Development Bank to Test Global Debt Market
While the reach nations of the European Union heed warnings about the potential collapse of their market for sovereign debt, Mongolia is going to tap the global debt market. The Mongolian Development Bank had announced that it would issue USD 600 million equivalent of medium-term Euro bonds with the assistance of global financial giants such as ING, Deutsche Bank, and HSBC. The bonds are planned to be sold in several stages through the Singapore Exchange (SGX) this December and into 2012.
Open up a window
The idea of sovereign bond issuance isn’t new for Mongolians. In order to fight financial crisis in 2008, Mongolia planned to issue USD 1.2 billion in sovereign bonds. Even last year, officials from the Ministry of Finance said that discussions were underway to get into the global debt market. However, since then, the expectations have melted away and the sovereign bond hasn't come to the global market as Mongolia has had access to concessionary lending at low rates and with long maturities.
Thanks to its vast reserves of mineral resources, Mongolia has outgrown its status as a poor-income-country, which means times when free financial assistance was solicited are over. It was then understood that the Government couldn’t afford to finance ambitious projects from the budget. Therefore, Mongolia needs commercial external borrowings.
“Although the Mongolian Development Bank was formed only five months ago, it has already become an important tool to implement the financing of nationwide infrastructure development projects of the Government,” said Mongolian Prime Minister S.Batbold. According to the Development Bank the bonds will finance ambitious projects such as a new railroad, The Sainshand Industrial Complex, and The New Development Program.
On other hand, the Government wants to establish a benchmark to help Mongolian companies access the capital markets. “Sovereign bond issuance will open up a window for private companies to go and raise money,” explained Ch.Ganhuyag, Vice Minister of Finance. Today, only the Trade and Development Bank (TDB) has experience issuing bonds out of Mongolia.
Market Situation
The Development Bank's debt issuance depends on the market situation, said experts. Since the European dept crisis has worsened and the United States has lost its triple-A rating from Standard & Poor's, investors are afraid of the bond market. Due largely to these factors, the yields of Mongolian bonds may be much higher than expected before. Surprisingly, although the world capital market environment is not favorable at present, the Development Bank of Mongolia managed to issue the bonds in terms compared with countries in a similar situations, according to its official statement.
The international rating agency, Standard & Poor’s has rated the Development Bank of Mongolia’s bonds similarly to the Government of Mongolia, -(BB-).
Foreign experts explained that the bonds of emerging countries are attracting investors seeking to diversify risks as well as earn high returns. According to The Express Tribune, today emerging markets represent 10-15 percent of the global debt market, up from 6 percent in 2000.
The good news is the situation of Mongolia is generally sounder than developed countries, where potential economic recession fears can spook the market. The economy grew at a furious pace with the World Bank data showing GDP growth of 20.8 percent in third quarter, following 17.3 percent growth in second quarter. Moreover, the Mongolian total public sector debt is equivalent to 42 percent of GDP, compared to 100 percent for USA and other historically rich countries.
The Development Banks` bonds would offer investors a chance to diversify their Asian sovereign bond portfolio and it would be expected to attract attention of foreign financial and investment banks interested in operating in Mongolia.
“Foreign investors are eying Mongolia,” pointed B.Batjargal, chairman of the Development Bank, “because of this, the bond issuance likely to be successful”.
After the Fund Raising
Some experts did not hide their pessimism and skepticism that the newly formed Development Bank can implement large-scale projects by issuing bonds.
“The Development Bank first needs to differentiate among projects it can finance. Only projects that are determined to be profitable, for which feasibility studies are prepared must to be implemented,” pointed out Rogier van den Brink, a lead economist at the World Bank.
He explained that at the World Bank for example, the preparation of implementation of one project requires at least one year.
“If the Development Bank issued bonds and raised capital today, what will be done with this capital? No projects have been estimated, and none are ready to be implemented,” Rogier warned.
We should keep in mind, that the Development Bank will be the first Mongolian entity to issue bonds with sovereign guarantees, which means in case the Development Bank cannot pay off its debt, then the Government will pay for it.
Of course, USD 600 million is not a big deal for large foreign investors, even though, it is s big number for Mongolians, amounting for almost 10 percent of the GDP. Therefore, the Development Bank needs to assign high responsibility.
“In a country like Mongolia, where there is a big conflict of interest between the public and the private, we should make a perfect contract and make all of the process open and transparent in order to create these ambitious construction projects by credit,” pointed out D.Jargalsaikhan in his article entitled Bond-Access to the Sea.
