On October 25 of 2012, Parliament approved a resolution to issue medium and long-term securities of up to five billion USD on the international market in order to finance the policy to “accelerate the economy, invest in long-term development, and support exports”. In one month, the new government sold a one billion USD ten-year bond with an interest rate of 5.1 percent, and in January of 2013, sold another five million USD five-year bond with an interest rate of 4.1 percent on the international market. Usually, it is the side giving credit that names a bond program with a name seeped in national pride. However, the Mongolian government, the side borrowing, named this program the “Chinggis Bond”. Chinggis Khan would probably be ashamed, for he conquered the world; he didn’t borrow money.
Five hundred million USD and one billion USD of the Khan’s debt will need to be repaid in January of 2018 and December of 2022 respectively. In addition, 615.6 million USD in interest is to be paid on an semi-annual basis.
Yet, after two years, the Minister who initiated the bond program (and gave it the Khan’s name) has resigned and his ministry is no more. Of the 1.5 billion USD in bond proceeds, 60 percent (or 882 million USD) has already been dispersed and the remaining 40 percent is in savings and is to be allocated to projects in the coming years. Of the dispersed amount, 610 million USD will be repaid from the federal budget (allocated as 252 million USD for roads 252, 40 million USD for the “Gudamj” project, 102 million USD for infrastructure, 20 million USD for power plants, and 194 million USD for new railroads) and 272 million USD will be repaid from project proceeds: the purchase of a Boeing 767 for 2.9 million USD, state housing projects for 60 million USD, agriculture and light industry projects for 152 million USD, 14 million USD in construction, and 27 million USD to fund 888 projects to increase export and replace imports.
CAN THE DEBT BE REPAID ON TIME?
Debt accrued in domestic currency is referred to as government debt, while debt accrued in foreign currency is sovereign debt. The reason for which is that the country itself is the guarantee for foreign debt. If the combined amount of these two types of debt rises above a certain percentage of the economy, the situation becomes risky for both the borrower and the lender. If a household accrues debt that is many times more than their income, they might even lose their home. By law, Mongolian national debt cannot increase to more than 40 percent of our gross domestic product (GDP). However by the third quarter of 2014, the debt level had reached 50 percent. Our government’s total debt is 13.2 trillion MNT, of which 3.9 is foreign debt, 2.1 is domestic securities, 2.7 is foreign securities (Chinggis and Samurai bonds), 2.3 is government guarantees, and 1.6 is the debt of state-owned enterprises. The loans of state-owned enterprises working in the red are almost equal to the Khan’s debt.
Also, the depreciation of the tugrik by 30 percent during the previous year has increased the debt to be paid in U.S. dollars accordingly. The parliamentary approval without knowledge of precisely which projects were to be financed and how it would be repaid goes back, once again, to the issue of “dual roles”. Since the Minister of Economic Development sees the freely dispersed bond proceeds as a “heavenly endowment” and the Prime Minister has stated, “our children will pay for it”, we still haven’t fully decided where to allocate the proceeds, even after two years.
Because the bonds will be repaid from the federal budget – or in other words, by the taxpayers – the credit risk of Mongolia has increased sharply. By taking into consideration the pressures on the federal budget, third parties have recently decreased the credit rating of Mongolia to negative or risky.
IF WE CANNOT REPAY IN TIME…
It is obvious that if we cannot repay the debt accrued in the name of our children, our Great Khan will be shamed once again. Especially since the probability of shaming our Khan is growing increasingly high.
First, three years from now, the government might proclaim that they have no plans to pay 500 million USD in one day, which is equal to the entire federal budget investment, and that it is the problem of the next government. In the draft of the 2015 federal budget, nothing was allocated to the principal of the debt, only the interest payments.
Second, instead of paying attention to the bond proceeds, the Ministry of Finance has drafted a bill to allow national debt to reach 70 percent of GDP and is lobbying for its parliamentary approval.
Third, the restructuring of the ministries is once again decreasing the effectiveness of the public institutions, and negatively impacting their ability to operate in the long-term. Besides which, in the current environment, where we are facing economic crisis with income from mining operations decreasing, foreign investments declining drastically, inflation increasing, and the tugrik dramatically depreciating, the return on the bond investments is also in decline. If Mongolia cannot repay the bond in time, it is possible that Mongolia’s default will be proclaimed throughout the international community and Mongolian accounts held in foreign countries will be frozen. Mongolia’s reputation will fall and, even worse, the trust of the international community in Mongolia will disappear. It will require a decade of effort to reclaim our reputation and the speed of development will be decreased drastically. Our country’s credit risk will rise and the price of foreign debt will increase. When the country’s credit rating falls, it also holds back private companies and makes pulling foreign investment very expensive. Thus, the development of the economy will be met with many challenges, it will be difficult to be competitive, imports will increase, and the tugrik will depreciate even further.
Economic development requires investment. Because a developing country like ours was unable to implement policies to wisely manage foreign investment to drive growth, we had to start relying on foreign debt.
In order to not shame the Great Khan, it is up to everyone to pay down this “great debt” through his or her taxes. When will the Mongolian government start implementing intelligent policies?
2014.10.29