Uguudei Bond

Jargal Defacto
Jargal Defacto 3.7k Views
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During an impromptu session on May 28, the government made a decision to issue bonds worth one billion USD on the international capital market. Although the previous government issued the Chinggis bonds worth 1.5 billion USD three years ago, they had not decided how to spend it. As a result, the previous government did not touch the money that came from the Chinggis bonds for almost two years while making coupon payments for the entire time. It was a long time before they could finally distribute the funds.

It is said that the purpose of the new bonds is to finance the budget deficit with a low cost, long term source, to help resolve the balance of payment difficulties, to extend repayment periods of foreign securities from the government and those that have been guaranteed by the government, and to take regulatory measures to relieve pressure on the budget.


Extending repayment periods of foreign debts means that the government is going to use the money from the new bonds to start reducing the debt from the old bonds. The repayment of the debt that came from the Chinggis bonds is due in 2017. However, the government is not in a position to make the repayment whilst projects that were financed by the bonds are not repaying their loans.

It means that Mongolia is choosing a path to repay a debt with another debt by issuing new 10-year bonds to repay the old 5-year bonds. The new bonds can be called ‘Uguudei’ in alignment with ex-minister Batbayar’s logic that gave the name ‘Chinggis’ to the previous one. It means that Chinggis’s debt is going to be repaid by a loan acquired using his son’s name.

YOU CANNOT JUST REPAY A DEBT WITH ANOTHER DEBT

N.Altankhuyag, the previous Prime Minister, said “Our future generations will repay the debt from the Chinggis bonds.” It is turning out just like he said. The people are still waiting for the government to produce a report on where this huge sum of money went, what the selection criteria was, and how the repayment is going. New bonds should only be issued after justification of money spent from the previous bonds is properly reviewed.

Is the current government actually allowed by law to raise new debts? After debating for days, the parliament raised the debt ceiling from 40 percent of GDP to 58.3 percent last year. Mongolia’s external debts have already reached that ceiling. If a part of this debt had been repaid, we would have had room to acquire another loan. However, the current government has decided that the debts in the railroad and energy industries do not belong to them.

If the debts in these two industries, which gives space to acquire a loan worth one billion USD, does not belong to the government, who is going to take responsibility? There is only one animal that buries its head in the sand and believes it is hidden from others. Does our government resemble an ostrich?

Going back to the purpose of the new bonds, relieving pressure on the budget means that the government is going to acquire any foreign loans that they can get, and use them to make up for the budget deficit, which has been increasing. Internationally, there are many examples of what consequences could be faced if a huge, long term loan is acquired only to make up for operational costs.

FOLLOWING GREECE’S PATH

The situation in Greece is an example of what ultimately happens if debts are repaid by acquiring another loan.Greece’s external debt is currently 1.8 times bigger than its economy. The amount of debts is not the major factor here. Japan once had a debt twice as high as its economy, but it carried on successfully. Having debts that equalled 50 percent of their GDP in the mid-1980s, Brazil and Mexico announced bankruptcy. The major factor is whether an economy is capable enough to repay their debts on time or not. If a country raises debts every year, the investors will become more doubtful. This increases the interest rates. The new bonds that are about to be issued will have higher interest rates than before.

It begs the question as to whether Mongolia will be able to repay these debts with business income rather than a new loan. If not, new bonds will keep coming. Uguudei bonds will be followed by Khubilai bonds and so on. If Mongolia is to become capable of paying off the debts with business income, the government needs to make it clear how we are going to do it. If they do not make it clear and keep raising external debts, we will need to stop them. The government must have discipline.

The lenders require countries that are repaying debts with other loans to take austerity measures. It means that the taxes will be raised and the budget will be cut at the same time. Greece had to reduce its budget deficit from 16 percent of GDP to 9 percent. Spain decreased it from 31 percent to 10 percent. These measures led to public unrest and social instability. In the five years of crisis, 3,000 people committed suicide because of causes related to financial decline while thousands were left homeless. Furthermore, hundreds and thousands of qualified workforce went abroad looking for jobs. This is just one story how ordinary people are burdened with the task to repay a loan that was acquired and irresponsibly spent by a few people.

2015.06.10

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