Mongolia Eyes First Bond Sale
Mongolia, a country that has been rescued five times in 22 years by the International Monetary Fund, is seeking to raise as much $1.5 billion in its first government bond offering, an amount equal to nearly one-fifth of the size of its economy.
It is as if the U.S. government tried to borrow $2.5 trillion in one bite.
Mongolian officials, who have been visiting investors this week to drum up demand, are seeking to sell a five-year bond with a yield of 4.125% to 4.25% and a 10-year bond that will yield 5.125% to 5.25%, according to bankers involved in the deal. The bonds will be denominated in dollars, and selling was set to begin as early as Wednesday, they said.
"This is a big-bang entry into global capital markets," says Jan Dehn, co-head of research for Ashmore Investment in London, which manages $68 billion and was an early lender to Mongolia's government. Ashmore's funds plan to buy the bond.
Other bond investors also appear to be interested in buying, a sign of the hunger among global bond buyers for any investment that offers a relatively high yield.
Buyers would be flying in the face of nagging worries about whether Mongolia, a country wedged between China and Russia, is a good investment. The nation's foreign-exchange reserves are shrinking, inflation is at double digits and the stock market has fallen 30% this year. The government also has made several decisions seen as unfriendly to business.
Best known for its horse-filled steppes and its founding father, Genghis Khan, Mongolia was the emerging-market world's wunderkind just a few years ago. Gross domestic product grew a blistering 17% to $8.6 billion in 2011, just two years after the country needed a loan from the IMF to bailout its banking system.
"Mongolia was the hot place to be two to three years ago," says Laurent Ettedgui, a portfolio manager at Quam Asset Management in Hong Kong. While many investors are now looking at other markets, he says, enough will be willing to look past the country's problems to focus on Mongolia's mineral riches and proximity to China.
"People will be hungry, less than before, but you will have the big players taking part," he says.
Emerging-market countries have issued a record $85 billion in sovereign debt in 2012, according to data firm Dealogic. Zambia and Bolivia also became first time issuers this year.
The money from the Mongolia bond would go to pay for roads, mining investment and electricity production, according to a presentation reviewed by The Wall Street Journal.
Investors already have shown a strong appetite for Mongolian debt. The country's state-owned development bank sold $580 million of bonds in March in an offering that was oversubscribed by 10 times. The bond, which is backed by the government, has an interest rate of 5.75%, but demand has driven up prices and pushed down the yield to 4.5% in the secondary market.
By comparison, Italy's benchmark 10-year bond trades with a yield of about 4.75%. Zambia's 10-year bond, sold in September, yields 5.625% and Bolivia's 10-year bond sold in October, yields 4.875%.
Standard & Poor's Ratings Services rates Mongolia BB-, a non-investment grade, or junk rating, similar to Bangladesh and Georgia. Moody's Investors Service rates Mongolia B1, similar to Senegal and Kenya.
The attraction of Mongolia is that it is rich in natural resources such as copper, uranium and coal. The country's biggest copper mine, owned by Rio Tinto PLC and the Mongolian government, is set to start producing next year. Analysts predict Mongolia will be the world's second-largest exporter of copper after Chile in coming years, generating tax revenue to support bond payments.
But the country has run into unanticipated speed bumps. Growth is expected to "slow" to 12.7% this year, according to the IMF. The government's deficit is expected to rise to almost $650 million, or 7% of GDP.
Falling global commodity prices have hit Mongolia's mining industry hard. Meantime, government spending increased 42% in the first eight months of the year, according to the World Bank. To cover a drop in tax receipts, the government borrowed $145 million from the central bank, while giving more than 50% pay increases to civil servants. Inflation is running at 15%.
Mongolia is "prone to boom-bust cycles," says Tim Condon, economist for ING. The question for investors is whether they can "be confident that it won't just be a two-to-three-year run of growth and then another IMF program," he says.
A weakening currency could also hamper Mongolia's ability to pay back the bond. The Mongolian central bank has spent $800 million in currency markets to prevent the togrog from losing value against the dollar. Net currency reserves have dropped to $1.4 billion, a two-year low, according to the IMF.
Government moves have soured the foreign-investment climate. Foreign direct investment is expected to be around $3 billion this year, said a Mongolian government official, down from $4.6 billion last year.
The government effectively blocked an attempted takeover of a major Mongolia coal producer by a Chinese state-owned enterprise. The company, Rio Tinto-controlled SouthGobi Resources Ltd., had its mining license suspended for several months, and an Australian lawyer for the company is being prevented from leaving the country as part of a corruption investigation. SouthGobi has said no charges have been filed and that it is cooperating with authorities.
