Mongolia. Summary. Economic Indicators

Transcription

1 Mongolia Summary Moody s Caa1 / S&P B- / Fitch B- 1 Economy: Agriculture 13%, Industry 35%, Services 51% Mongolia is a country with abundant natural resources, especially copper, gold, and coal, which it is starting to exploit. Development of large-scale mining projects such as Oyu Tolgoi are major drivers of economic growth and key to developing its wealth. However, over-dependency on commodities has led to volatile economic cycles with growth ranging from 1% to 17% over the past decade. Amid deteriorating economic conditions, Mongolia reached an agreement with the IMF and other international partners in 2017 worth more than US$5 billion on the condition that it will strengthen its banking system and implement structural reforms. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 4,366 4,168 3,947 3,660 3,553 3,721 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of imports) Foreign Reserves (% of GDP) As of November 2017 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Gen Gov Fiscal Results Excluding Off Budget; including off budget 143

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency BB Local Currency BB BB- BB- B+ B+ B B B- B- CCC CCC Moody s S&P Fitch Moody s As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s S&P Fitch Bond Spreads Mongolia 2010 EMBIGD 2017 As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 144

3 Mongolia Strengths Abundant Natural Resources Mongolia is rich in natural resources, which remain largely unexploited and represent significant growth potential. 2 The country has some of the largest copper reserves (57.0 million tons), 3 and coal reserves (175.5 billion tons) in the world. 4 It also holds substantial amounts of other mineral deposits, including gold and fluorspar. 5 The Mongolian government has identified 15 mineral deposits that it considers of strategic importance and are the focus of developing its mining industry. Mongolia s underground resources are estimated to be worth more than US$1 trillion 6 and are, therefore, a major potential growth engine. Another important resource, though less relevant now than in the past, is agriculture, largely cereal and animal husbandry. Mongolia is the second-largest producer of cashmere in the world after China, but it produces the finest. 7 Large Scale Mining Projects The development of the Oyu Tolgoi mine will be a key driver of economic growth in the next several years as it is expected to be the third-largest copper mine in the world when it reaches full production. 8 The mine is one of the world s largest untapped copper deposits. Mining companies have already invested more than US$6.6 billion in this project, and started producing and exporting copper in June A dispute between the government and developer Rio Tinto stalled development of the project until both parties reached an agreement in May 2015, but Rio Tinto approved in May 2016 the expansion of Phase II, with an estimated investment of US$5.3 billion. 9 Oyu Tolgoi s 2016 production was 201,300 metric tons of copper and 300,000 ounces of gold. 10 The mine is expected to reach full production in 2026 producing an average of 430,000 tons of copper and 425,000 ounces of gold annually over the life of the mine. The IMF estimates that by then, Oyu Tolgoi will generate approximately one-third of Mongolia s GDP. The government owns 34% of Oyu Tolgoi. 11 Another important project is the development of the coal deposits of Tavan Tolgoi, one of the largest undeveloped coal fields in the world. Its deposits total 7.4 billion tons of coking and thermal coal resources. While the initial projection was that Tavan Tolgoi would reach million tons by 2017, 12 this project has faced significant delays as the government did not secure enough financing and decided to sell stakes to Chinese and Japanese companies. 13 The consortium is expected to invest US$4 billion in the project and is currently waiting for final approval from the Mongolian Parliament and China s State-Owned Assets Supervision and Administration Commission 14. Development of Tavan Tolgoi is an important component of the government s recently introduced Economic Stabilization Plan, with a target period of China Connection Mongolia s main trade partner, China, is a key driver behind growth. They are natural trade partners because Mongolia is a commodity producer and China is a major consumer of commodities. China accounted for nearly 90% of Mongolia s total exports and nearly a third of imports. 16,17 Trade between these two countries should continue to grow as most of the mining products of Oyu Tolgoi and Tavan Tolgoi mines will go to China. Both mines are less than 500 kilometers from the Chinese border and very close to major cities, such as Beijing. Importantly, Mongolia s ties with China go beyond trade. For example, this year the Central Bank of China renewed a swap line of RMB15 billion (US$2.2 billion) until Relations are gaining momentum, with Chinese President Xi Jinping advocating for more bilateral all-around strategic partnerships. 19 Despite government and business sector fondness 145

