The Minister of Economic Development, N.Batbayar and the Minister of Finance, Ch.Ulaan held a press conference last Friday. They both recently traveled abroad selling government bonds worth USD $1.5 billion. After their first endeavour, they arrived back home with funds equal to 17 percent of our GDP. This was the first time Mongolia’s ship set sail on the sea of finance, facing its very first wave in a vast, uncertain sea.
The media praised our government for issuing a large number of bondswhich are cheaper than those of developing countries or to countries which have been hit by economic crisis. They are similar to those bonds issued by the U.S. Government in terms of weight compared to GDP. However, one significant question was never asked: Why is interest rate of U.S. bonds three to four times cheaper than our rate? There was no mention about the ‘disciplined’ spending of the bond loan which we recently acquired. The difference in the interest rates of bonds issued by the U.S. and Mongolian Governments makes up for the greater risk associated with Mongolia. It shows why Mongolia has far greater risks and why there is a need to properly analyze and discuss this.
TRUE NATURE OF CHINGGIS BONDS
A bond is generally given a name in accordance with its intended use. However, our government acts in a waywhereby the manner of doing things far outweighs the true purpose. The government has used emotive and symbolic technique by calling these bonds “Chinggis Bonds.” What is the true nature of this historically huge debt that bears a big name, yet fails to express the real meaning and intention of the loan?
A bond is a loan acquired by the government. These are sovereign bonds that were issued by the Government of Mongolia through four international banks with the condition that they must be fully paid back in two parts in five and ten years. The government must make a coupon payment every six months. The Chinggis Bond’s coupon payment for its USD 500 million, five-year bond is 4.125 percent a year while its USD one billion, 10-year bond is sold at 5.125 percent.
The main reason more than 100 funds sent in their requests to purchase Mongolian bonds is that they are actively looking for some place profitable in which to invest their surplus capital. This is of course, due to the global financial crisis. Although the interest rate of the 10-year bond issued by the U.S. government is only 1.62 percent (which is why they are viewed the most risk-free) Mongolian bonds are three times more profitable despite the greater risks. On top of that, Mongolia has vast amounts of natural resources, the prices of which will increase over the long-term. Mongolia is only starting to use its world class mineral deposits.
Starting from the day of purchase, a bond buyer has the right to sell all or part of his bond to a third party whenever he wants. In order to ensure the receipt of coupon payment, the owner and buyer of the bond are registered. This is why it is classified as a “registered bond.”
The U.S. is unable to push its lenders to raise the currency rates because China has purchased one third of all U.S government-issued bonds. If China starts selling these bonds in great amounts, the interest rate will go down, reducing the price of U.S. bonds. This is the basic tool for market evaluation and will eventually push away portfolio investment making the economy slow down. Throughout the history of mankind, many wars have broken out because countries have been unable to or have refused to pay its debts. For instance, after the Russian Bolsheviks announced that they were not willing to inherit the debts that were owed by the Russian Empire, its lender countries waged a war against Russia.Such wars will not occur in modern times, however, lenders require tough conditions for trade and service.
WE HAVE THE MONEY, WHAT NOW?
This is a question which should be answered prior to getting a loan. The government must finalize the intended use of the loan project by project and legalize them. Only then, can accountability be ensured. This will allow these vast funds to be wisely used. The value to be created will produce huge profits – many times more than the amount needed to fully pay back the original debt.
The Mongolian government has readily demonstrated its inability to do precisely this when the Development Bank issued its bonds at the beginning of this year. The names of many ministers still remain the same despite the formation of a new government. No one has been held accountable for paying MNT 100 million every day for no apparent purpose. It is because the money belonged to the public, not to individuals. The issuance of Chinggis bonds means that Mongolia will pay an extra USD 196,000 (MNT 275 million by today’s rates) daily starting from December 6. In five years, the first part of the debt, USD 500 million, will be paid. Then, Mongolia will similarly start making a coupon payment of USD 140,000 daily and will pay the full debt back in another five years. This means that in order to cover the full debt we will have to pay USD 1.5 billion altogether with the coupon payments, valued at USD 605 million.
If we misspend this huge amount of money, it will become a crime rather than an achievement, the burden of which will be put on the shoulders of future generations.
It is irresponsible of the government today to have nothing but a general list of expenditure areas such as new construction, infrastructure, power, railroad, paved roads and mineral processing plants. As soon as they acquire the loan, the government is supposed to immediately start transferring the money to relevant organizations based on a detailed, carefully analyzed study of which projects are best implemented by the government and which are by private sectors. If they cannot do this with USD 1.5 billion, Mongolians have the inherent right to demand the government postpone issuing the rest of the bondswhich are worth USD 3.5 billion.
By building infrastructure, we will be able to make substantial contributions to reducing production costs and improving labor productivity. With the use of newly found infrastructure, the private sector will make more profit which will encourage capital accumulation that will be turned back into investment capital and ultimately make our economy grow larger. Furthermore, if we manage to domestically produce power and petrol which is currently purchased from abroad at expensive rates, economic efficiency as well as cash flow will improve.
The government should purchase housing loans from banks, continue to expand these loans, offer the loans to customers with an interest rate of no more than seven percent a year, promote fair and free competition between construction companies and improve public governance in infrastructure and land relations. This will help us to move thousands of households to apartments, which will dramatically increase Mongolia’s labor productivity.
WHO WILL BE RESPONSIBLE FOR SETTLING THE DEBT?
When the time comes to fully pay this huge debt, the current administration that actually got this loan and spent it will be long gone. The next generation will have to bear the burden. Future governments will be responsible for settling the debt, which means our children will have to be the ones who pay it back.
Greece and Spain are on the edge of bankruptcy due to lack of accountability. People have been shocked to discover that everything was registered in the wrong accounts because of the inability of those governments to closely monitor the spending of government bonds. In spite of managing to acquire very large loans, their labor productivity deteriorated and social care expanded. This eventually made it impossible to pay public sector employees such as teachers and policemen. It is easy to see how a country can enter into a social disorder like this on every day on television.
However, other member countries of the European Union are working together in order to bail out these two countries, share their deficits and put their economies back in order. Who will help Mongolia if we proceed down this path of economic destruction?
Can we guarantee that we will be able to pay this extremely large debt on time? Will we use the money for its intended purpose with transparency, efficiency and without conflict of interest? In order to monitor the expenditure and make changes when necessary, a Monitoring Council of Chinggis Bonds needs to be established by the National Security Council under the auspices of the President. This council should consist of academic and public representatives who will ensure the release of expenditure reports project by project and disclose them to the public. Based on the report analysis, the monitoring council must then decide if new bonds should be issued or not.We will need to enter the international market in order to settle this massive debt. Therefore, Mongolia will have to increase foreign investment so that modern technology and know-how can be properly brought into the country. It’s ironic that the very same people who are pursuing a policy to restrict foreign investment will actually be the ones in charge of spending this loan.
We as a nation have just faced the first wave of the financial sea. As we sail along, Mongolians must realize that although each new wave may bring large profits, it may also bring the same amount of risk. Nevertheless, when these funds are properly managed, there is ample opportunity and great leverage for us to reach higher levels of development. It is time for the Mongolian Government and the people to understand this.
Note: By the time of publication of this article, the Mongolian People’s Revolutionary Party (MPRP) has decided to quit the coalition government. The MPRP including Ch.Ulaan – the Minister of Finance, will not escape the responsibility of settling this huge debt regardless of whether they are in the government or not.
Translated by B.AMAR