Mongolia awaits economic rebound in 2016

By Paulius Kuncinas
Regional Editor, Oxford Business Group

The current drive in Mongolia to promote growth and foreign investment appears likely to yield results, as a key breakthrough in a long-running dispute over the expansion of a mine will help act as a stimulus for a 10-year, one billion USD sovereign issue in the coming months.
While growth is expected to ease to 5.3 percent this year, down from 7.8 percent in 2014, the economy is on course for a rebound in 2016, Prime Minister Ch.Saikhanbileg said during a visit to London earlier this month, aimed at drumming up investment in Mongolia.
Agreements all around

After two years of negotiations, differences were settled with Rio Tinto in May over the 5.4 billion USD Oyu Tolgoi copper and gold mine expansion project. This is likely to be followed by government approval for work to begin at the Tavan Tolgoi coking coal mine project over the coming months, the prime minister told The Financial Times in early July.
Delays in these projects, combined with a sharp decline in commodity prices, uncertainty over investment regulations and slower growth in China, have weighed on Mongolia’s foreign direct investment (FDI) inflows, which fell to 850 million USD last year, after reaching 4.4 billion USD in 2012 and 2.29 billion USD in 2013.
Although the government hopes that both projects will bring a wave of investment and spur interest in other developments, the benefits are unlikely to be felt before next year. “Until an actual ramp-up in production takes place, Mongolia will remain dependent on external borrowings, as well as short-term liquidity easing measures,” ratings agency Moody’s wrote in late June.

Key role for bonds

To shore up external financing, the government announced plans at the end of May to tap the international bond markets with a 10-year, one billion USD sovereign debt issue. Mongolia’s cabinet said the funds may be used to finance the budget deficit or resolve balance of payments difficulties.
With 1.8 billion USD worth of state-backed or sovereign bonds due to mature in 2017 and 2018, the government is perhaps more likely to use some of the newly raised capital to pay down older debt, like the so-called Chinggis bond issued in 2012. This would help it avoid breaching the debt ceiling, which was raised from 40 percent to 58.3 percent earlier this year.
The government has shown a commitment to reining in debt levels, which climbed sharply in recent years on the back of slower economic growth; estimates from Fitch put Mongolia’s debt-to-GDP ratio as high as 63 percent as of the end of last year.
Lowering its debt exposure would help insulate Mongolia from external risks, with Moody’s warning in June that the country’s foreign reserves, although stable, were insufficient to fully cover maturing external debt obligations in the event of a credit shock.
However, officials remain confident that news of the Oyu Tolgoi deal will be well received by the markets. In April, Fitch heralded the positive impact of such an agreement. “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.”

Inspiring confidence

Investors might also be attracted by government proposals to put key state assets on the auction block. The government is considering selling its stake in the Tavan Tolgoi mine, while the privatization of power plants and other state-owned enterprises is also being considered, D.Angar, CEO of the Mongolian Stock Exchange, told Bloomberg at the beginning of July.
News that Mongolia rose to the ranks of an upper-middle-income economy in the World Bank’s most recent per capita GNI figures, released in early July, has also been welcomed. The country made the second-largest improvement of the economies surveyed, advancing eight places year-on-year; these gains are all the more remarkable considering Mongolia only attained lower-middle-income status in 2011.
While the country prepares itself for another year of modest growth, higher per-capita incomes could help foster more positive economic momentum, with growing consumer spending power and more robust demand generating opportunities across a variety of other sectors.

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