4 Lazard Emerging Markets Debt for closer relations with China, we note that this is not universally shared as there are also concerns among citizens that Mongolia is becoming a satellite state of China. 20 President Khaltmaagiin Battulga, who campaigned on a more nationalist platform advocating for less dependency on China, has thus far maintained a strong relationship with China. Free and Fair Elections Until the 1990s, the Mongolian People s Party (MPP) was the ruling party operating under a one-party system since the 1920s. Mongolia has since transitioned to a democracy. Mongolia has had seven consecutive successful and free democratic elections since the 1990s. The main opposition party is the Democratic Party (DP) which was founded in 2000 through a merger of five smaller parties. Since then, the DP and the MPP have been alternating power. In June 2017 the DP regained the presidency from the MPP with the victory of Khaltmaagiin Battulga. The MPP also currently controls parliament with Ukhnaagiin Khurelsukh named as prime minister in October 2017, succeeding former Jargaltulga Erdenebat following a noconfidence vote. Structural Reforms and Commitment to the IMF Program In light of the deteriorating economic conditions since 2015, the new MPP government has introduced a much-needed economic stabilization plan that aims to stabilize macroeconomic conditions in the short term while also undertaking medium-term economic reforms to ensure a more sustainable economic growth model. Some of the more immediate objectives include increasing currency reserves to reduce balance-of-payment pressures and higher levels of engagement with multilateral and bilateral organizations such as the IMF. Mongolia reached an agreement with the IMF in 2017 for a three-year Extended Fund Facility program worth US$440 million. The IMF program also opens up other forms of financing that may ultimately reach as high as US$5.5 billion of financial support. In its first review, the IMF noted that performance under the program has been good, with all quantitative targets on track and that this ambitious structural reform program will help sustain growth in the medium term. Weaknesses Commodity Dependence Mongolia s economy is highly dependent on the mining sector, which accounts for about 50% of revenues and 90% of exports. As a result, the country is vulnerable to commodity shocks that lead to boom-bust cycles. Mongolia s growth rate in the past 10 years has been relatively volatile, averaging 7.8% from , followed by a sharp contraction of -2% in 2009, and then resuming high growth rates that averaged 11.2% between , with a subsequent collapse of the economy due to the commodity shock. The IMF expects growth in of 2% 2.5%, although the outlook is rosier in the medium term as mining production is expected to increase. This highlights the volatility of the economy as a function of commodity production and prices. The structural reform program on which Mongolia has embarked should help make the economy more resilient to these shocks. 146

5 Mongolia Fast Rising Debt Levels Mongolia s debt level has risen at a rapid pace, going from 60% of GDP in 2015 to an estimated 101% of GDP by Most of the debt increase are driven by external debt, which is estimated to reach 82% of GDP in However, the debt-to-gdp ratio is expected to decline after 2018 and reach 85% of GDP by The high proportion of external debt is a vulnerability that the government is trying to address by reducing foreign currency exposure. Weak External Sector and Low Level of Reserves Mongolia s current account deficit has been high historically, at more than 25% of GDP from Although it has since fallen to about -4% of GDP in the past three years,, it is expected to increase to -9.5% in One factor contributing to the large current account deficit is the economy s small size and the large investment associated with its mining projects. While the increase in current account deficit will be driven by FDI, we note also that Mongolia s reserve levels are fairly low. Reserves peaked at US$3.8 billion at the beginning of 2013 and have fallen to US$1.25 billion as of July 2017 although the IMF expects to see reserves rebound to US$2.5 billion in Infrastructure The country s infrastructure is still underdeveloped and in need of upgrades. Less than half of the country s roads are paved, and many of the roads in the capital, Ulaanbaatar, are in need of improvements. The government is expanding its road networks to connect different regions at an estimated cost of US$5 billion. Development of a railway network is also critically important for the mining sector. Mongolia is planning to connect the large mining projects with a railway network that facilitates transportation to Russia and China. Overall investment needed to build the railways network is estimated to exceed US$8 billion. Investment in the energy sector will also be required to meet increased demand from the mining sector. The construction of a thermal plant in Tavan Tolgoi also is expected to supply electricity to Oyu Tolgoi and reduce energy imports from China. Finally, Mongolia is also part of China s ambitious One Belt One Road initiative, benefiting from a strategy of constructing roads and railways to develop a trilateral corridor between Mongolia, China, and Russia. 147

