WHY THE BAILOUT?
The Mongolia government has jointly announced with the IMF that it will implement a politically difficult, but inevitable, rescue package, and avoid becoming a delinquent international debtor. Let’s be clear, this is an aid package as it has a very low interest rate. It is also coming from longterm friends of Mongolia - the IMF, World Bank, ADB, Japan and other bilateral partners. The Chinese government will reportedly extend a 2.2 billion USD Yuan swap facility (due in August) for three years.
This multi-party package will only come into being because the Mongolian government has agreed to a structural reform of government finances and processes. Signing up to the 440 million USD IMF package has opened the door to a five billion USD plus support and debt restructuring package.
The IMF’s 440 million USD package by itself will make little up-front difference to Mongolia’s plight, being drawn down over three years.
This larger package will also make the refinancing easier of existing government debts. Just recently DBM’s bonds of 580 million USD (issued at 5.75 percent interest for five years) were exchanged for the new 600 million USD Khuraldai government bond (issued at 8.75 percent for seven years). The new Khuraldai bond interest is worth 52 percent more than the DBM bond raised five years ago. However it is a 2.1 percent lower interest rate than the last 500 million USD bond raised just 12 months ago – representing a 20 percent reduction in borrowing costs. This is the biggest benefit from the proposed IMF deal.
However, lenders are also saying, “If we are to help you then you must also help yourself.” The restructuring of government revenues and expenditures is required “with or without bond repayment” and “with or without IMF bailout”.
By the end of 2016, the state budget deficit reached 15 percent оf GDP and public debt reached 78 percent of GDP, according to Unuudur. Government expenditures have grown at a far faster rate than its revenues. At the peak of commodity prices, the government was running a large deficit and borrowing from abroad to make up for it. With the downturn in commodity prices, the debt situation has become chronic.
Fiscal restructuring has to take place, with or without IMF bailout, but with IMF bailout at least the country will receive fiscal support from donor organizations. So the main culprit is not just a temporary fall in mining product prices, it’s the underlying fiscal structure and policies which created the unsustainable budget deficit and inefficiency.
Some economists claim that the bailout package is either unnecessary or its terms are unfair - or both.
But we ask you - what do individuals, families and companies do when they fall on tough times? They restructure to survive. If they don’t, their relatives, shareholders and trading partners quickly cut financial support. They restructure or fail. For companies, you restructure or go bankrupt.
Officially, governments do not become bankrupt – look at Zimbabwe for instance. However, where lending countries and major lending institutions see the economy or government finances being mismanaged and in very poor condition, they quickly reduce their support, and demand action before support is re-instated.
There are also notable examples of countries like Venezuela where political leaders prolong their own country’s agony. They pretend the crisis does not exist, or waste time placing the blame on other parties. They often continue to print money to pay their own bills and make debt repayments. They do this for personal benefit, but economic recovery does not occur and calamity moves closer because the underlying economic structure itself is erroneous.
Government leaders may take actions within their own country that defy logic. In recent years, despite facing an economic crisis, Mongolia failed to support a number of large investment projects which could deliver billions of USD in foreign direct investment and tax revenue. Projects like the Tavan Tolgoi coal mine, Power plant No. 5 and Gobi power plant could bring in at least five billion USD in foreign investment. However, due to political conflicts this hasn’t happened. Unfortunately, no minister in Mongolia resigns when he or she pursues a bad policy and can’t work with investors.
However, when governments borrow from international markets to fund domestic projects they ironically expose themselves to the reality of being a “commercial borrower” – where government must repay its debt on time or face significant consequences.
We know from experience that when the economy is strong, the exchange rate is usually strong. This occurred during the Oyo Tolgoi stage one construction and the peak of the commodities boom when coal and iron ore prices were very high.
But now we also know that when the economy is weak, exchange rate declines and interest rates climb to high levels. Furthermore, the cost of repaying international debt increases significantly in local currency terms. When government revenues have fallen and government costs are not reduced at the same rate, a bad problem is made worse.
All of these factors are in play in Mongolia and the only realistic option is to accept the IMF remedy. While it is bitter to swallow, it is better to face reality sooner rather than later. Without the remedy, a declining future and financial disaster comes much closer. A mega-commodities boom is not around the corner and will not be our savior.
