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| Weathering the storm: Mongolia has been battered in recent years, with little protection in place for investors |
Five years ago, Mongolia was riding high, posting double-digit, breakneck-pace real economic growth, and attracting foreign investors seeking to exploit its rich resource endowment.
That growth has fizzled out on the back of the commodity price plunge and a shortage of government finance after years of debt-fuelled largesse, only a fraction of which has ended up in productive investments amid widespread embezzlement.
All this took place against the backdrop of a worsening investor climate dominated by the renegotiation of the Oyu Tolgoi copper project, culminating in a financing and tax dispute between the government and the private operator Rio Tinto.
And it shows.
Mongolia’s risk score shed 10 points from 2011 to the beginning of 2016, and last year it continued to fall, chalking up the largest drop in Q4 of all the 186 countries surveyed by Euromoney (data are provisional ahead of publication next week):
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That alone has taken the borrower down nine places in the global rankings in only the final three months of the year, to 123rd.
It extends a downward trend that has seen Mongolia plummet 43 places since 2011 into the lowest of ECR’s credit risk categories: tier five – the highest default risk.
The fiscal deficit has ballooned to 20% of GDP.
And the tughrik has depreciated by around 22% against a resurgent US dollar since the end of June 2016, increasing the risk of inflation and debt servicing problems.
It is no wonder that scores for the government finances, and for bank and currency stability are extremely low (less than four out of 10 in Euromoney’s survey).
Economic growth is crawling to a standstill, and unemployment – and the poverty that goes with it – is rising sharply, pushing the score for that risk factor downwards.
Scores for institutional risk, and the regulatory and policymaking environment have fallen sharply, too, and debt indicators paint a dismal picture.
Having raised more than $30 billion-worth of financing during the past five years, Mongolia is now saddled with a 70% of GDP debt ratio.
A $1 billion bond is due in 2018, with $580 million issued by the state Development Bank maturing in March that it has no hope of repaying.
However, there might just be a glimmer of hope on the horizon.
Talks are under way with the IMF to try to come to an arrangement on a financial assistance programme. It remains unclear if the new government has the political will to impose the austerity the IMF will require as the precondition for its lending.
Turning to China is an option, but it will not resolve the underlying problems, and, besides, bilateral tensions have increased after Mongolia entertained the Dalai Lama in November.
In that light, an IMF programme might be unpalatable, but it might be Mongolia’s only realistic option, slowly turning around its fortunes.
Contributing expert Khashchuluun Chuluundorj, economics professor at the National University of Mongolia, agrees, saying “the fiscal situation is severe”, but he believes the budget will under-finance government spending and will be amended to reduce the deficit. “The probability of an IMF deal is high,” he believes.
However, as other high-risk defaulters have also found, the economy will continue to suffer, and it could be a long and precarious road back.
This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.