Mongolia: new Samurai bond puts fiscal rules in spotlight
Resouce-rich Mongolia is going back to the international bond market in a push to offset a weakening economic cycle.
Government-backed Development Bank of Mongolia (DBM) has placed a ¥30bn ($290m), 10-year samurai bond to invest in much needed infrastructure projects. But the deal is stretching the country’s borrowing rules to the limit.
The operation is 90 per cent guaranteed by the AAA-rated Japan Bank for International Cooperation (JBIC), which largely explains a final coupon of 1.52 per cent.
Although DBM was expecting a slightly lower yield of around 1.3-1.35 per cent, the deal stands out as a very good one for a a country whose sovereign and quasi-sovereign debt retains junk status among the world’s major rating agencies.
Still, there is one last piece that has to fall in place to make it happen, as Mongolia’s Fiscal Stability Law (FSL) approved in 2010 leaves little space for further debt issuance. The government and the DBM itself have borrowed over $2bn in international debt markets since March 2012 and public debt has climbed to around 50 per cent of GDP. Total debt should not exceed 40 per cent, which should rule out any further bond issuance.
That means an amendment to the FSL is necessary. The finance ministry drafted a bill to raise the debt ceiling to 60 per cent, but it failed to get the required two-thirds majority in parliament in November. The government is now drafting a new bill to classify types of debt – in effect to separate public debt from quasi-sovereign debt (debt issued by state entities like the DBM), according to a Mongolian source who wished to remain anonymous.
Chris MacDougall, managing director at Mongolia Investment Banking Group, tweeted a few days before the deal:
“The government can do that it whatever it wants on the legislative side, but we need to see a bit of a spark to get the economy back on track. Issuing new debt is not going to fix the economy in the long run and investors would like to see some more legislative stability,” the MacDougall told beyondbrics after the placement.
Twisting the FSL to make room for the samurai bonds risks setting a dangerous precedent. Mongolia does not boast a brilliant track record in public finance management as the International Monetary Fund rescued the country five times over the last 23 years. The 2010 FSL was supposed to become a turning point and a milestone on the road towards sustainable public finance management. Boosted by mining developments such as Rio Tinto’s Oyu Tolgoi (OT) copper and gold mine, whose phase I alone attracted investments for some $6.2bn, Mongolia’s economy posted a five-year average real GDP growth of 9.3 per cent. But the economy is deteriorating amid uncertainties over OT phase II, along with weaker commodity market conditions. Fiscal discipline hangs in the balance again.
Even before Mongolia works out how to account for the samurai bond, parts of the FSL had lost traction already. Its 2 per cent public deficit threshold, for example, is largely avoided through off-budget spending carried out by the same DBM. Considering all spending, the overall fiscal deficit will likely reach 12 per cent of GDP this year, the World Bank estimates.
“This has rendered the FSL ineffective as a constraint on policy-making,” rating agency Fitch said in its latest report on Mongolia, where it revised the country’s outlook to negative from stable while affirming its previous B+ rating.
Some government officials believe the economic assumptions behind the FSL are now proving to be too challenging for Mongolia’s current economic cycle. But further tweaks the rules will add new uncertainties over the government’s stance over fiscal stability. Debt is one thing, but a clear plan and limits are needed, otherwise it can backfire. Samurai warriors were known to have sharp swords.
Government-backed Development Bank of Mongolia (DBM) has placed a ¥30bn ($290m), 10-year samurai bond to invest in much needed infrastructure projects. But the deal is stretching the country’s borrowing rules to the limit.
The operation is 90 per cent guaranteed by the AAA-rated Japan Bank for International Cooperation (JBIC), which largely explains a final coupon of 1.52 per cent.
Although DBM was expecting a slightly lower yield of around 1.3-1.35 per cent, the deal stands out as a very good one for a a country whose sovereign and quasi-sovereign debt retains junk status among the world’s major rating agencies.
Still, there is one last piece that has to fall in place to make it happen, as Mongolia’s Fiscal Stability Law (FSL) approved in 2010 leaves little space for further debt issuance. The government and the DBM itself have borrowed over $2bn in international debt markets since March 2012 and public debt has climbed to around 50 per cent of GDP. Total debt should not exceed 40 per cent, which should rule out any further bond issuance.
That means an amendment to the FSL is necessary. The finance ministry drafted a bill to raise the debt ceiling to 60 per cent, but it failed to get the required two-thirds majority in parliament in November. The government is now drafting a new bill to classify types of debt – in effect to separate public debt from quasi-sovereign debt (debt issued by state entities like the DBM), according to a Mongolian source who wished to remain anonymous.
Chris MacDougall, managing director at Mongolia Investment Banking Group, tweeted a few days before the deal:
“The government can do that it whatever it wants on the legislative side, but we need to see a bit of a spark to get the economy back on track. Issuing new debt is not going to fix the economy in the long run and investors would like to see some more legislative stability,” the MacDougall told beyondbrics after the placement.
Twisting the FSL to make room for the samurai bonds risks setting a dangerous precedent. Mongolia does not boast a brilliant track record in public finance management as the International Monetary Fund rescued the country five times over the last 23 years. The 2010 FSL was supposed to become a turning point and a milestone on the road towards sustainable public finance management. Boosted by mining developments such as Rio Tinto’s Oyu Tolgoi (OT) copper and gold mine, whose phase I alone attracted investments for some $6.2bn, Mongolia’s economy posted a five-year average real GDP growth of 9.3 per cent. But the economy is deteriorating amid uncertainties over OT phase II, along with weaker commodity market conditions. Fiscal discipline hangs in the balance again.
Even before Mongolia works out how to account for the samurai bond, parts of the FSL had lost traction already. Its 2 per cent public deficit threshold, for example, is largely avoided through off-budget spending carried out by the same DBM. Considering all spending, the overall fiscal deficit will likely reach 12 per cent of GDP this year, the World Bank estimates.
“This has rendered the FSL ineffective as a constraint on policy-making,” rating agency Fitch said in its latest report on Mongolia, where it revised the country’s outlook to negative from stable while affirming its previous B+ rating.
Some government officials believe the economic assumptions behind the FSL are now proving to be too challenging for Mongolia’s current economic cycle. But further tweaks the rules will add new uncertainties over the government’s stance over fiscal stability. Debt is one thing, but a clear plan and limits are needed, otherwise it can backfire. Samurai warriors were known to have sharp swords.
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