per cent of the GDP and the Government’s external debt should not exceed 50 per cent of the GDP. On both counts Mongolia is right at the red line which means no more loans are allowed.
To circumvent the inconvenient restriction, the Government wants a new law on debt management. The draft is likely to be discussed at the first session of Parliament in the new year. It divides loans into two categories:Government loans, and business loans to companies.
The idea is to delink from State loans the loans to projects from proceeds of bonds. But even when the latter is treated as simple business loans, the external debt of the Government will equal 60 per cent of the GDP, once all the money talked about above comes in.
A common sense response to all this is that whatever way a loan is shown on paper – Government or corporate — the real test is the Government’s perceived ability to meet its financial liabilities in time.
Year of hope and risk
Loans will be an important part of our economic scene in 2014, but the Government puts great hopes on income from sale of OT’s open pit products. That way, 2014 at the moment is being seen as the ‘year of hope’ by the Government. Indeed, N.Altankhuyag’s Reform Government has high expectations from 2014. Expected income for the year from copper concentrate, coal and iron ore sales have been computed at the highest rate possible under the Budget Law. As you can see from the chart, the Ministry of Finance’s projection of both the volume of export and the income from it is much higher than that of either the World Bank or the Mongol Bank.
OT sales will make up 71 per cent of the total export of 2014, according to the Government. It also expects coal sales by Erdenes Tavan Tolgoi will drastically increase up to 6.8 million tons and exceed the sales of Energy Resources LLC. In addition, the Government expects significant amounts of money from Chinggis, Samurai and MIGA bonds, and from the loan from China Development Bank. It believes that the law on debt management will be passed and that there will be new investments following the law passed recently. The Government also hopes that the law on ‘Making gold trade transparent’ will be passed, companies will start submitting their gold to the Mongol Bank and that the country will begin seeing the benefits of the funds invested in construction and industries in 2013. It predicts the economy will grow up to 15 per cent.
Considering that Mongolia will be beset with a great amount of trade loans, I would like to conclude that the coming year will be one of big risks that will bring either a great fall or a great revival.