After the bonds are issued, then the most important thing would be the Development Banks` capital expenditure and its result.
“If we fail to implement the ambitious projects in a timely and efficient manner, then the credit rating of our Government would be even worse,” Jargalsaikhan added.
Open up a window
The idea of sovereign bond issuance isn’t new for Mongolians. In order to fight financial crisis in 2008, Mongolia planned to issue USD 1.2 billion in sovereign bonds. Even last year, officials from the Ministry of Finance said that discussions were underway to get into the global debt market. However, since then, the expectations have melted away and the sovereign bond hasn't come to the global market as Mongolia has had access to concessionary lending at low rates and with long maturities.
Thanks to its vast reserves of mineral resources, Mongolia has outgrown its status as a poor-income-country, which means times when free financial assistance was solicited are over. It was then understood that the Government couldn’t afford to finance ambitious projects from the budget. Therefore, Mongolia needs commercial external borrowings.
“Although the Mongolian Development Bank was formed only five months ago, it has already become an important tool to implement the financing of nationwide infrastructure development projects of the Government,” said Mongolian Prime Minister S.Batbold. According to the Development Bank the bonds will finance ambitious projects such as a new railroad, The Sainshand Industrial Complex, and The New Development Program.
On other hand, the Government wants to establish a benchmark to help Mongolian companies access the capital markets. “Sovereign bond issuance will open up a window for private companies to go and raise money,” explained Ch.Ganhuyag, Vice Minister of Finance. Today, only the Trade and Development Bank (TDB) has experience issuing bonds out of Mongolia.
Market Situation
The Development Bank's debt issuance depends on the market situation, said experts. Since the European dept crisis has worsened and the United States has lost its triple-A rating from Standard & Poor's, investors are afraid of the bond market. Due largely to these factors, the yields of Mongolian bonds may be much higher than expected before. Surprisingly, although the world capital market environment is not favorable at present, the Development Bank of Mongolia managed to issue the bonds in terms compared with countries in a similar situations, according to its official statement.
The international rating agency, Standard & Poor’s has rated the Development Bank of Mongolia’s bonds similarly to the Government of Mongolia, -(BB-).
Foreign experts explained that the bonds of emerging countries are attracting investors seeking to diversify risks as well as earn high returns. According to The Express Tribune, today emerging markets represent 10-15 percent of the global debt market, up from 6 percent in 2000.
The good news is the situation of Mongolia is generally sounder than developed countries, where potential economic recession fears can spook the market. The economy grew at a furious pace with the World Bank data showing GDP growth of 20.8 percent in third quarter, following 17.3 percent growth in second quarter. Moreover, the Mongolian total public sector debt is equivalent to 42 percent of GDP, compared to 100 percent for USA and other historically rich countries.
The Development Banks` bonds would offer investors a chance to diversify their Asian sovereign bond portfolio and it would be expected to attract attention of foreign financial and investment banks interested in operating in Mongolia.
“Foreign investors are eying Mongolia,” pointed B.Batjargal, chairman of the Development Bank, “because of this, the bond issuance likely to be successful”.
After the Fund Raising
Some experts did not hide their pessimism and skepticism that the newly formed Development Bank can implement large-scale projects by issuing bonds.
“The Development Bank first needs to differentiate among projects it can finance. Only projects that are determined to be profitable, for which feasibility studies are prepared must to be implemented,” pointed out Rogier van den Brink, a lead economist at the World Bank.
He explained that at the World Bank for example, the preparation of implementation of one project requires at least one year.
“If the Development Bank issued bonds and raised capital today, what will be done with this capital? No projects have been estimated, and none are ready to be implemented,” Rogier warned.
We should keep in mind, that the Development Bank will be the first Mongolian entity to issue bonds with sovereign guarantees, which means in case the Development Bank cannot pay off its debt, then the Government will pay for it.
Of course, USD 600 million is not a big deal for large foreign investors, even though, it is s big number for Mongolians, amounting for almost 10 percent of the GDP. Therefore, the Development Bank needs to assign high responsibility.
“In a country like Mongolia, where there is a big conflict of interest between the public and the private, we should make a perfect contract and make all of the process open and transparent in order to create these ambitious construction projects by credit,” pointed out D.Jargalsaikhan in his article entitled Bond-Access to the Sea.
After the bonds are issued, then the most important thing would be the Development Banks` capital expenditure and its result.
“If we fail to implement the ambitious projects in a timely and efficient manner, then the credit rating of our Government would be even worse,” Jargalsaikhan added.
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