MONGOLIA STUCK IN DEBT CYCLE
Another year, another impending default crisis for Mongolia. Beginning in late 2016, the talk of Mongolia’s inability to repay the 580 million USD Euro Bond began to surface in the media. Leading all the way up to the maturity date in March 2017, it was starting to look like defaulting on the debt was inevitable.
Fortunately, the Ministry of Finance was able to refinance the bond, exchanging the notes of the old bond into a new bond named Khuraldai. Now, the first round of repayment of 500 million USD for the Chinggis Bond is due in January 2018 and the 160 million USD owed for the Dim Sum bond is due in May 2018. How will Cabinet manage its newest headache amidst threats of dismissal, and more importantly, how will Mongolia break out of its debt cycle?
According to the State Secretary of the Ministry of Finance B.Nyamaa, Mongolia does not currently have enough capital to repay the total 660 million in bond debt owed in 2018.
“As of right now, we do not have enough accumulated reserves to complete the repayment of these bonds in 2018. The foreign currency reserve is very low and the budget deficit remains high. Even though the economy has rebounded, we haven’t been able to concentrate the 660 million USD needed for bond repayment in 2018,” reported B.Nyamaa, State Secretary of the Ministry of Finance.
According to B.Nyamaa, if the government is not able to deliver on its debt obligation in 2018, stemming from international precedent, all of the sovereign debt the government has issued in the past will be automatically declared non-performing.
The Ministry of Finance is working to make sure it does not come to face with the prospect of paying the debt with what is left of the nation’s foreign currency reserves. Negotiations to refinance the bond payments are already underway according to the ministry. However, due to unforeseen political circumstances, namely the Vice Speaker of Parliament Ya.Sanjmyatav and over 30 MPs’ proposal to scrap the current Cabinet, the situation has reached a standstill. The potential political instability has caused many international investors to question Mongolia’s stability going forward as well as the future of the IMF program.
The current situation regarding the potential dismissal of Cabinet has only intensified the problem. Previously, the Ministry of Finance was able to focus on refinancing the Euro Bond with a newly issued Khuraldai Bond. However, this time the ministry has its hands full with drafting a new budget for 2018 and the looming threat of dismissal. With the payment due in January 2018, only three months away, the threat of a default seems even more realistic compared to the previous bond crisis.
The Ministry of Finance saying that Mongolia can’t repay its bond debt is a significant issue but it’s only the latest. The bigger issue at hand is the vicious debt cycle that Mongolia has entered into. Previous administrations issuing bonds with no concrete plan of repayment, investing the money into the wrong avenues has brought Mongolia to its current juncture.
For instance, the Euro Bond money was designed to finance various projects through the Development Bank of Mongolia (DBM). Cabinet Secretariat J.Munkhbat conceded that in the last four years, there has been many illegal activities and violations directly connected with the DBM. He even further went on to say that the missteps and violations of the DBM have contributed largely to the current economic hardships. The issue of how the bond money was spent is part of a larger problem of government transparency, or lack thereof, and corruption. The reality is that the money from all the bonds issued from the government is either in the wind or tied up in useless avenues. Realistically, Mongolia is not getting back any of that money any time soon.
The bigger issue at hand is breaking out of the debt cycle Mongolia has put itself in. A cycle in which the government is spending money it doesn’t have to repay old debts, only prolonging the debt. Meanwhile, the interest payment of the bond debt continues to add up and the threat of a default becomes more real with every passing day.
The only way Mongolia can dig itself out this hole, is to first not issue any more sovereign bonds in the near future. This is the easy part. The step that the government might have more issue with is restraining from unneeded expenditure.
The extended fund facility program being implemented with the IMF therefore is an important defense. The program is helping to curb any extra expenditure the government might have, opening up the opportunity to accumulate reserves from sources as mining income.
Even after the program is concluded, Mongolia must maintain its accumulation of capital to repay any debt it has incurred. Meeting debt obligations with its own money is the only way Mongolia can hope to escape the debt cycle it has found itself in.
In addition, politicians such as the President’s Chief of Staff Z.Enkhbold promising to forgive the debt of citizens must put aside their political ambitions and populist policies to focus on avoiding the very real possibility of a default. While some economists and pundits have welcomed the idea of a default, as a hard line measure to “teach a lesson” to the Mongolian people and the government, a default will surely be disastrous for an already weakened economy.