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Mongolia caught in a debt trap

Jubilee Debt Campaign, an organization that strives for breaking the chains of debt, published an interesting report last month. They named nine countries (Bhutan, Ethiopia, Ghana, Lao PDR, Mongolia, Mozambique, Senegal, Tanzania, and Uganda) that have become fully dependent on external debt, and emphasized that the gap between the rich and the poor in these countries keeps growing despite their high economic growth. Their citizens are demanding that their governments stop raising more loans from the international capital market and fully disclose the expenditure of previous loans in detail to the public.
These countries rely heavily on the mineral resources they export, rather than manufacturing and service industries. Therefore, their economies are highly dependent on commodity prices, while most of their revenue goes to a few elites. Jubilee Debt Campaign also said that these countries have too much external debt compared to the size of their economy, a high risk of ending up not being able to pay off the debt, and they have too much deficit in the operating costs of their public budget with an increased likelihood of a growing debt burden.
In economies that are almost fully dependent on a small number of mineral resources and their prices, the government has only two choices: increased debt or increased development. It is time for Mongolians to discuss what these choices are and what Mongolia’s choices should be in the future.

THE PATH TO DEBT

On August 10 of this year, China weakened their strictly controlled currency by two percent against the U.S. dollar for the first time in 20 years. China’s government explained that they took this action to support their exports, which decreased by 8.6 percent within a year. As a result, international stock market indices have started falling amidst the fear that China’s unlimited consumption could decrease.
If large investment funds start selling their China-tied securities, a lot of companies will see drops in the price of their shares and will have to downsize their business. Economies like Mongolia’s, which export their coal, copper, and gold solely to China, will be experiencing another hit.
On the other hand, our government is incapable of thinking of anything other than acquiring new loans to settle principal repayment and coupon payments. It is forcing investors to sell their Mongolian bonds.
When Mongolia issued bonds worth 1.5 billion USD from the international capital market in 2012, investors believed that Mongolia would be able to satisfy China’s never-ending demand for commodities, and were willing to purchase bonds worth 10 billion USD. However, the investors, who bought the bonds with a coupon rate of 4.5 percent on average, sold them with a presumed yield of nine percent. It was written about in The New York Times on August 22. This shows that Mongolia’s risk of not being able to make the payments on time has doubled. It is believed that if the calculated yield of a bond being traded on the secondary market is higher than the initial coupon rate, there is a greater risk in regards to repayment.
After announcing their intention to obtain a long-term loan to repay debt from the previous short-term loans, Prime Minister Saikhanbileg’s government purchased Chinese bonds at the cost of one million CNY, at a rate of 7.5 percent. This is a warning that the risk is growing. This means that if Mongolia issues sovereign bonds today, the coupon rate will be 10 percent. Governments that issue bonds with such high rates are referred to as dubious borrowers in the international market. The history of Greece’s bankruptcy began just like this: repaying debt with more debt, while interest rates increase.
THE PATH TO DEVELOPMENT

It is inevitable that a market economy occasionally suffers from a crisis caused by faulty policies and actions. If you cannot find your own mistakes and fix them, a crisis will be repeated. A country like Mongolia, which is almost entirely dependent on a small number of mineral resources and commodity prices, should make a structural change to its economy, carry out economic diversification, and acquire the flexibility to respond to sudden changes in the external environment.
Those countries who have managed to do it first established funds to manage changes. Initially, they approve a public budget with realistic estimates of major commodity prices. If the prices turn out to be higher than expected and more revenue is recorded, the extra revenue is accumulated in a special fund, such as a national fund or a sustainability fund. When the commodity prices are lower than envisioned, the fund is used to make up for the deficit, which protects the economy from price fluctuations.
Countries such as Norway and Chile have gained a lot of experience with this concept. Even though almost every parliamentarian in Mongolia and dozens of ministers have visited these countries to learn from their experiences, they have not put these teachings down on paper. It is reminiscent of the Mongolian phrase, “A donkey would not know if there is gold or water in his ears.”
Furthermore, the government should use mining income to develop other industries, encourage the activities of the private sector, support market competition, build required infrastructure, prepare the domestic workforce, and help businesses enter the international market.

OUR CURRENT SITUATION

As Mongolia has already acquired more loans than it can handle, we must first stop pursuing new loans. We must decide how these loans should be repaid and how to create accumulated funds. An independent report must be done on where the capital raised by previous bonds has gone, and how their repayment prospects look. The information must be disclosed to the public.
The government today is doing nothing about how and when the loans should be repaid. Instead they are busy trading positions and ministerial seats. Mongolia’s authorities are about to pass a law to grant amnesty to their associates who are under investigation for corruption charges. Although the president partially vetoed the proposed law, the bent lawmakers are still expected to oppose the veto and protect those who stole public property and wasted the capital that came from bonds.
Our citizens are demanding that the government stop raising more loans from international capital markets and to publically disclose how the capital from previous bonds was spent. We have the right to make this demand, because it is us – the taxpayers – who will eventually pay for all external and internal debt the government has.
When the time comes to repay these huge loans, even Interpol would have trouble locating some of these politicians.

Trans. by B.AMAR

Short URL: http://ubpost.mongolnews.mn/?p=16016

Posted by on Aug 30 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.

2 Comments for “Mongolia caught in a debt trap”

  1. Another great article Jargal.

  2. Andreas Goretzky

    are there any figures?
    meaning loans / credits and their payback rates compared to GDP?

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