Mongolia’s rumbling resource nationalism

Mongolian stocks tanked in the aftermath of the first-round presidential contest, cast as a referendum on the ruling People’s Party (MPP) IMF program-related economic policies, before stabilizing for a 2% gain through end-June on the Bloomberg 20 leading companies index.

The MPP standard bearer Miyeegombo Enkhbold campaigned on a foreign investor-friendly platform, while his main opponent and first ballot winner Khaltmaa Battulga from the Democratic Party ran as a populist railing against Chinese and Western exploitation of natural resources that will “finish in 40-50 years.” A third party entrant from reconstituted Communists came within several thousand votes of defeating Enkbold, whose anti-corruption reputation was upended by the release of a tape recording where he allegedly sold government jobs, for the upcoming July 9 face-off.

The parliament wields the most power under the country’s post-independence setup, but the president can veto legislation and appoints judges. With his Trump-like “Mongolia first” slogan and more flamboyant personality as a former judo star in contrast with trained economist and career politician Enkbold, Battulga has momentum into the final push, and even if ultimately defeated his reasserted mining nationalism may check Fund-promoted industry and financial sector changes.

The parliament wields the most power under the country’s post-independence setup, but the president can veto legislation and appoints judges

The price of the benchmark external 2024 bond – the product of an exchange for the US$600 million Development Bank original one due in March for new seven-year sovereign paper with an almost 9% coupon – also fell with the initial election results. Despite the country’s ratings downgrade to borderline default “C” level last year, the issue was oversubscribed in the wake of the $435 million IMF line, which, combined with other bilateral and multilateral support, brought the entire rescue package to $5.5 billion. Two other international bonds will mature in 2018, and plans call for pre-financing them commercially alongside domestic debt market development, which can open a supplemental channel to strained bank lending. Currency risk is a major consideration and Beijing has extended an RMB15 billion swap for the period that could, in theory, be drawn on to aid rollovers.

GDP will contract marginally this year after meager 1% growth in 2016. Copper, gold, coal and other minerals account for 80% of exports, and the $4.5 billion Oyu Tolgoi (OT) venture with Rio Tinto was held up over ownership and funding disputes until recently. In May the MPP-controlled government that won power last June introduced foreign investment reforms at IMF urging that doubled the mine exploration area to one-fifth of the country and abolished a law mandating local bank handling of all revenue. Construction has been another economic mainstay, and agribusiness and tourism are diversification targets. Fiscal and monetary policies and the balance of payments have regularly veered out of control since market transition in 1990, triggering consecutive international bailouts. The budget and current account gaps were 17% and 4%, respectively, of GDP last year, as the government debt ratio rose to 70% and reserves dipped to several months imports. The central bank had to hike interest rates 500 basis points to defend the currency, with the benchmark at 15%, around triple inflation, coming into the period before the Fund agreement. The hike ravaged bank balance sheets already suffering from near double-digit bad loan levels due to runaway special government-backed industry and mortgage schemes.

Fiscal adjustment under the jointly designed Economic Recovery Program aims to establish a primary surplus by end-decade, when debt/GDP is also to settle at 75% as further phases of the OT and other big commodity projects go online. It restrains public sector pensions and salaries and increases excise taxes, and phases out so-called quasi-fiscal activities such as central bank subsidized lending. Monetary policy will remain tight, with exchange rate intervention confined to “disorderly” market conditions to rebuild reserves toward the goal of six months import cover.

Banks will be subject to comprehensive audits to be prepared for recapitalization and restructuring, and new legislation will enact stricter asset classification, liquidity, management and resolution rules. Securities market oversight is also weak despite a cooperation accord between the London and Mongolian stock exchanges, and regulators will receive additional training and enforcement power.  Democratic Party challenger Battulga has blasted the austerity moves and warned of Chinese threats to national security with mine and infrastructure ownership. He promises to reinstate the local bank revenue management order and restore Mongolian “pride” with raw materials, claims that earn popular applause and may understandably aggravate foreign investor raw feelings.