6 Lazard Emerging Markets Debt Country Background Size 1,564,115 KM 2 (19th) Capital Ulan Bator Population 3.1 Million Religion Buddhist 53.0%, Muslim 3.0%, Shamanist 2.9%, Christian 2.2%, Other 38.9% Median Age 28.3 Years Literacy Rate 98.4% Independence 11 July 1921 Political System Semi-Presidential Republic Government Leadership President Khaltmaagiin Battulga; Prime Minister Ukhnaagiin Khürelsükh Next Election 2021 Legislative Branch Unicameral State Great Hural Economy Agriculture 13.3%, Industry 35.3%, Services 51.4% Labor Force Agriculture 31.1%, Industry 18.5%, Services 50.5% Merchandise Exports Copper, Apparel, Livestock, Animal Products, Cashmere, Wool, Hires, Nonferrous Metals, Coal, Crude Oil Export Partners China 84.1%, United Kingdom 6.8% Currency As of November 2017 Source: CIA Togrog/Tugriks (MNT) 148

7 Mongolia Country Timeline 1924 The People s Party chooses Lenin s road to socialism bypassing capitalism and renames itself the Mongolian People's Revolutionary Party (MPRP). The Mongolian People s Republic is proclaimed Yalta conference agrees to preserve the status quo Soviet control in Mongolia. Mongolians vote for independence in a UN plebiscite. Mongolia is recognized by the Republic of China Relations established with the People s Republic of China. Railway built across Mongolia linking Russia and China UN Security Council approves Mongolia's UN membership. Diplomatic relations established with the UK Soviet Communist Party General-Secretary Brezhnev signs a friendship treaty in Ulan Bator allowing secret stationing of Soviet troops in Mongolia Gorbachev's Vladivostok speech opens the way to detente with China and the withdrawal of Soviet troops from Mongolia Street demonstrations force resignation of the MPRP Politburo. Political parties are legalised. Elections to the Great Hural (parliament) are won by the MPRP, but 19 of the 50 seats in a new standing legislature go to non-communists The first direct presidential elections are won by Ochirbat, nominated by the National and Social Democrats MPRP candidate Bagabandi wins presidential election IMF approves nearly $40 million in low-interest loans over next three years to help tackle poverty and boost economic growth Dalai Lama visits. China denounces trip and warns Mongolian leaders not to meet the Tibetan spiritual leader Russia writes off all but $300 million of Mongolia s debts. Parliamentary elections, in which the opposition performs strongly, result in political deadlock over contested results. Tsakhiagiin Elbegdorj is eventually appointed as prime minister following power-sharing deal MPRP candidate Nambaryn Enkhbayar wins presidential election Former Prime Minister and candidate of the opposition Democratic Party, Tsakhiagiin Elbegdorj, wins presidential election, defeating incumbent Nambaryn Enkhbayar by a narrow margin. Governing MPRP says it accepts the result Controversy as Mongolian People's Revolutionary Party reverts to Communist-era name of Mongolian People's Party. Ex-President Nambaryn Enkhbayar sets up small breakaway Mongolian People's Revolutionary Party Mongolia and Rio Tinto-owned Ivanhoe Mines reach agreement on stakeholding in the massive Oyu Tolgoi copper mine. Mongolia settles for a 34% share, as previously agreed, dropping demands for parity Mongolia puts Tavan Tolgoi coal mine deal on hold while it decides whether to go it alone on developing the project. It had earlier agreed to work with a group of US, Chinese and Russian companies Mining giant Rio Tinto says it will lay off up to 1,700 workers at the massive Oyu Tolgoi mine in Mongolia following a dispute with the government Prime Minister Norov Altankhuyag is dismissed by a vote of parliament. He had been under fire for alleged corruption and economic underperformance. Deputy Prime Minister Dendev Terbishdagva takes over as acting head of government. Parliament elects Chimed Saikhanbileg as prime minister in a vote boycotted by the opposition Mongolian People s Party Prime Minister Chimed Saikhanbileg removes the Mongolian People's Party from the coalition government by dismissing six of its ministers. 149

