It seems like the world sees Mongolia as a bankrupt country that has nothing left to do other than announce its financial meltdown. Reputable organizations that assess the fiscal health of countries have downgraded Mongolia’s credit ratings, one after another. On November 18, Moody’s downgraded Mongolia’s rating from B3 (highly speculative) to Caa1 (substantial risk).
Moody’s linked the downgrade to the increased uncertainty over the Mongolian government’s ability to meet its debt obligations over the next two years as economic growth weakens and budget revenue decreases, which has resulted in increased government debt pressure. Given the expectation that the factors contributing to current economic hardships would not swing, Mongolia’s credit rating was given a stable outlook.
It is true that Mongolia’s short-term future depends on our ability to reduce budget deficit while meeting existing debt obligations. Our economic outlook is defined by whether or not we manage to create new goods and services to be exported, and if we are able to export our coal, copper, and gold in greater volumes.
Mongolia is currently in a situation where there are limited opportunities to change our debt structure and bring foreign investment into the country. The solution hangs on whether or not Prime Minister Erdenebat’s government will be allowed by his political party to tackle the challenges, and – if so – if the government can succeed.
CAN THINGS BE TURNED AROUND?
The Mongolian People’s Party (MPP) has the important task of getting the country out of its economic crisis and strengthening the values of democracy and a free market economy. Even though the MPP had a landslide victory in the last elections, winning 85 percent of votes, they must remember that the choice made by the people was largely due to the fact that voters wanted to see a political party other than the Democratic Party (DP) in power. The media is still reporting about how MPP members who are lesser known and have less experience have ended up acquiring a seat in Parliament.
The MPP established its government and selected J.Erdenebat as Prime Minister. They made controversial political appointments within the political party and set up a “professional” cabinet in a relatively short time. The new government had its action plan approved by Parliament and started their work without wasting time. However, its internal debt has grown so big that they are now unable to fulfill their obligations. Interest payments now account for one-fourth of the public budget. Under these conditions, the government has set forth an objective to acquire a huge loan quickly, at any cost.
Although the government had almost finalized an agreement with China to receive a soft loan of 4 billion USD, the Chinese government postponed all meetings and negotiations following the Dalai Lama’s visit to Mongolia. Also, it looks like the stand-by program being negotiated with the International Monetary Fund (IMF) is likely to be concluded next year, by the time we celebrate the Lunar New Year.
Furthermore, the Oyu Tolgoi mine stopped its exports after the Chinese side increased the payments they impose at the border. Erdenes Tavan Tolgoi is not able to contribute to state revenue because it is exporting coal at a price that is five times below global market rates to pay off existing debt. Due to the limited capacity of Chinese border points, our coal trucks are making the world’s longest traffic jam as they line up, one after another, for 20 kilometers. Foreign investment in our mining sector has almost stopped completely.
So, what can we lean on during this time of hardship? Government stability is essential today. One point of proof is that we have a parliament that is dominated by a single political party. However, some MPP members of parliament have already started talking about replacing the government or changing some of its ministers. They should look at what happened with the DP and understand the dire consequences of changing the government. This is usually fueled by members of parliament willing to do anything to get a ministerial position.
Parliament does not have much of a choice other than letting Prime Minister Erdenebat’s government finish what they started.
CAN THE GOVERNMENT SUCCEED?
After becoming the majority party, the MPP kept talking about how the DP put the country in debt. However, the reality is that the decision to issue 6 billion USD in government bonds was made by the MPP-DP coalition government. Although it is late, the MPP has finally stopped the talk of division and has started taking action.
A crisis is a rare opportunity to fix mistakes. The current situation is our opportunity to strengthen our government and economic institutions and to make them inclusive. We need to move away from having extractive institutions that only serve the interests of political groups, and hold those who have stolen public funds accountable for their actions. The reform in political institutions must start with the political parties, they need to make their financing transparent to the public and have their financials assessed through independent audits.
Also, we need to fully embed the principles of the free market, free up all prices (with the exception of electricity, which should be freed up in phases by creating more supply options), allow for free competition, and create opportunities for the private sector to increase their competitiveness. State-owned companies should be privatized, one after another, and we need the infrastructure for this to happen.
If Mongol Bank delivers on its accountability to operate independently from the government, stops its foreign currency interventions, and refuses to take part in selling government bonds, commercial banks will have no other choice but to grant loans. True market prices can only be achieved when the government’s bonds are traded on the stock exchange.
The question is whether or not Prime Minister J.Erdenebat’s government has the courage, desire, and capability to carry out these macroeconomic changes. We should see our current situation as an opportunity to fix previous mistakes and lay the foundation for moving forward, regardless of which political party is in power. What is critical is that our parliament must not waste this opportunity by creating political instability or uncertainty. Also, what is equally important is that the current government cannot afford to make mistakes now.
Trans.by B.Amar