The total debt owed by the Government of Mongolia today (including external and internal debt, debt securities, loan guarantees and debt owed by state-owned and locally owned companies) has reached 10 trillion tugrugs, which is as big as half of our economy. Although Clause 6.1.4 of the Fiscal Stability Law states that “Government debt must not exceed 40 percent of GDP calculated by the yearly prices”, the authorities are currently resolved to raise the debt cap to 60 percent of GDP and pass the 2014 public budget.
It is time to discuss about what the acceptable amount of government debt is, what happens when a sovereign country suffers from debt pressure, and what Mongolians should do now.
Mongolia’s debt today: Too much or not?
There are standard ratings that determine how much debt a country can handle and these ratings count soft loans provided to developing countries as external debt. The ratings measure external debt burden against the yearly GDP, debt services against government revenue and exports. In total, there are five criteria that are each scored from 1 to 6. The debt burden on economy is categorized as low, average or high. As Mongolia scored 3.41 in the ratings and is put under the ‘average debt burden’ category, the International Monetary Fund (IMF) set out that Mongolia’s external debt (including loan guarantees) must not exceed 40 percent of its GDP. This rating system is called Country Policy and Institutional Assessment (CPIA) index, which assesses economic policies and institutional capacity of government organizations.
You do not have to be an expert to see that Mongolia’s economic policy and institutional capacity of our governmental organizations are only average. For more than 20 years, the governments we have had only talked about developing the market economy, but kept doing the opposite thing in reality. Mongolia managed to lay the basis for its future development by managing to continuously attract investment and having the private sector lead the economic growth. However, our government is still ignoring the existing opportunity to develop the economy without having to put its citizens in a huge debt.
In the last 10 years, our mining industry generated enough income for us to complete the basic steps towards economic diversification. If we were more cunning, our government officials would not be competing to see who has the fanciest car or the biggest house and who can bring the most expensive Arab horses from abroad on an airplane. If we treated the matter in a more intelligent way, the authorities would not have conspired with each other to deal the most expensive land in Ulaanbaatar and the people would not be obsessed with getting a job in the government. On the contrary, if we used the mining revenue wisely, we could have encouraged fair competition, started producing high quality goods and services, boosted our reputation internationally and made investments in the economies of our two neighbors.
The Government of Mongolia has been receiving a huge amount of financial aid as well as soft loans from international development organizations and governments of other countries for the past 20 years. It was the first time ever when our government issued bonds last year to acquire expensive loans from foreign banks and private companies. But, can our government make the best out of this huge loan?
The Lost Decade
A financial crisis broke out by the beginning of 1980s when certain Latin American countries, namely Brazil, Argentine and Mexico, failed to meet their debt obligations when their external debt far exceeded their earning capacity.
These countries borrowed a huge amount of money from the international financial market by issuing government bonds in the 1960-1970s to achieve industrialization and build infrastructure. They did not have any trouble finding loans because of their high economic growth catalyzed by natural resource extraction. Oil prices skyrocketed in 1973, which made it easy for these countries to sell their government bonds to international banks.
The total external debt of Latin American countries increased by 20 percent in 1975-1985 and it reached 315 billion USD by 1983, which equaled half of regional GDP at that time (the same level of external debt in terms of GDP ratio as Mongolia has today). Those Latin American countries paid 66 billion USD for coupon payments only in 1982. The coupon payments had grown 5.5 times as much as it was in 1972. Their CPIA index at that time was 3.0 (Mongolia’s CPIA index today is 3.41).
In August, 1982, the Government of Mexico declared that they were no longer able to meet its debt obligations, announced a moratorium suspending all payments for 90 days and called for their lenders to commence re-negotiations on loans. It was followed by a significant fall in credit ratings of Latin American countries, which resulted in international commercial banks halting loans to Mexican companies and demanding urgent loan repayments. The story repeated itself in Argentine later on.
The global economy suffered greatly from the Latin American crisis and the interest rates of the loans previously given to the Latin countries were raised, causing more debt burden. This crisis reduced the national income per capita considerably and expanded the gap between the rich and the poor. Also, there were other negative consequences such as increasing crime rates as the youth in those countries became more involved in criminal activities including drug trade and prostitution. The 1980s is referred to as “The Lost Decade” in Latin American countries. Some countries including Greece, Spain and Portugal have recently started a similar journey towards a very similar Lost Decade.
Mongolia’s choice
The Government of Mongolia has already borrowed foreign loan that cannot be fully absorbed in our economy, let alone being repaid. Nevertheless, our politicians who do not see further than an election term are attempting to issue new Samurai bonds to acquire more loans in Japanese yen. The authorities seem to be feeling glorious, as if they have accomplished something worthy of praise and appreciation, when they acquire loans from foreign private companies.
No one is currently thinking about what we would do the year after the next parliamentary elections when Mongolia has to repay the 500 million USD along with its six-month coupon payment of 35 million USD on December 5, 2017. We have not even started thinking about how to start creating accumulation for bond repayment. Moreover, one billion USD has to be repaid within one day in 2022. In these circumstances, the politicians we have today are trying to acquire more loans instead of immediately setting up a loan repayment fund to start accumulation. Those politicians probably will be nowhere to be found by the time when Mongolia has to repay the debt. Not even the Interpol would be able to find them then.
Any debt owed by the Government of Mongolia is paid with the public budget. Therefore, I would like to urge the members of parliament to pass a law that registers bonds and government guarantees in the public budget balance and include public expenditure under the ceiling of two percent of GDP.
Let us include certain indicators in the law that measure and assess whether the infrastructure built with funding from government bonds has been used to improve economic competitiveness or not. This way, more loans to build more infrastructures can be banned in case the previous ones prove to have been ineffective in boosting economic competitiveness.
Instead of acquiring foreign loans, our government needs to create stable legal environment that attracts investment, both domestic and foreign, into huge, long-term projects and establish good concession agreements to be implemented in a timely manner. It is time for us to stop making investment with public budget in big industrialization projects and restrict the issuance of government guarantee to the Development Bank.
The most pressing issues we have today still remain to be resolved: the public governance needs to be strengthened and there must be greater transparency in government activities. We do not have to become a Latin Mongolia who lost its ten precious years to debt burden.
2013.10.30