Not so long ago, Mongolia was shunned by the international investment community. Detractors argued huge reserves and close proximity to China could not obviate structural failings or mitigate aggressive cyclicality. Too many false starts led groups to steer clear. But just as the pre-pandemic world seems a distant memory, so too, global political instability has forced a reappraisal of the risks and strengths of frontier debt. It is against this backdrop, Mongolia has started 2023 with confidence.
In January, Mongolia managed to attract US$450m by drawing on a substantial reservoir of demand, forcing yields down, in what would have historically carried higher rates of interest. Alongside, contemporaries such as Turkey, Oman and Uzbekistan, Mongolia intelligently took advantage of favourable market conditions, leading some commentators to ask whether it may continue to restructure. Given robust trading on the secondary markets, it represents a profoundly different macro environment from recent times.
Inside the Mind of a Morgan Stanley
As Morgan Stanley recorded, it is unclear how long emerging and frontier markets like Mongolia will be able to draw on this pool of capital. One school of thought is this is purely a function of interest rate movements in the US and other developed economies. Ostensibly, attempts to control inflation and the attendant effect on base rates, being the main determinant of whether Mongolia (and others) can continue to borrow on preferential terms.
A more generous interpretation of matters, however, is not simply on a macro level, but on a micro level too, markets are more favourably predisposed to Mongolia than was recently the case. Data from the Asian Development Bank (ADB) shows GDP growth for 2022 of 1.7%, building on the 1.4% of the preceding year. In comparative terms, this lagged both China and South Korea and offered little obvious cheer to investors. Looking to 2023, however, Mongolia begins to outperform, recording growth of 4.9%. Inflation- though stubbornly high at nearly 12%- is due to have fallen from an estimated 14.7% in full year 2022. Mongolia’s current account balance, meanwhile, is due to improve.
In May 2022, Fitch had given Mongolia a ‘B’ long term foreign currency issuer default rating, and when it came to the voluntary exchange and tender offering for the debt due to mature in 2023 and 2024, it assigned the same. Florian Schmidt of Frontier Strategies, who advised on the issuance, highlighted how it satisfied many of the country’s key requirements.
The Importance of Removing Upcoming Redemption and Refinancing Risks for Long-Term Growth
Amongst these, Schmidt pointed to removing upcoming redemption and refinancing risks and optimising the debt maturity profile. It additionally kept the rate at the 2024 level and ensured a sustainable ongoing level of exposure. The significant oversubscription, seems to suggest there is positive sentiment amongst many of Mongolia’s existing lenders.
Even accepting the peculiar circumstances of early 2023, it stills points to Mongolia’s continued rehabilitation in the international investment community. Recent history has been a potent story of hubris and overreaction. Back in 2011, explosive growth led to commentators prematurely coining sobriquets like ‘Ulaan Qatar’ and ‘Minecolia’. After complications at Oyu Tolgoi and injudicious use of proceeds from the mining boom, matched to faltering commodity prices, there was a feeding frenzy amongst commentators keen to write off the country wholesale.
As ever, neither analysis quite hit the mark. The sometime curse of resources is now better understood, but back then, China’s continued industrialization was little disputed, and international markets got ahead of themselves. Similarly, the hurt and trauma dealt by the road to the IMF’s bailout in 2017, poisoned perceptions. Now perhaps- and particularly post lockdowns- a more dispassionate assessment is emerging.
In 2021, the World Bank reached its new country partnership framework with Mongolia, offering structured support until 2025. Premised on pillars of strengthening economic governance, boosting competitiveness, and improving quality of life, it’s neither eye catching nor revelatory. It does, however, align with Mongolia’s broader development strategy- Vision 2050- and helps position a steadier period of reform, rooted in fiscal responsibility and probity. Whether recent success in the bond markets can be replicated will probably be a function of both the macro and the micro. Either way, with ratings agencies and international capital, there is a continued thawing of sentiment toward Mongolia which should encourage those who have survived a long winter.