Is Mongolia bouncing back?
This time last year, Mongolia’s prospects seemed grim. The government’s extravagant spending, expectant of high revenues from coal, gold and copper mining, rocketed debt to 80% of GDP as commodity prices fell. Foreign reserves had dwindled from over $4bn in 2012 to barely over $1bn, roughly covering four months of imports, while the Mongolian tögrög declined 17% against the dollar from June to October alone and was named by the BBC “the world’s worst performing currency”. Fitch downgraded its rating, citing increasing external liquidity risks and deteriorating fiscal conditions. Mongolia was forced to turn to the IMF for the second time in 8 years, for almost the same reasons as the first.
Following the 2009 bailout the IMF declared that “determined policy implantation” had fostered “a remarkable economic turnaround”. It seems this turnaround was not sustainable in the long-term. Although the $242m package paid Mongolia’s debt arrears and pushed growth into double digits (From 2009 to 2014, the economy grew by 70%), the economy struggled to manage the next commodity cycle and has ended up needing IMF assistance once more. This February the IMF agreed to provide $400m to avoid default and to build the country’s foreign exchange reserves, and if approved it could unlock a combined package of $3bn from benefactors such as the World Bank and Asian Development Bank for Mongolia.
Despite multiple delays in the IMF package due to a changeover of government, the Mongolian Stock Exchange Top 20 Index is up 74% on last year and commodity prices are on the rise. Growth is expected to pick up – to reach 3.3% this year and 4.2% the next. It has already saw a year-on-year growth rate of 5.9% for the first 9 months of 2017, with the IMF itself has acknowledged that the Mongolian economy is recovering faster than expected. As the nation exports 80-90% of its goods to China (an even higher figure than North Korea), recent days-long blockages on the border have represented a boom in trade, particularly of coal exports, and heavy investment is pouring into the Oyu Tolgoi copper mine. Structural reforms within the banking sector and government will continue to contribute to this growth, and investors are paying attention - last month an $800m sale of bonds attracted more than $5.5bn in bids, unheard of for the nation, despite its fiscal and credit problems. Mongolia seems to be on track to return to the fortunes at the turn of the decade, and with the added $3bn cushion likely to come its way next year, it is set to be steadily back on its feet.
The big question is, will this be a repeat of 2009? Will Mongolia be knocking at the doors of the IMF in another 8 years with depleted foreign exchange reserves and growing debt in another commodity price lull? Overall they are on course to avoid another repeat of history, given current political instabilities do not continue or negatively impact fiscal and monetary management. The wide-reaching structural reforms being implemented have already raised the confidence of not only investors but have gained approval from the IMF itself, while the majority Buddhist nation even famously chose Chinese investment and cooperation over ties with the Dalai Lama. At the risk of default last year, Mongolia is now on target to have no major foreign debt maturities until 2021. The former centre of the Eurasian steppe has the potential to use its position to diversify out of mining and use its revenues to decrease its reliance on primary product exports and China, given it can follow the IMF’s guidelines and responsibly manage the next commodity cycle.