What the IMF’s return means for Mongolia
The story of Mongolia’s relationship with the International Monetary Fund is a tale of geopolitics, local greed, mismanagement and uneasy ties with Chinese and Western investors. The return of the IMF to Ulaanbaatar is a harsh wake-up call for Mongolians and investors alike.
Mongolia’s budget deficit is set to reach 20% of gross domestic product this year, and around $2 billion in public and private debt is scheduled to come due next year. With the Mongolian economy on its knees, Chinese creditors are making a case for greater investment concessions.
In recent years, Mongolia has severely mishandled relations with many foreign investors, most obviously with metals producer Rio Tinto, an investor in the Oyu Tolgoi gold and copper mine. Chinese interests have filled the void left by an exodus of Western investors.
Even if new IMF assistance helps Mongolia to avoid fiscal collapse, individuals and businesses in the country are still struggling with debt carrying high interest rates of over 22%. Banks in Mongolia typically lend money at annual rates of 22-28%. By comparison, shadow lenders offer loans at interests of about 36%.
But Chinese banks offer corporate lending against Mongolian collateral at an average of 5.6%, while the Chinese shadow banking market provides funding at rates of 10-20%. Because of the enticing borrowing differential, some worry that refinancing moves could further increase Mongolia’s dependence on China.
Bank of China (BOC) is seeking to open a branch in Ulaanbaatar. However, competition concerns have prompted Trade and Development Bank of Mongolia, Golomt Bank and Khan Bank to lobby the government to delay or reject Bank of China’s application for a full banking license.
Second cry for help
At the height of the global financial crisis in 2009, Mongolia called on the IMF for assistance and borrowed $232 million. The country was able to repay the loan early, as its main exports of coal and copper boomed due to strong demand from China.
To restrain dependence on China — Mongolia’s largest export market and main creditor — the Mongolian People’s Party government that took office in July has reached out to the IMF for help in restructuring debt and the economy.
Mongolia submitted a formal request on Sept. 30 for financial assistance from the IMF. Its total external debt is estimated at $23.5 billion, nearly double its GDP of $12 billion. Government debt makes up about $8.4 billion.
A $580 million bond issued by the Development Bank of Mongolia needs to be paid or refinanced by next March. Analysts say the government needs to repay a total of $1.7 billion-$1.8 billion over the next two years.
Efforts to reform the economy and financial system consist of a mix of austerity measures and the promotion of new mining projects, in the hope that the commodity cycle will soon turn and that investors might give Mongolia a second chance.
The Mongolian tugrik now trades at 2,278 against the dollar, down 12% so far this year and 92% off its peak in 2011. In an attempt to stabilize the depreciating currency, the Bank of Mongolia, the central bank, raised interest rates by 4.5 percentage points to 15% on Aug. 18.
The Mongolian Stock Exchange, which celebrated its 25th birthday this year, trades at a price-to-book ratio of 0.13 and is one of the cheapest markets in the world. It is also the world’s third-worst performing stock market, with a 21% year-to-date decline. In comparison, the average price-to-book ratio of companies in New York’s S&P 500 index stands at 2.7.
Growth expectations for Mongolia are falling. The Asian Development Bank recently forecast GDP growth of 0.3% for 2016 and 1.4% for 2017. The World Bank expects Mongolia to grow at 0.7% in 2016, 2.7% in 2017 and 6.2% in 2018.
By contrast, the Mongolian government forecasts growth of 3% for 2017, premised on new momentum to push forward a number of projects. The list includes a $5.3 billion expansion of Rio Tinto’s Oyu Tolgoi mine; the development of the Tavan Tolgoi coal mine and an associated railway and power plant; development of an open-pit gold mine at Gatsuurt; and a 250-megawatt power plant expansion in Ulaanbaatar.
The market increasingly expects that the ramp-up of underground construction at Oyu Tolgoi, long delayed by disputes over costs and taxes, will bring in $1.1 billion in investment in 2017. Such investment would have spillover effects for other sectors of the economy.
The question on investors’ minds is whether the new IMF bailout will be like the one South Korea received in 1997 — a highly disputed and initially unpopular but ultimately very successful, albeit painful, restructuring. Or will Mongolia’s second IMF bailout in less than seven years fail to achieve much, due to corruption and the economy’s dependence on natural resources?
Mongolia will probably muddle through, thanks to strategic international interest in its vast natural resources. Yet Oyu Tolgoi may not give the quick payoffs that officials are hoping for. Rio Tinto chief executive Jean-Sebastien Jacques has been quoted as saying that Mongolia won’t receive any dividend from the mine for 10 years. The mine, though, is expected to be in operation for more than 75 years and management perhaps just wanted to stress long-term benefits.
As a young country, Mongolia needed to go through a boom-and-bust cycle for the government, business community and even ordinary citizens to become more mature in handling natural wealth and to reduce corruption and infighting. But the multiyear dispute with Rio Tinto over Oyu Tolgoi could have been avoided.
Now, at least, more Mongolians realize that foreign investors have to be treated with respect, and that the country needs to create a more transparent and level playing field to unleash its own vast potential.
Rainer Michael Preiss