June 2014
The World Bank declared in 2012 that with a rise in its per capita GNI (Gross National Income) Mongolia had become a middle income country, leaving behind its place among those in the low income category. Along with this came an end to an era of loans and grants from international financial organisations and donor countries.
The cover of the September 2012 issue of the Mongolian Mining Journal said “Bye bye, Stand-By”, to underscore Mongolia’s new freedom to take commercial loans from any source of its choice, as restrictions imposed by the International Monetary Fund as part of its bail-out stand-by programme were no longer applicable.
Mongolia has made liberal use of this opportunity since then. The Development Bank has issued $580 million worth of bonds and Government-guaranteed “Chinggis” bonds for a total of $1.5 billion have been sold at international stock exchanges. And now the Government is planning to issue bonds worth $3.5 billion in stages. Most Mongolians may not be aware that these public borrowings are not governed by any legal regulations.
Efforts over the last two years to systemise the issues around commercial loans in line with the Law on Regulation of Foreign Investments and Donations, in force since 2003 when Mongolia was still classified as a “developing and poor” country, have borne little result, leaving these bonds as “ownerless” funds that are spent without legal regulation. Soon, however, Mongolia will be called upon to repay this “ownerless” loan. The present decade may very well go down in history as one of “debt pressure”, for redemption of the Development Bank bonds falls due in 2017 and of the Chinggis bonds the next year.
At the beginning of the year, the Government submitted to Parliament a draft law on Debt Management. It is a short bill, with only seven chapters, but seeks to break new ground in setting out guidelines for public borrowing. If and when it becomes law, we shall have several new principles of debt management.
For example, Clause 6.1.4 of the draft says, “Government debt must not exceed 70 per cent of GDP calculated by annual prices and the face value of state guarantees must not exceed 20 per cent of GDP calculated by annual prices”. This move to raise the ceiling to 70 per cent will allow the Government to raise huge amounts in international markets for development projects. To curb profligacy, the bill also proposes strict criteria for allotting this borrowed money to selected projects and programmes. These will also be held accountable for proper utilisation of the money allotted to them. Ownerless loans will finally have owners.
Another principal change relates to state guarantees. Projects that seek such guarantee will henceforth have to fulfil more stringent conditions. This makes it unlikely that we shall ever again see guarantees similar to those given in relation to the Chinggis bonds. Since the draft seeks to limit state guarantees to 20 per cent of the GDP, the implication is that if money for development has to be raised through sale of bonds, they have to be guaranteed by the Development Bank.
The bill also proposes to put the “total debt” of Mongolia into two legally different categories: Government debt and companies’ foreign debt.
Such a Debt Management law will be of great help at the current stage of the development of Mongolia. The opposition in Parliament insists strongly that this law alone is not enough, and a complementary law on development policy planning must be passed as well, to indicate how to manage large funds through a sustainable and long-term policy. This second law would ensure that mega projects are not tinkered with if elections put a new party in power.
As major changes are awaited in the macroeconomic management in Mongolia, we decided to devote this issue of the Mongolian Mining Journal to details of events in the micro environment. Of special importance is a story on downsizing in the mining industry. Another reports on how the Tsagaansuvarga copper-molybdenum project gets set to move after being in limbo for long.
The adverse impact on the economy from repayment of foreign debts will be felt from 2017, whereas 2014 has been the hardest year so far for mining companies in Mongolia. The private sector will have to settle debts totalling a whopping $702 million this year, the highest amount in recent years. Major mining projects have received USD loans mainly from the European Bank for Reconstruction and Development, the Development Bank and the Standard Bank. With the USD running high against the MNT, mining companies, already hit by falling exports, are finding it an existential challenge to pay back their loans. The Government has not taken any worthwhile steps to cushion the double blows on the private sector.
The Government has been plugging its own budgetary deficits through selling Chinggis bonds abroad and also through selling bonds in the national stock exchange. The last two years have seen the sale of securities worth nearly MNT2 trillion. Such measures will also be regulated by theLaw on Debt Management.
A boiling hot summer lies ahead of our economy. Many feel the proposed law will lead to a halt in the rise in USD rates, by allowing the Government to issue USD bonds and thus increase foreign currency reserves of the Mongol Bank. But all this may take a long time, as MPs will debate the proposed draft long and hard.
Nearly all grading organisations have lowered the credit rating of Mongolia by one level. This means any new bond on offer will be attractive to investors only if it carries an interest rate of 7%-8%, not as cheap as the Chinggis bonds. There will thus be more to repay when their redemption time comes, making the next decade even more stressful.
Our neighbours are watching all our moves to tackle the present economic crisis, and it is fair to assume that both Russia and China, on political calculations, will, at a time they consider Mongolia most vulnerable and receptive, offer a “cheap” political loan to trap us. This summer will find leaders of both countries in Mongolia. One cannot but recall how Vladimir Putin came on a brief visit in the summer of 2009, gave “orders” to establish joint companies in railway and uranium, and returned home.
Without a doubt, their leaders’ plan for this summer’s visit is to make sure that Russia and China get involved in the new lines of Mongolian railway and in the development of the Tavan Tolgoi deposit. Soon to enter an era of debt pressure, Mongolia is coming closer to the “monster’s mouth”.