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Mongolia bond positions turned underweight in global emerging market strategies, as tens of thousands of Ulaanbaatar protesters in bitter winter cold called for lifting the “fog” in a play on words combining the initials of the Mongolian People’s Party (MPP) and the Democratic Party (DP). The action followed another spate of scandal revelations, including the parliamentary speaker selling government positions and insider abuse of a decades-old discount mortgage lending scheme, where connected officials and families were able to earn tenfold returns on cheap money.

With the popular discontent new splinter parties plan to enter parliamentary elections in 2020, and MPP Prime Minister Ukhnaagin Khurelsukh and his cabinet are likely to face another vote of confidence after an attempt narrowly missed in November, just a year after a predecessor was ousted for corruption. He claimed wealthy business executives were behind the move, but independent media commentators now urge resignation as the only route to safeguarding democracy. Russia and China, combining their infrastructure and raw materials interests in an “economic corridor,” also impose governance strains. Despite 6% gross domestic product growth, Mongolia’s trade surplus with them was down 35% to $925 million through the third quarter of last year.

In October, the International Monetary Fund (IMF) released another $35 million under its 3-year $430 million program anchoring $5.5 billion in overall bilateral and multilateral assistance, amid banking system and foreign reserve warnings. At the same time, Anglo-Australian miner Rio Tinto announced a delay in the $4.5 billion expansion of the Oyu Tolgoi gold and copper joint venture, where the state has a one-third stake. With mechanical challenges the first output may not come until late next year, and the operation could again be complicated by profit-sharing demands reflected in the country’s dozen-place drop in the latest World Bank Doing Business rankings. Metal and coal export reliance spotlight these flagship projects, with limited diversification into other industries like processed textiles from cashmere. The European Bank for Reconstruction and Development estimates almost $2 billion in earnings potential from garment added value, and is advising local herders and cooperatives.

Ratings agencies maintained their “B” grade, with 6% range growth again expected in 2019 on inflation just above that level. The budget ran a primary surplus last year, and the central bank adopted a tightening stance in September, after selling 10% of $3 billion in reserves to support the depreciating tugrik currency against the dollar. The IMF review cautioned on a return to 20% annual credit extension even with the institution of macro-prudential limits, such as maximum debt service ratios for consumer and mortgage loans. It noted that bad asset classification and recapitalization exercises were incomplete, and that the Financial Action Task Force continued to assign low anti-money laundering scores. Continued decline in world gold and copper prices and the Chinese shift to national coal production will widen the current account deficit, and fiscal loosening this year can pose medium-term public debt danger should the sovereign attempt to re-access markets under higher global interest rates, the IMF report implied.

Continued decline in world gold and copper prices and the Chinese shift to national coal production will widen the current account deficit

In November, the IMF also fielded a mission in Uzbekistan, and flagged economic “overheating” with 5% growth and 15% inflation, as the current account surplus slid to a 3% of GDP deficit. Sudden price, trade and exchange rate liberalization under President Shavkat Mirzoyev sparked energy and water shortages, and agriculture suffered bad weather. Public wages were hiked 10% to compensate, as the central bank raised rates above 15% to fight government-directed credit expansion. Quasi-fiscal operations, especially through the Reconstruction and Development Fund, left a 2.5% deficit in 2018.

n 2019 tax reform is a priority to close the gap, including better collection of value-added and luxury levies. State enterprise restructuring and divestiture is also on the agenda, with possible sales on the 25 year old Tashkent Stock Exchange. With 125 listed companies, only 10 are liquid, with daily turnover under $100,000, according to frontier market specialists. Price-earnings ratios are under five times, and foreign investment in banks may soon be authorized, while public and private equity launches are in preparation through Hong Kong and London. Government leaders were in Germany in mid-January on a road show touting financial services, tourism, food processing and auto-making prospects, although specific deals were foggy.

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