‘Latin Mongolia’ and the imminent debt crisis
The current total debt of the government of Mongolia (including external and internal debt, debt securities, loan guarantees and debt owed by state and locally-owned companies) has reached 10 trillion MNT, which is equivalent to almost half of Mongolia’s entire economy.
Although Clause 6.1.4 of the Fiscal Stability Law states, “Government debt must not exceed 40 percent of GDP calculated by the annual prices,” the authorities are currently planning to raise the debt cap to 60 percent of GDP in the 2014 public budget.
It is time to talk about what the acceptable amount of government debt is; what happens when a sovereign country suffers from debt pressure, and what Mongolians should do now.
Mongolia’s debt today: Too much?
There are standard ratings that determine how much debt a country can handle and these ratings view soft loans provided to developing countries as external debt. The ratings measure external debt burden against the annual GDP, debt services against government revenue and exports. In total, there are five criteria that give a score from 1 to 6. The debt burden on the economy is categorized as low, average, or high depending on the score from the five criteria.
In the rating system, Mongolia scored 3.41 and was put under the “average debt burden” category, but the International Monetary Fund (IMF) advised that Mongolia’s external debt (including loan guarantees) must not exceed 40 percent of its GDP. This rating system is called the Country Policy and Institutional Assessment (CPIA) Index, which assesses the economic policies and institutional capacity of government organizations.
You do not have to be an expert to see that Mongolia’s economic policy and institutional capacity of government organizations are only average. For more than 20 years, the governments of Mongolia only talked about developing the market economy, but kept doing the opposite in reality. Mongolia managed to lay the basis for its future development by managing to continuously attract investors and having the private sector lead economic growth. However, our government is still ignoring the existing opportunity to develop the economy without having to put its citizens under a substantial debt.
In the last 10 years, the mining industry generated enough income for Mongolia to take basic steps towards economic diversification. If we were more cunning, government officials would not be competing to see who has the fanciest car, the biggest house, or who can bring the most expensive Arab horses from abroad.
If we treated the matter with more intelligence, the authorities would not have conspired with each other to make deals on the most expensive land in Ulaanbaatar, and jobs in the government would not draw so much obsession. But if we used the mining revenue wisely, we could have encouraged fair competition, started producing high quality goods and services, boosted our reputation in international circles and made investments in the economies of our two neighbors.
The government of Mongolia has been receiving a huge amount of financial aid as well as soft loans from international development organizations and foreign governments for the past 20 years. Last year, Mongolia released government bonds for the first time to acquire expensive loans from foreign banks and private companies. But can our government make the most out of the huge loan?
The Lost Decade
A financial crisis broke out at the beginning of the 1980s when certain Latin American countries, namely Brazil, Argentina and Mexico, failed to meet their debt obligations when their external debt far exceeded their earning capacity.
These countries borrowed a huge amount of money from the international financial market by issuing government bonds in the 1960s and 1970s to achieve industrialization and build infrastructure. They did not have any trouble finding loans because of their high economic growth catalyzed by natural resources. Oil prices skyrocketed in 1973, which made it easy for these countries to sell their government bonds to international banks.
The total external debt of Latin American countries increased by 20 percent between 1975 and 1985, and it reached 315 billion USD by 1983, which equaled half of the regional GDP at that the time (the same level of external debt in terms of GDP ratio as Mongolia has today). Those Latin American countries paid 66 billion USD for coupon payments only in 1982 alone. The coupon payments had grown five and a half times as much as they were in 1972. Their CPIA index at that time was 3.0 (Mongolia’s CPIA index today is 3.41).
In August 1982, the government of Mexico declared that they were no longer able to meet its debt obligations, announced a moratorium suspending all payments for 90 days and called for their lenders to commence re-negotiations on loans. The move was followed by a significant fall in the credit ratings of Latin American countries, which resulted in the halt of international commercial bank loans to Mexican companies and demand for urgent loan repayments. The story repeated itself in Argentina later on.
The global economy suffered greatly from the Latin American crisis and the interest rates of the loans previously given to the Latin countries were raised, causing more debt burden. This crisis reduced the national income per capita considerably and expanded the gap between the rich and the poor. Also, there were other negative consequences such as increasing crime rates as the youth in countries of high debt became more involved in criminal activities including the drug trade and prostitution. The 1980s is referred to as “The Lost Decade” among Latin American countries. Some countries including Greece, Spain and Portugal have recently started a similar journey towards a very similar “Lost Decade.”
The government of Mongolia has already borrowed foreign loans that cannot be fully absorbed by the economy, let alone be repaid. Nevertheless, our politicians who do not see further than an election term are attempting to issue new Samurai bonds to acquire more loans from Japan. The authorities seem to be feeling proud, as if they have accomplished something worthy of praise and appreciation, when they manage acquire loans from foreign private companies.
No one is currently thinking about what we will do the year after the next parliamentary elections, when Mongolia has to repay the 500 million USD debt along with its six-month coupon payment of 35 million USD on December 5, 2017. We have not even started thinking about how to start creating accumulation for bond repayment. Moreover, one billion USD has to be repaid in 2022. In these dire circumstances, the politicians we have today are trying to acquire more loans instead of immediately setting up a loan repayment fund to start accumulation. Those politicians will probably be nowhere to be found by the time Mongolia needs to repay its debts. Not even Interpol will be able to find them then.
Any debt owed by the government of Mongolia is paid by the public budget. Therefore, I would like to urge the members of parliament to pass a law that registers bonds and government guarantees in the public budget balance and include public expenditure under a ceiling of two percent of GDP.
Let us include certain indicators in the law that measure and assess whether the infrastructure built with funding from government bonds has been used to improve economic competitiveness or not. This way, more loans devoted to building more infrastructure can be banned in the case where the previous ones prove to have been ineffective towards boosting economic competitiveness.
Instead of acquiring foreign loans, our government needs to create a stable legal environment that attracts investment, both domestic and foreign, into large-scale long-term projects and establish good concession agreements to be implemented on a timely basis. It is time for us to stop making investment swith public funds in large industrial projects and restrict the issuance of government guarantee to the Development Bank.
The most pressing issues we have today still remain to be resolved. Public governance needs to be strengthened and there must be greater transparency in government activities. We do not have to become a “Latin” Mongolia who lost a decade of development under a debt burden.
Translated by B.AMAR
Short URL: http://ubpost.mongolnews.mn/?p=6634