The Mongolia flag is placed next to one for the International Monetary Fund before a briefing in Ulaanbaatar on a US$5.5 billion bailout package for the debt-racked country. Photo: AFP

Mongolia was lauded this month for more “durable than anticipated” 3% GDP growth in 2017 in the International Monetary Fund’s first review of its US$400 million rescue program, following an $800 million five-year external bond return in October, where the 5.5% yield was half the previous peak.

Since the May rescue by the IMF, commodity exports have picked up, particularly to China, with mine closures in that country and its ban on imports of North Korean coal, and boosted budget revenue in local-currency terms with the weaker exchange rate against the US dollar. “Investor confidence recovery” with the successful international issuance will boost the balance of payments and reserves, and fully cover 2018 maturities and refinance more expensive domestic debt, according to the evaluation.

However, both the IMF and frontier-market fund managers continue to be wary as political and banking-sector complications in Mongolia dilute the upbeat narrative. The new government elected in July lost a confidence vote, ousting the prime minister, who was then replaced by his deputy, while the IMF’s health check was delayed.

Bank credit growth is still at a runaway 20% annual pace, with large foreign-exchange exposure and a 7.5% bad-loan rate pending the results of an overall asset quality audit by the central bank. Despite headline economic strides, on structural reform the IMF report assigned a “mixed” score, as regional peers Azerbaijan and Kazakhstan not under the lender’s thumb likewise have rebounded from crisis but remain ambivalent near-term bond bets.

The jumps in prices for Mongolia’s coal, copper and gold from Chinese demand stoked 5% first-half growth in gross domestic product, but construction has been negative for four years, with excess real-estate inventory. The windfall produced a budget surplus through September, but scheduled social and civil-servant handouts will result in a deficit, as the 2018 blueprint adopted by parliament could send the overall gap close to 10% of GDP, according to President Khaltmaa Battulga, who vetoed it as against the IMF arrangement.

Growth is slated at 4.2% amid introduction of a progressive income tax, but the president lambasted “inefficient investment projects” pushed by the ruling Mongolian People’s Party, which holds 65 of the 75 seats.  Battulga belongs to the opposition Democratic Party.

A fiscal-stability law envisages end-decade balance, but the IMF warns that the government wage bill compromises the target and threatens medium-term sustainability, with public debt already at 85% of output

A fiscal-stability law envisages end-decade balance, but the IMF warns that the government wage bill compromises the target and threatens medium-term sustainability, with public debt already at 85% of output.

Inflation was over 8% in October, and monetary policy has reversed course toward easing with a 100-basis-point drop in the benchmark interest rate to 11%. The IMF urged the central bank to go slowly on cuts as the recent reserve buildup to $2.5 billion on a stable tugrik may not last. The Bank of Mongolia has regularly dipped into the stash for intervention, even though its currency powers are murky and shared with the Finance Ministry.

An updated organic law is to clarify the central bank’s independence and regulatory authority more broadly, but in the meantime its hands are full with the asset-quality exercise conducted with accounting firm PricewaterhouseCoopers. It will screen bank business plans and apply stress tests, with capital holes to be remedied by the end of next year when deposit insurance is due to start.

Among outstanding challenges, the financial sector agenda is “most important” and funding decisions should not tilt to favored shareholders or jeopardize the public-sector balance sheet, the IMF evaluation concluded.

Azerbaijan came in for separate caution under a December Article IV survey by the IMF, with stagflation ending as the hydrocarbon and service industries revive, but with banking-sector restructuring “still incomplete.”

Inflation will be near 15% in 2017 after exchange-rate depreciation, and increased fiscal spending should be reined in by clear rules before 2019, it recommended.

Privatization has drawn foreign-investor interest in real estate, and external debt remains minimal at under 20% of GDP.

Fitch Ratings expects positive growth in 2018 muddied by “continued bank asset quality pressure” despite the bad-loan cleanup at the International Bank of Azerbaijan. The rater was also skeptical about the Halyk-Kazkommertsbank consolidation as the biggest government-owned lender in Kazakhstan following the initial stage of operations merger in December.

Foreign-exchange positions may deteriorate as local-depositor tenge sentiment continues to swing as measured by dollarization levels, and international bonds were shaken by a New York court ruling freezing central-bank reserves in an investor dispute while the overall system is in knots.

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Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.

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