Mongolia looks to Chinggis bonds for export boost

By Paulius Kuncinas
Regional Editor,Oxford Business Group

The government in Mongolia has revealed plans to support domestic export manufacturers, with the aim of reducing a burgeoning import bill and boosting the country’s economic foundations.

Prime Minister N. Altankhuyag said at a press conference in early January that the government would allocate 360 billion MNT (209 million USD) from the 1.5 billion USD raised by the 2012 sale of “Chinggis bonds” to provide loans to local businesses in the primary export industries of minerals and cashmere.

Mongolia’s much-anticipated first sovereign bond, which was strongly over-subscribed, was dubbed “Chinggis” by members of the local media after the country’s founding father, Genghis Khan.

Since the offering in November 2012, the funds raised have financed infrastructure growth, helping to reduce the economic impact of falling coal exports last year.

Applications for the latest initiative are now with the authorities, with the selection process due to be finalized by March 1. The state-run Development Bank of Mongolia (DBM) will then allocate funds to successful candidates, while setting terms and conditions with borrowers.

High imports a concern

Mongolia’s hefty import bill climbed to six billion USD last year, with the country importing 88 percent of its consumer goods. According to the local media, the nation buys 74 percent of its dairy products from abroad, despite producing 45 million head of livestock, alongside 41 percent of flour-based products and 62 percent of its textiles and clothing. Minerals, machinery and electrical appliances also feature on the list of imports.

The plan to boost export industries squares with the “Let’s Construct and Create in Mongolia” program, announced by Altankhuyag on January 9. The initiative is spearheading a national drive to increase the value of exports by one trillion USD (595.2 million USD) in 2014, with “support for manufacturing replacing support for imports.” In December, the National Statistical Office of Mongolia revealed that exports fell 4.2 percent in the first 11 months of 2013.

Infrastructure boost

A drop in mining revenues caused by reduced demand from China weighed on Mongolia’s economy during 2013. However, investment in infrastructure helped to drive growth in other areas of the economy. Annual GDP growth accelerated to 14.3 percent in the second quarter, buoyed by infrastructure spending, particularly the construction of roads linking six of Mongolia’s provinces.
The Chinggis bond has helped finance more than 200 projects, including roads and railways, air transport, energy and housing, across the sectors.

A total of 256.3 billion MNT (149 million USD) was used to construct 700 km of paved roads, while 837.9 billion MNT (487 million USD) went towards financing a wave of new railways, the Tavan Talgoi power initiative and a metallurgy plant.

Deficit concerns

However, critics have questioned the use of the proceeds from the Chinggis bond sale and say they have been used to finance off-budget programmes in an effort to avoid the fiscal stability law (FSL), which limits the size of the budget deficit.

When it was introduced in 2010, the FSL placed a cap on outstanding debt and the fiscal deficit, with the limit set as a percentage of GDP. Last November, parliament rejected a proposal to amend the FSL and increase the government’s borrowing capacity to 60 percent of GDP for 2014. The cap was set at 50 percent for 2013 and is due to come down further to 40 percent this year.

Questions have also surrounded a 30 billion JPY (290 million USD), 10-year bond that the DBM issued late last year to finance infrastructure projects. Thanks to a 90 percent guarantee by the Japan Bank of International Cooperation, borrowing costs were low, with the note’s coupon set at 1.52 percent.

In December, the Financial Times pointed out the so-called Samurai bond would likely run up against the country’s borrowing limit. The same month, ratings agency Fitch noted the government’s budget deficit had reached 12 percent of GDP in 2013, effectively rendering the FSL “ineffective as a constraint on policymaking”.

At the same time, the ratings agency revised the country’s outlook from stable to negative, and both the World Bank and IMF have cautioned the government in recent months that its expansionary fiscal and monetary policies could threaten the stability of the economy.

This suggests that, while international investors have so far been willing to lend money to Mongolia at relatively inexpensive terms, going forward, they may seek additional reassurance that current spending levels are not putting the country’s immediate outlook at risk.

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