In November 2016, Mongolia reeled as Fitch issued a further downgrade to B- (FT). Anaemic growth, economic mismanagement and impending repayments, loomed large. Prior to the package led by the International Monetary Fund (IMF), Mongolian politicians looked on in vain hope of a solution. But sometimes fortune favours the brave. Battered by a winter of discontent, partners trusted in Mongolia, and now the markets seem minded to agree.
After a year which saw the explosive re-emergence of coal, industrial output increase 40%, and the stock market hit record highs, the government has again returned to the international capital markets. Initially marketing US$650m, demand sent the total sum to US$800m. According to Finance Asia, orders amounted to an incredible US$5.5bn (Finance Asia). In a climate of low yields, savvy bond investors are betting on Mongolia where the likelihood of default is remote.
Guidance on the Caa1/B-/B- issuer was put at 6.125%, however, by close it was fixed at par to a yield of 5.625% (Finance Asia). This rate compares favourably with recent performance. In March, the government raised US$600m on its seven year Khuraldai bond at 8.75% (Intellinews). The change since March 2016 is still more astounding. Then, Mongolia debt traded at 10.875%, reflecting its perceived ‘junk’ status (Intellinews). Today, investors would fall over themselves to buy at that level.
The contrast in just over eighteen months, reflects broader emerging market trends. Investors are beginning to re-appraise risk, and scrutinise the real likelihood of delinquency. In September, Tajikistan, raised US$500m from its inaugural offering at a fixed rate of 7.25% (FT). Meanwhile, in August, the Iraqi government raised US$1bn for five year money at a rate of 6.75%- an issuance six times oversubscribed.(FT) Mongolia is cashing in on this improved liquidity to enable it to create robust foundations for the future.
Over many hard years, Mongolia and its bankers, have grown savvy. The so-called Gerege bond, marketed by Credit Suisse, Deutsche Bank and JP Morgan, initially targeted US markets, known for larger exposure to frontier economies. In so doing, it built momentum in the Asian markets. By close, 42% was taken by US investors with 30% and 28% taken by Asians and Europeans respectively. As Mongolia continues to meet its debt obligations, rates may fall further.
On the one hand, this latest tranche of debt, should be seen as a vote of confidence in the IMF-backed Mongolian recovery. But there is a more fundamental point: Mongolia is reigning in unsustainable debt, and cashing in on favourable pricing. With the government announcing plans to buy back US$500m of yuan and dollar denominated bonds due in 2018, it will stave off maturities until 2022, giving it time to reform and grow (Intellinews).
Amidst the many other indicators we track, this is yet another signal of an uptick in performance. Long may it continue. To hear more about the Mongolian economy, why not download our latest quarterly update? Click here to download.
If you’d like to discuss Mongolia more generally, send me an email and I’d be happy to talk: oliver@apipcorp.com