Bond Market in Mongolia

...

[pic 5]

Figure 5 Government Debt to GDP

Second Country Offering Dim Sum Bonds

Mongolia Government issued a CNY 1 billion dim sum bond at 7.5% on Jun 24, 2015. Mongolia is the second country to offer dim sum bond after Britain has issued a CNY 3 billion dim sum bond at 2.7% in 2014. At 7.5%, Mongolia dim sum bond offered an attractive 464 bps (as of 25 June 2015) over 3-year Chinese government bond. Such a yield pickup suited those who are high yield seekers and can stomach the added risk. Also, the three-year tenor offered limited duration risk and offered diversification for portfolios with only USD bonds. This bond was associated with high volatility because its GDP concentrates on only exports and foreign direct investment. Furthermore, political risk involved in investing this bond was mainly concerned with maintaining a healthy relationship with China and foreign. Finally, this dim sum bond required a close follow up with the progress of another mega coal mine project Tavan Tolgoi, which could potentially bring USD 4 billion to Mongolian GDP.

Mongolia government is now facing several imminent debt repayments and the prospect of having to restructure its sovereign and parastatal debt is now one of the main priorities of the Mongolia government. The outstanding bond issues and the cumulative value is listed in the Table 1 below. Because of these potential problems, rating agencies are now adjusting Mongolia’s corresponding rating as listed in Table 2. It is obvious that most ratings are given at a level of B- or so which is quite critical based on the current liability level of Mongolia. We would practise a comprehensive analysis in next part.

[pic 6]

Table 1 Outstanding Bonds Issues

[pic 7]

Table 2 Mongolia Bonds Rating

In year 2017, The state-owned Development Bank of Mongolia, which finances development and commercial projects and grants subsidized mortgage credits, has a US$580 million bond to due, as well as a US$2.4 billion bilateral three-year swap line with China will expire in 2017. With the repayments to due in the coming years. Mongolia is being questioned by a lot of investors whether it will be able to meet its debt obligations.

Bonds Market in Mongolia after Economic Crisis

Due to the continuous falling of commodities prices since 2012, Mongolia’s sovereign bond market has suffered a major setback in recent two years, and its government finance minister has officially announced that the country “is in a deep state of economic crisis”.

As it is mentioned above, Mongolian GDP is heavily relied on transportation, mining, and construction – the construction sector is displaying a 129% increase in the second half of year 2013.

[pic 8][pic 9]

Figure 6 GDP Growth Rate by Key Sectors

However, with the growing balance of current account deficit and falling commodities price during recent years, the consumption-led construction boom is found to be unstable and not sustainable in the short-run. The following graph(Figure 7) shows the price changes of gold in the recent five years. Since 2012, the prices of minerals have been keep falling for five years straight. With mining and construction being the core industries of the country, Mongolian GDP has already fallen from double-digit growth to 3% growth as of 2015 as it is mentioned in the previous figure.

[pic 10]

Figure 7 Gold Price

Mongolia has a less well-diversified economic with a deep disproportionate reliance on China economy growth –87.9% of Mongolia’s exports flow to China (Figure 8). Due to the slowdown of Chinese economic growth and the shrinking demand of minerals, Mongolian economy is negatively affected.

[pic 11][pic 12]

Figure 8 Destination of Mongolia’s Exports

On 2016/8/10, the nation’s finance minister Choijilsuren Battogtokh addressed on a nationally television, announcing that the government debt would reach 78% of the GDP, far above the country’s 55% target. And in terms of debt to GDP shown in Figure 9, there is an increasing trend from 31% in 2010 to 77.4% now which shows the ability that Mongolia can produce and sell sufficient goods and services to pay back the debts declines over time.

[pic 13][pic 14]

Figure 9 Economic Indicator – GDP and Revenue

The finance minister’s speech triggered a selloff in Mongolian market, with the country’s dollar-dominated debt tumbling 7.7% last month – the government’s $1 billion Eurobond due December 2022 went down 6.21 cents to 83.72 cents, and pushed the yield up 138 basis point to 8.51%. At the same time, Mongolian currency Tugrik devalued to 2138 against dollar after 18 consecutive days’ dropping.

The reason behind the devaluation of Tugrik is that Mongolian foreign exchange reserves is roughly running out. Right now, there are only $1.3 billion foreign exchange reserves as shown in Figure 10.

[pic 15][pic 16]

Figure 10 Economic Indicator – Foreign Reserve

Mongolian economy outlook

Basically, in 2012 Mongolia sold $1.5 billion in sovereign debt called Chinggis Bonds which are used to finance road projects across the country. The government needs repay $500 million in 2018 and the rest in 2022. The Development Bank of Mongolia should repay $580 million next year. In total, Mongolia has about $5 billion in general government debt, which is beyond the country’s repayment capacity.

Given the constant downward sloping GDP growth rate and increasing debt, Moody’s Investors Service has announced the following changes in ratings – “Mongolia's government bond rating at B2. The outlook on the rating remains negative. Currently, Moody's has affirmed the government's B2 issuer rating, its senior unsecured MTN rating at (P)B2 and the short-term Not Prime issuer rating” (Moody’s). This set down of credit rating to B2 with negative outlook will increase Mongolian borrowing cost, and further increase the sovereign bond’s default risk. Right now, the Mongolian government is setting up