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3 Rocky
road ahead for Mongolia By
Peter Lee
The Human Development Fund is
funded by revenues from resource exploitation
along the lines of the Alaska Permanent Fund and
the Norwegian sovereign wealth fund. In other
words, it is a non-renewable resource fund, albeit
with Mongolian characteristics - ie it has become
something of a piggy bank for politicians to curry
favor with the electorate while slighting the
restructuring of the economy against the day,
admittedly far in the future, when all the ores
are gone.
In 2011, the payout from the
fund accounted for 40% of the government's budget,
raising the specter of "Dutch disease" inflation
the fund is specifically designed to avoid.
The 2012 payout was funded primarily by
the Oyu Tolgai copper mine and the Chalco payment
to Erdennes TT. [5] The Chalco payment to Erdennes
TT amounted to about half of the value of
the $500 to $600 million
social welfare payout (in cash and services) that
Mongolian politicians have promised to make from
the nation's Human Development Fund to Mongolia's
3.1 million citizens in the runup to the June 2012
parliamentary election.
In effect, then,
Chalco got a bargain on coking coal while
effectively bankrolling the Mongolian
election-year giveaway meant to demonstrate the
benefits of resource nationalism. [6] After the
June 2012 parliamentary election the coalition led
by the victorious Democratic Party apparently
decided to push resource nationalism and determine
what limits if any there were to the eagerness of
foreign financiers, the tolerance of foreign mine
operators, and the patience of the Chinese.
Unable to tap the bonanza of the
longed-for Erdenes IPO, the government instead
opted to issue $1.5 billion in government bonds.
The issue - equivalent to 17% of Mongolia's
current GDP - was quickly oversubscribed by a
factor of 10, which perhaps provides a misleading
idea of the international appetite for Mongolian
risk and respect for the wisdom of Mongolian
fiscal management, especially since the government
apparently had no concrete plans for how to use
the funds and pay back the principal and interest.
Writing on his blog, The
Mongolist, on January 16, Brian White
observed:
The government has been criticized
by the opposition Mongolian People's Party (MPP)
for not having a clear plan on how to spend the
funds now that the government has received them.
Prime Minister Altankhuyag has responded on
behalf of his government that there is a plan in
the works and a "Policy Council," which he will
chair, has been formed to ensure proper use of
the funds.
To me this is a far more
frightening bit of news than the market scare
brought on by MPRP. In the highly partisan and
depressingly opaque environment of the Mongolian
parliament, the current government has
introduced USD 1.5 billion of revenue without a
binding and clear statutory authority for how it
should be spent.
The government of
Mongolia seems to have a tremendous amount of
faith in the political system's ability to
produce a good outcome here. Moreover, the list
of proposed projects for the revenue, which
includes development of an industrial complex in
Sainshand, expansion of the railroad,
development of Tavan Tolgoi, and a potential
subway system in Ulaanbaatar among other things,
is shockingly broad when viewed in the context
of reality.
Just take the fact that Oyu
Tolgoi (a single project) has required about USD
6 billion in financing thus far and it still has
not begun full commercial production, and it is
hard to imagine USD 1.5 billion going very far
on the government's wish list.
In
addition to funding some immediate investment
needs, the Democratic Party coalition apparently
hopes that it can gain leverage with investors by
demonstrating it has the option of funding its
resource development through the issuance of debt
without giving away equity.
Case unproven,
it seems, by the $1.5 billion issue. Foreign bond
buyers were probably willing to take a flutter on
a small issue of an exotic bond whose failure
could not sink a diversified portfolio, a minor
risk justified by the attractive theoretical
fundamentals of Mongolia, namely its low baseline
GDP and the potential for enormous growth of its
resource sector.
However, an economic
pundit ran the numbers in the UB Post (and also
looked at the possibility that the government
might turn to another $3.5 billion bond issue, in
part to help pay for the first $1.5 billion) and
drew the conclusion that Mongolia's total foreign
indebtedness had already reached worrisome
levels:
As for Mongolia, the ratio of the
total amount of our debt ($10.9 billion) to the
GNI ($14.1 billion as the sum of GDP $8.5billion
+$277 million transferred from abroad + $5.3
billion FDI) is 77%. And, the ratio of the total
amount of debt to our export income, which was
$3.8 billion, is 300%. When compared to average
developing country, it is three times higher
than the GNI [gross national income] and four
times higher than the export income, which shows
that the external debt of Mongolia is completely
enormous.
Can the government keep its
fiscal and business house in order - and continue
to attract foreign investment and grow the economy
at the 17.5% rate that caused all the excitement
in the first place? In the new year, signals have
been decidedly mixed, for reasons that are not
entirely related to the weakening of Chinese
demand.
On January 9, 2013, Erdenes TT
management gave the Mongolian government the bad
but not unexpected news that it was facing a
shortfall of $200 million thanks to the
election-year giveaway:
Earlier, "Erdenes Tavan Tolgoi" JSC
has been financed first with 350 million $in the
form of advanced payment under the agreement
established with Aluminum Corporation of China
Limited (CHALCO), later received additional 131
million $from GOLOMT Bank (Mongolia) and another
100 million $from Development Bank (Mongolia),
comprising a total of 581 million $investments
to date…only 270 million $were utilized for
Company's activity from the total of 581 million
$invested, whereas the rest of 311 million $was
distributed to civilians accounting into Human
Development Fund.
As to how the
requested $200 million bailout will be used,
management had this
to say:
If to receive the $200 million
investments, the activity will be normalized and
citizens are able to receive their dividends
from 1,072 shares distributed by the Government
of Mongolia.
To rephrase this rather
fractured passage, some of the funds will be used
to pay dividends to those Mongolian citizens who
decided to hold onto their ETT shares (1,072 per
person) instead of selling them to the state.
Dividends have become an important issue
because the new government repudiated the previous
regime's promise to buy back the 1,072-share
Erdenes distribution, making the payment of
dividends something of a political imperative.
The government placed the blame for the
financial shortfall squarely on the contract price
negotiated by Erdenes TT (whose previous chief, B
Enebish had been forced to retire "for personal
reasons" in October 2012 while being criticized by
sources inside the government for "overspending"
and "slowing the project down") and the previous
government with Chalco.
According to a
deal that the former Government signed with
CHALCO, Erdenes TT LLC sells high quality coking
coal for $70 per ton to China. But the deal causes
loss to the company.
Therefore Erdenes TT LLC is trying
to re-negotiate with China over the
deal.
Whether or not Erdenes is
actually selling coking coal to Chalco below its
marginal cost (it recently claimed it was losing
$8/ton) is an interesting question that is
difficult to answer. All that can be said with
confidence is that the government wants more money
from the Chalco deal.
Presumably, Chalco,
in light of the fact that it 1) prepaid for the
coke which is as yet largely undelivered and 2) is
aware that virtually all of the prepayment was
transferred out to the Human Welfare Fund, is
perhaps not eager to agree to pay more for the
coking coal it hoped to get.
Bloomberg's
headline on January 17, 2012 revealed: "Mongolia's
Erdenes TT Halts Coal Exports to Biggest Buyer
China". Erdenes TT's new chief explained:
Exports to customers including
Aluminum Corp of China Ltd. stopped on Jan 11 as
Erdenes TT couldn't pay Altangovi, said Yaichil
Batsuuri, who has led the company since October.
Altangovi provides warehousing services at the
border with China, the biggest buyer of
Mongolia's steelmaking coal.
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