Mongolia mine deal may see a return of investors

By Paulius Kuncinas
Regional Editor, Oxford Business Group

Investor appetite towards Mongolia could be improving amid hopes Ulaanbaatar may be in the process of settling a long-running dispute with mining giant Rio Tinto over the development of phase two of the Oyu Tolgoi mine, allaying concerns over the government’s ability to repay or roll over existing debt.
The government said in early April it had agreed “in principle” to an agreement with Rio Tinto, helping break the deadlock which has thwarted the second phase of the Oyu Tolgoi gold and copper mine. The underground development of the project, estimated to cost around five billion USD, has been at a standstill for more than two years due to differences between the two partners over taxes owed, financing and costs from the first construction phase.
The standoff with Rio Tinto as well as falling minerals prices and weakening Chinese demand for coal, have resonated throughout the economy, with foreign investors holding back from committing to new projects until the investment climate becomes more predictable, and prompting a drop in foreign direct investment last year.
“A deal could have potentially transformative effects for the country’s external accounts and macroeconomic position, catalyzing billions of dollars in new foreign capital inflows, accelerating economic activity and providing relief to many of the country’s key credit constraints,” ratings agency Fitch said in a note in April.

Cooling appetite for bonds

Nonetheless, bond markets have been negatively impacted recently, with both local and foreign investors shunning government paper. A clear sign of soured investment appetite emerged when the government had to withdraw an 10 billion MNT (5.1 million USD) three-year bond issue on April 8 after receiving no bids in an auction, the central bank said.
Another auction in mid-February for 20 billion MNT (10.2 million USD) of three-year bonds also attracted no interest from overseas or local investors, even though Mongolian banks are traditionally the largest buyers of government bonds. Nick Cousyn, chief operating officer of brokerage firm BDSec, said the lack of interest was the result of liquidity shortages in the market. “The banking system is tight on cash due to delinquencies and deposit flight,” he told AFP news agency in February.
A separate 40 billion MNT (20.4 million USD) bill auction in February fared slightly better, with half of the bonds being sold. The cool response of the market prompted the government to consider a standby agreement with the IMF. Prime Minister Ch.Saikhanbileg said in February that this was “an open option among many” for Mongolia. Since then, however, Ulaanbaatar has not made any further statements regarding IMF assistance.
“No official talk has been made on entering an official bailout program, but there is a need to consult the policy changes with the IMF and other international organizations such as World Bank,” said the Prime Minister.

Mounting debts

Although Fitch said a deal on Oyu Tolgoi would help stabilize Mongolia’s credit profile, it has stamped Mongolia’s sovereign issuer default rating with a negative outlook, highlighting weak external liquidity as one of the country’s credit weaknesses. Analysts have warned that Mongolia will struggle to repay its debts if the economy is not able to turn a corner soon.
Public debt has risen to an estimated 59 percent of GDP as of the end of 2014, according to Fitch, while its resource-driven revenue streams have partly dried up due to low commodity prices and weaker global demand. The cost of servicing debt has also increased as a result of the devaluation of the tugrug, which has lost about a quarter of its value against the U.S. dollar since the start of 2013.
At the same time, deadlines are looming with one billion USD in sovereign bonds due in 2018. Mongolia also has to repay part of its bilateral currency swap agreement with China in 2017, though this could be extended for another term, as was the case in 2014 when China increased the value of the swap facility from 3.28 trillion MNT (1.6 billion USD) to 4.8 trillion MNT (2.44 billion USD), helping ease some of Mongolia’s short term funding concerns.
“The government has a window to resolve these vulnerabilities, but, as time goes by, the window closes. Large repayments are due in 2017 and 2018, and that time horizon is not that far away,” said Anushka Shah, an analyst at Moody’s.
According to the Asian Development Bank, average GDP growth could be limited to 4 percent this year and the next − after reaching 7.8 percent growth in 2014 − unless there is a recovery in foreign investment. This is putting greater pressure on the government to resolve the situation at the Oyu Tolgoi mine, to shore up investor confidence and lower credit risks.

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Posted by on Apr 28 2015. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.

1 Comment for “Mongolia mine deal may see a return of investors”

  1. Rio Tinto has NOT announced that ANY sort of agreement has been reached yet. The tax issue still stands to be resolved. The MNG Government is correct when complaining about the cost overrun but they forced OT into it by their own demands to have OT buy from local suppliers and hire 95% locals. The cost overrun was caused by OT having to buy locally and getting ripped off from local suppliers. I worked for OT for many years and I have seen OT pay TEN TIMES the actual realistic price for goods and services. OT purchasing employees are extremely corrupt and steal as much as they can.

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