What to consider in refinancing debts

2019  |  October   |  024

◼ Maintain policy discipline and healthy financial system as priority
◼ There’s a joke in the parliament that elections would exist until repayment


Just before the Parliamentary election four years ago, Mongolia issued Mazaalai bond at the international market, with the highest interest rate in the country’s history. The high-interest rate was inevitable at that time when economic indicators were poor, including growing Government budget spending, falling commodities prices and foreign investors turning away. The time is almost up to pay back the 500 million USD bond, borrowed for a five-year period at a 10.875 percent interest rate. 

Despite an ostensibly well-performing economy, Mongolia is at risk of sliding back into the same situation that existed at the time of lending the money. In addition to slowing down the global economy, it’s hard to predict the nature and timing of the consequences brought forth by the Trade War between the USA and China. While analysts are positively forecasting the commodities prices in the medium and long term, there’s unanimous agreement that they would fall in the short term, indicating a drop in export revenues and bond repayment at the same time.  

Moody’s advised “Mongolia is passing the point of climax of its economic cycle. It needs further policies and actions to stabilize current growth at 5-6 percent”. The company views that despite the medium-term well performance of the country’s macroeconomics, there are certain risks in terms of foreign risks and payment performances in the medium term. This effectively insinuates that “Don’t get too excited that current economic performances are doing well”. 

As of today, the Government of Mongolia has 7.2 billion USD in debt and 2.9 billion USD scheduled for repayment within the next four years. Specifically, these repayments are 500 million USD in the Mazaalai bond in 2021, one billion USD in Chinggis bond in 2023, 800 million USD in Gerege bond, 476 million USD in Khuraldai-1 bond and 124 million USD in Khuraldai bond in 2023. 

The Only Option

The Ministry of Finance and the Bank of Mongolia are making peace with the fact that there’s no other way than to refinance the debts. However, they are seeking ways to pay 10-20 percent of the foreign debts and payments with a high-interest rate and possible risks by leveraging positive macroeconomic climate. While the BoM is awaiting negotiations to extend the swap agreement with the People’s Bank of China for another three years, the Government drafted and introduced to the public debts and payments strategy. Technically, the Government and its affiliated agencies are required to conduct debts management and monitoring analyses every half-year, present them to the Financial Stability Council and make appropriate decisions, according to the Debts Management Law passed in 2015. However, failure to realize these processes up till now leads us to doubt whether the Government is handling the debts at all. Reportedly, there’s even a running joke in the “grey parliament house” that elections would exist until debts are repaid.  

Mongolia issued a bond at the international market in 2012 for the purpose of diversifying its economy. Today, however, not only did the economy not diversify, the country is under immense debt pressure. If the bond money were spent on projects and programs that yield short-term benefits, export revenues would have hiked up much faster and there wouldn’t be a debt headache today. 

As of today, the Government of Mongolia has 7.2 billion USD in debt and 2.9 billion USD scheduled for repayment within the next four years

Experts say that a huge policy mistake was made and that policy played a crucial role in creating debts. “We must think when to create debt in the medium and short terms. Other countries have their own comprehensive plans. We are learning this just now. Last fall, the Parliament updated the Medium-term Debts Strategy which allows for extending or converting debt periods. If Mongolia’s economic prospects are positive and the implementation of major projects is clear, investors would be interested in converting the debts. They won’t be too hasty to demand their debt. Therefore, negotiations are crucial. International research agencies are advising us to make negotiations to convert the debts as soon as possible. We must heed this advice and make them with haste. We need to give a good impression to our investors”. 

Possibilities for a reduced interest rate

The Eurozone economic growth is in recession due to many reasons including Germany’s industry sector decline and Brexit. China’s growth has slowed due to the US-China Trade War. The IMF and other organizations are reporting that the US economy is shifting towards a slowdown. The US dollar interest is predicted to be driven down by the expectation that the global economy may slide towards recession in the medium term. Major banks reduced their interests and implemented a policy to nourish the economy during the previous economic crises. This time, most banks are loosening their financial conditions in order to decelerate the economic crisis. For example, The Federal Reserve Bank drove down its policy interest rate three times since the end of last year to around two percent. If the conditions are met for a global economic crisis, the rate may reach 0 percent, as highlighted by analysts. Weakening USD may prove advantageous for countries like us who are seeking out loans and bonds.      

There’s no doubt that Mongolia’s inclusion in the FATF’s “Greylist” would set back the country’s efforts to raise low-interest financing from the foreign market. Fortunately, investors are confident that Mongolia could perform the requirements under the Grey List satisfactorily and is seeking ways to exit the list, noted D. Gan-Ochir, Chief Economist of the Bank of Mongolia. Therefore, it’s important to maintain policy discipline and a healthy financial system as a priority. This would help maintain investors’ trust. It’s also crucial to prove to investors that Mongolia is a reliable country and regain their trust in order to switch high-interest bonds with cheaper rates. On the other hand, this year’s only positive news was the Parliament’s decision not to cancel Oyu Tolgoi’s Agreement, in contrast to its yearlong campaign of confiscating licenses and increasing taxes. 

Oyu Tolgoi brings in majority FDI

Mongolia recently fell down from no. 70 to no. 80 in rankings of the World Bank’s Ease of Doing Business Index. The World Bank and the IFC gave a very clear message: “Mining will be your main breadwinner in the coming years. However, foreign direct investments must be absorbed into other sectors. These are the two main pillars”. Unfortunately, the Government and the National Development Agency have a long list of planned but not executed tasks. On the subject, Foreign Ambassadors to Mongolia remarked at the recent Conference on opportunities to boost foreign investments “Ground the plan of action in real life. Tie up government policies with foreign sector policy. Clarify your documents. Legal implementation has setbacks. Develop a plan on how the government and the private sector can diversify the economy. Pursue that plan.”

As there aren’t many cases where foreign investors come to Mongolia and buy stocks and bonds from the national stock exchange, the return flow is minuscule. However, the majority of the incoming capital flow is in the form of Oyu Tolgoi investment. Oyu Tolgoi has been depositing an annual 1.2 billion USD in the past two years. No less than 70 percent of the country’s foreign direct investment is made up of Oyu Tolgoi’s investment. However, the project’s development has recently been delayed for certain reasons. The first sustainable production schedule is now possibly pushed back by 30 months and capital spending is increased by up to 2.2 billion USD, as announced by the company. Notwithstanding Oyu Tolgoi, foreign direct investments to the country are likely to drop. Today, there’s no major project to fill in this gap. It’s hard fact that non-mining sector investments are merely hearsay.  


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