Day 824: Requesting IMF Aid Because GDP Grew “Only 7.8%” Reveals Mongolia’s Expectations
For most astute people that keep up on world events, the notion that a country with GDP growth for 2014 of 7.8% starting crisis dialogues with the International Monetary Fund (IMF) must sound bizarre. The IMF typically steps in to help economies in deep crises or failing. Mongolia’s currency is in crisis with a drop in excess of 50% in the past 4 years. Amazingly, GDP growth that has declined to 7.8% in 2014 from 11.6% in 2013 is an economic slowdown crisis for Mongolia as planned spending was predicated on faster GDP growth, faster expansion of Mongolia’s mining industry and higher natural resource prices.
In 2011 and into early 2012, government spending ramped up predicated on numbers that would drop off. The ruling party also engaged in some extra spending on handouts to citizens of Mongolia in the hopes of winning hearts and votes for June 2012’s parliamentary elections. As noted by the Mongolia based brokerage arm of Eurasia Capital in its January 2011 annual Mongolia Outlook report:
The government’s 2011 budget saw a swift return to pre-crisis deficit spending habits and a departure from the fiscal disciplinary measures agreed to in commitments with the IMF following the 2009 bailout. The 2011 budget included more cash handouts and a 30% increase in government employee salaries, which the World Bank estimates will result in up to 20-25% inflation in 2011. Such fiscal policy runs the risk of a wage inflation spiral or the Dutch Disease in Mongolia. With 2012 being an election year, fiscal discipline and declines in spending are unlikely in the 2012 budget…
One can see on the chart below from a report by the IMF in March 2011 a typical notion of how GDP would grow going forward from 2011 through 2016, an average of 13.5% per year for the coming six years including an anticipated 15.7% in 2014. In fairness, one of the shortfalls has been the decline in the price of copper, currently trading around $5,700 per U.S. ton whereas the nadir in copper’s price on the below chart is $6,500.
Three former employees of SouthGobi Resources are imprisoned now for alleged tax evasion activities by the company. The major problem year in the government investigation seems to be 2011 as two of the three men involved, American Justin Kapla and Filipino Hilarion Cajucom Jr., only began working at their positions relevant to the investigation in June 2011. The courts of Mongolia seem to only be interested in company data from 2007 to 2011 as well as data from the first quarter of 2012. Their case – and SouthGobi’s fate as a company – travels in parallel to the flight of Mongolia’s currency and economy.
The genesis of problems for company and country begins in April 2012 when Chinalco, a Chinese company, wanted to purchase controlling interest in SouthGobi. Within a month, a sweeping investment law against foreign investment was created to block one controversial purchase by a Chinese company. This law would blockade the country from foreign investment for years to come. During the same time, investigations into improprieties of SouthGobi’s finances began. The expected growth on the below chart by ACI Mongolia and the Financial Markets Association presents another optimistic view of the future of the country that was circulating in 2011 and would not be realized (as the speculative GDP for 2013 on the below chart is more than double the actual GDP of 2014).
As noted in earlier articles, the result of deterring the Chinese purchase of SouthGobi has led to a faltering economy that increasingly relies on Chinese debt financing. Ignoring international legal standards, Mongolia broke five of its own laws in convicting three former employees of SouthGobi to prison – Messrs. Kapla and Cajucom along with Cristobal David – and fining the company $18 million for tax evasion.
Some understandably fiercely independent people in Mongolia say the country does not need foreigners and can return to its historical roots of a nomadic herding lifestyle. However, the country has infrastructure needs – roads, healthcare, education, et cetera – which require economic funds either from growing the economy with greater foreign investment from a diverse group of mining and related companies that are from around the world; or from various aid agencies and predominantly from its neighbors China and Russia that have a vested interest in a stable Mongolia. As China and Russia are also foreign countries, and aid agencies also bring in funds from foreigners, it seems that Mongolia is unable as yet to exist without foreign borne funds.
The question is the manner in which foreign funds are delivered – debt, aid or investment in developing mining and other assets of the country – and which path will allow Mongolia to one day arrive at a point where it has sustainable economic growth that will no longer involve having discussions with the IMF at least once every 5 to 10 years.
Requesting help from the IMF shows that the country will seek handouts to continue spending as planned (when growth was expected to be more robust) while battling the foreign mining companies that could unshackle the country’s economic growth. Breaching its own national laws to send three foreign mining executives to prison – after their defense twice proved the evidence against them was insufficient – sends a message to the world that Mongolia deep down prefers to solely rely on China and Russia for support and other foreigners and agencies should either give no strings aid money or leave.