Let us be clear again, the current level of Mongolian government debt is not sustainable and Mon- golia has significant international debts due for payment soon. Refinancing, on good terms, when you have already high debt levels and a weak economy is extremely difficult.
The current success of Khuraldai bonds was only possible because investors thought that the country is serious in its intent to rebuild its own troubled finances with the help of IMF.
The Institute of National Strategy (INS) supports the IMF bail-out package and the co-commitment measures being put into place by the government. INS realizes there will be hardships, but INS also wants a better future for Mongolia, and the bailout package is the first step towards this future.
However, INS states that the long-term solution is not the bailout package per se. We need our government to put in place “economic stimulation policies and programs” that ultimately provide better government services, higher incomes and more jobs for all Mongolians. Restructuring the fiscal system to make it sustainable is a precursor to recovery.
SUPPORT THROUGH STRONG ECONOMY
Restructuring and repaying old debts is not enough. Cutting government expenditures and raising taxes is not enough. It is critical that Mongolia’s government deliver a strong engine room – that is a “strong and growing economy” to provide the things that other country’s citizens take for granted. The government needs to bring about economic growth, solve escalating health issues and take real steps to actually improve the business climate.
We are all sick from pollution. We need our government to deliver healthy cities and towns for our citizens to live in. Health - wise, and politically, this is not negotiable. The IMF bailout package is not going to deliver clean cities.
We also need to remember that for every significant social problem not fixed there is an ongoing and growing public cost. To the government, this means a bigger health budget, for the business community this is lower productivity and absences, and for Mongolians this means chronic illnesses and reduced life expectancy.
We absolutely need strong businesses, both do- mestic and international, that make profits, pay taxes and provide well-paid jobs. The current government has stated that the state should not play a role in businesses going forward. However, the jury is out here - where we see state-ownes entities reverting back to large panels of ministry representatives on their boards.
Both sides of Parliament recognize the failure of our state-owned and state-run enterprises. They clearly do not deliver efficient business organizations or outcomes. They borrow from the government, make very small profits and pay little tax. They also have higher levels of employment than would be the case in privately run companies.
Our government must solve the riddle of how to attract the next wave of foreign investment and international finance. Last three years have witnessed reduced investment in all areas, from 6.57 trillion MNT in 2013 to 4.75 trillion in 2015. It is not just foreign investment that’s falling – domestic public and private investment is also falling.
The Mongolian banks do not have the capacity to service the needs of local businesses alone. Attracting investors to Mongolia is critical for Mongolia’s economy. A lower cost of borrowing for businesses is critical. Both are essential if we are to invest in new and efficient power and heating stations and smarter living technologies to solve Ulaanbaatar’s pollution problem. Again, here the long-term commitment to restructure and improve public finance is crucial.
The government urgently needs to accelerate the next stage of economic recovery. We need to harness the business sector and excite international financiers, promoters and investors about the prospects and returns from establishing businesses in Mongolia. This cannot be done on the basis of an IMF bailout alone. Real and credible actions are needed to kick start the key projects.
Mongolia’s natural endowments are minerals and agriculture. Mongolians have a rich culture and the world has an interest in Mongolia’s history. Mongolians in general are not isolationists. However, Mongolia does not have a large population so we must be smart in how we enter external markets to attract and underpin new business ventures. We need to be even smarter in how we attract and retain our future business partners and those who will fund future grand ventures.
Initiating large projects (whether in mining, energy, infrastructure or agriculture) is the quickest way to stimulate economic growth, but this does not always have a broad impact on incomes or employment. Mongolian officials have unfortunately struggled to form good relationships with in-country investors and build confidence with offshore investors. The Prime Minister has stated that addressing this is a key focus for his government.
Mongolia needs to build a strong and credible case for “why businesses should focus on investing in Mongolia” as opposed to other countries with similar opportunities.
The much-needed private sector investment will come when the correct conditions are in place. If these conditions are not attractive compared to our competitors, the inflow of investment will not be large.
This should be the next most critical task to be undertaken by the government. It is not an easy work, but it is vital that we get it right.