8 Lazard Emerging Markets Debt 2016 Mongolia says it will not allow future visits by the Dalai Lama after China opposed a visit by the Tibetan spiritual leader in November. Mongolia reaches an agreement with the IMF and other international partners worth more than five billion dollars on the proviso that it will strengthen its banking system and implement fiscal reforms Khaltmaagiin Battulga is elected president. Ukhnaagiin Khurelsukh succeeds ousted Jargaltulga Erdenebat as prime minister. Source: BBC 150

9 Mongolia Notes 1 As of December Wacaster, Susan, 2011 Mineral Yearbook Mongolia, US Geological Survey, December 2012, as of December 2013, Source: Lazard. 3 Government of Mongolia Offering Memorandum, October Ibid. 5 World Economic Outlook Database, International Monetary Fund, accessed on 20 December 2013, and as of December 2013, Source: Lazard. 6 Rio Tinto and Mongolia sign multibillion dollar deal on mine expansion, The Guardian, 19 May 2015, accessed on 30 November 2015, 7 Cashmere, NaturalFibres.org, accessed on 20 November 2015, fibres/cashmere.html. 8 Oyu Tolgoi, Turquoise Hill, August 2015, accessed on 20 November 2015, pdf/ppt/trq-sitevisit-aug2015.pdf. 9 accessed 22 October Government of Mongolia Offering Memorandum, October Oyu Tolgoi, Rio Tinto, accessed on 20 November 2015, 12 Mongolia: 2012 Article IV Consultation and Third Post Program Monitoring, IMF Country Report No.12/320, November 2012, and Mongolia Bond Prospectus, BofA Merrill Lynch, Deutchse Bank, HSBC, and J.P. Morgan, November Brletich, Samantha, Mongolia struggles to develop Tavan Tolgoi coal mine, Mining.com, 21 September 2015, accessed on 20 November 2015, 14 Government of Mongolia Offering Memorandum, October Government of Mongolia Investor Presentation, October Government of Mongolia Offering Memorandum, October Han, Bochen, The Trouble With China-Mongolia Relations, The Diplomat.com, 18 November 2015, accessed on November November 20, 2015, accessed 18 October accessed 22 October Hornby, Lucy, Lunch with the FT: Saikhanbileg Chimed, The Financial Times, FT.com, 15 May 2015, accessed on 8 November 2015, html accessed 18 October accessed 18 October accessed 18 October Mongolia: 2017 Article VI Consultation, International Monetary Fund, IMF Country Report: 17/140, May 2017, Request-for-an-Extended-Arrangement-Under-the Mongolia, International Monetary Fund, World Economic Outlook 2017, October 2017, accessed on 18 October Request-for-an-Extended-Arrangement-Under-the accessed 23 October Government of Mongolia Offering Memorandum, October IMF WEO Data October IMF WEO Data October As of October 2017, Source: Bloomberg Request-for-an-Extended-Arrangement-Under-the accessed 23 October Government of Mongolia Offering Memorandum, October Mongolia Bond Prospectus, BofA Merrill Lynch, Deutchse Bank, HSBC, and J.P. Morgan, November 2012 and as of December 2013, Source: Lazard. 34 China s Belt and Road Initiatives: Credit Implications for Mongolia, September 2015, ww.frontier-conference. com%2findex.php%2fen%2fdownload%2fcategory%2f43-sept-9th%3fdownload%3d277%3a1125- moody-s&usg=aovvaw0s7lsjezu_f1orrw2eyscu 151

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