Mongolia’s bonds rally after US$5.5b bailout avoids default
Investors who didn't blink as country stared into abyss land big reward as IMF, World Bank and China step in with refinancing
Mongolian bonds rallied after a US$5.5 billion loan package agreed on the weekend staved off default and rewarded investors who had hung on despite signs of mounting stress.
Investors had been particularly concerned about a US$580 million repayment due March 21 on a bond issued by state-run Development Bank of Mongolia. The country’s lawmakers had appealed for donations from local businesses and citizens to help the cash-strapped government pay creditors.
That bond, which the government hopes to soon swap for a new one, rallied as much as 2 cents in price on Monday. Issues maturing 2018, 2021 and 2022 rose 1.1 cent, 3.9 cents and 4.2 cents respectively, according to Tradeweb data.
“I have been long Mongolia for a long time, this is very good,” said Shahzad Hasan, who manages a portfolio of emerging-markets fixed-income securities at Allianz Global Investors in London.
“This will invite foreign investment in the country, especially in the mining sector, and it will improve confidence of foreign investors in Mongolia, so it is all very positive and very constructive.”
Mongolia will meet this week with foreign investors to see if it can swap the DBM bond for another state-guaranteed issue.
Depending on the terms of the exchange offer, such a swap could still be classified as a default, Moody’s Investors Service warned, just days after putting Mongolia on review for a ratings downgrade because of the possibility of a DBM default. However, the bailout could help Mongolia’s overall credit profile, it added.
The loan agreement for the mineral-rich country includes US$440 million from the International Monetary Fund, US$3 billion from the World Bank and others, as well as a 15 billion-yuan (US$2.2 billion) swap line extension from China.
Mongolia was seen by many as a classic case of the “resource curse.” It enjoyed double-digit annual growth between 2011 and 2013, but the boom went into reverse amid government overspending and falling commodity prices.
However, investors have largely kept faith with its bonds, betting either the IMF or China, the biggest buyer of Mongolian coal and metals, would come to the rescue.
The country’s mineral wealth was also a lure for longer-term investors, especially as the Rio Tinto-led Oyu Tolgoi project is expected to produce 560,000 tonnes of copper annually from 2025.
“The IMF program, along with the broader bailout package … should go a long way towards restoring investor confidence,” analysts at Nomura told clients.
The IMF expects Mongolia’s economic growth to accelerate to around 8% by 2019, Nomura noted, compared with last year’s 1%, which was a seven-year low. Hard currency reserves should almost quadruple from current levels to US$3.8 billion, back to the boom days of 2012.
“Eight percent growth is quite strong – but it can happen if the mining comes online and copper prices have rebounded,” Hasan said.
Economic stabilisation after the bailout should also pave the way for further investments into Mongolia’s mining sector.
“It brings clarity, which investors have been waiting for. It is the bottom-out everyone has been waiting for,” said Dale Choi, an analyst with Mongolia Metals and Mining, a research firm in Ulaanbaatar.
The bailout does, however, underscore some of the potential political strings attached to China’s involvement. Last month Beijing said it hoped that Mongolia had learned a lesson following repercussions from a visit to the country by the Tibetan spiritual leader the Dalai Lama in November.
“The Dalai Lama’s furtive visit to Mongolia brought a negative impact to China-Mongolia relations,” Chinese Foreign Minister Wang Yi told Mongolia’s Minister of Foreign Affairs Tsend Munkh-Orgil by telephone.
China also hoped Mongolia would “scrupulously abide by its promise” not to invite the Dalai Lama again, Wang said.
A week after the November visit, China imposed fees on commodity imports from Mongolia, charging additional transit costs on goods passing through a border crossing into China’s northern region of Inner Mongolia.
“Mongolia firmly supports the one China policy, consistently holds that Tibet is an inseparable part of China, that the Tibet issue is China’s internal affair,” the Mongolian minister was quoted as saying.