MONGOLIA’S MISSED MINING VEINS

Mongolian debt and equity frontier index entry ambitions were dashed after the landmark Tavan Tolgoi 30 percent coal mine flotation was postponed from this quarter until September, in position as the biggest and most widely held listing. At an estimated 6.5 billion tons, it is a vast untapped deposit and the state company owner working with foreign contractors has already agreed to supply China. One-tenth the offering is to be distributed to all citizens, a move critics, recalling early post-communist voucher experiments, have dismissed as an election year ploy. Global underwriters competed tenaciously for the mandate on the expectation of high investor interest and potential sale through foreign exchanges, with Hong Kong and London already hosting natural resource companies. The delay followed a critical IMF report under a staff monitoring program citing overheating and commodity price risk. GDP and private sector credit growth are running 20 percent and 50 percent respectively, and inflation too continues at a double-digit pace. Spending, including 3 percent of GDP in subsidized loans to small enterprises and cashmere processors, will breach fiscal responsibility law provisions, and a recently-created Development Bank nominally dedicated to infrastructure funding could drain additional sums. International reserves are at a record $2 billion and bolstered by a renimbi swap line with China’s central bank, but currency appreciation against the dollar along with copper export values have tapered. Monetary policy has been tightened with interest rate and reserve requirement hikes, but real rates remain negative and macro-prudential steps in particular to moderate rapid mortgage lending are absent. 

NPL numbers understate the problem and related-party exposures with greater systemic consequences are heavy in the Fund’s view. It laments “discipline erosion” since the post-2008 emergency standby arrangement was completed, and sees parallels with the boom and bust cycle then which Mongolian officials argue they have tried to tame following both developing and industrial economy “best practices.”

In contrast with the reprise there the IMF at the same time declared progress in the case of Iceland’s extrication from its spectacular banking system meltdown. GDP growth has finally turned positive and fiscal consolidation is proceeding despite government debt still at 100 percent of output. Capital controls have been extended through next year to allow more time for household and corporate balance sheet restructuring, final court decisions on currency and inflation-indexed instruments, and financial and operational repairs at the remaining three main commercial banks. The state mortgage fund’s solvency is still in doubt, local government borrowing poses a further burden, and overall prudential supervision suffers from enforcement and transparency gaps leaving scope for future eruptions, the review concludes.