Another concern: In May, Mongolia's parliament changed the foreign-investment law, requiring foreigners to get cabinet approval for small projects and parliamentary approval for big ones in mining and other key sectors.
It is as if the U.S. government tried to borrow $2.5 trillion in one bite.
Mongolian officials, who have been visiting investors this week to drum up demand, are seeking to sell a five-year bond with a yield of 4.125% to 4.25% and a 10-year bond that will yield 5.125% to 5.25%, according to bankers involved in the deal. The bonds will be denominated in dollars, and selling was set to begin as early as Wednesday, they said.
"This is a big-bang entry into global capital markets," says Jan Dehn, co-head of research for Ashmore Investment in London, which manages $68 billion and was an early lender to Mongolia's government. Ashmore's funds plan to buy the bond.
Other bond investors also appear to be interested in buying, a sign of the hunger among global bond buyers for any investment that offers a relatively high yield.
Buyers would be flying in the face of nagging worries about whether Mongolia, a country wedged between China and Russia, is a good investment. The nation's foreign-exchange reserves are shrinking, inflation is at double digits and the stock market has fallen 30% this year. The government also has made several decisions seen as unfriendly to business.
Best known for its horse-filled steppes and its founding father, Genghis Khan, Mongolia was the emerging-market world's wunderkind just a few years ago. Gross domestic product grew a blistering 17% to $8.6 billion in 2011, just two years after the country needed a loan from the IMF to bailout its banking system.
"Mongolia was the hot place to be two to three years ago," says Laurent Ettedgui, a portfolio manager at Quam Asset Management in Hong Kong. While many investors are now looking at other markets, he says, enough will be willing to look past the country's problems to focus on Mongolia's mineral riches and proximity to China.
"People will be hungry, less than before, but you will have the big players taking part," he says.
Emerging-market countries have issued a record $85 billion in sovereign debt in 2012, according to data firm Dealogic. Zambia and Bolivia also became first time issuers this year.
The money from the Mongolia bond would go to pay for roads, mining investment and electricity production, according to a presentation reviewed by The Wall Street Journal.
Investors already have shown a strong appetite for Mongolian debt. The country's state-owned development bank sold $580 million of bonds in March in an offering that was oversubscribed by 10 times. The bond, which is backed by the government, has an interest rate of 5.75%, but demand has driven up prices and pushed down the yield to 4.5% in the secondary market.
By comparison, Italy's benchmark 10-year bond trades with a yield of about 4.75%. Zambia's 10-year bond, sold in September, yields 5.625% and Bolivia's 10-year bond sold in October, yields 4.875%.
Standard & Poor's Ratings Services rates Mongolia BB-, a non-investment grade, or junk rating, similar to Bangladesh and Georgia. Moody's Investors Service rates Mongolia B1, similar to Senegal and Kenya.
The attraction of Mongolia is that it is rich in natural resources such as copper, uranium and coal. The country's biggest copper mine, owned by Rio Tinto PLC and the Mongolian government, is set to start producing next year. Analysts predict Mongolia will be the world's second-largest exporter of copper after Chile in coming years, generating tax revenue to support bond payments.
But the country has run into unanticipated speed bumps. Growth is expected to "slow" to 12.7% this year, according to the IMF. The government's deficit is expected to rise to almost $650 million, or 7% of GDP.
Falling global commodity prices have hit Mongolia's mining industry hard. Meantime, government spending increased 42% in the first eight months of the year, according to the World Bank. To cover a drop in tax receipts, the government borrowed $145 million from the central bank, while giving more than 50% pay increases to civil servants. Inflation is running at 15%.
Mongolia is "prone to boom-bust cycles," says Tim Condon, economist for ING. The question for investors is whether they can "be confident that it won't just be a two-to-three-year run of growth and then another IMF program," he says.
A weakening currency could also hamper Mongolia's ability to pay back the bond. The Mongolian central bank has spent $800 million in currency markets to prevent the togrog from losing value against the dollar. Net currency reserves have dropped to $1.4 billion, a two-year low, according to the IMF.
Government moves have soured the foreign-investment climate. Foreign direct investment is expected to be around $3 billion this year, said a Mongolian government official, down from $4.6 billion last year.
The government effectively blocked an attempted takeover of a major Mongolia coal producer by a Chinese state-owned enterprise. The company, Rio Tinto-controlled SouthGobi Resources Ltd., had its mining license suspended for several months, and an Australian lawyer for the company is being prevented from leaving the country as part of a corruption investigation. SouthGobi has said no charges have been filed and that it is cooperating with authorities.
Another concern: In May, Mongolia's parliament changed the foreign-investment law, requiring foreigners to get cabinet approval for small projects and parliamentary approval for big ones in mining and other key sectors.
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