Investors fear for Mongolia's finances

By Spencer Anderson

HONG KONG, March 23 (IFR) - Mongolia will struggle to repay its debts in the next three years, analysts and investors have warned, if it is unable to reverse a drop in economic growth.

Despite the country's vast reserves of gold, copper and coal, weak commodity prices have weighed heavily on Mongolia's finances. GDP growth of 7.8% in 2014 is still outpacing many of its regional neighbours, but it is down substantially from earlier years. Growth fell to 11.3% in 2013 from 17.5% in 2011, according to the World Bank.

Weaker revenue from mining has significantly harmed the government's finances. One of the most glaring examples is in its external liquidity resources, which fell to just over US$1bn this January from US$4bn in January 2013, according to Fitch.

Mongolia has become more reliant on a bilateral swap agreement with China. The People's Bank of China (HKSE: 3988-OL.HK - news) had previously capped this agreement to Rmb10bn (US$1.6bn), but, in July 2014, this was ratcheted up to Rmb15bn.

The Mongolian Government has US$1bn of sovereign bonds due in January 2018 and, in 2017, it will have to repay some of its swap agreements with China. It has also not helped matters that the local currency, the tugrik, has lost 42% of its value against the US dollar in the last two years.

Analysts believe that there is sufficient time to resolve these problems and that much of these obligations can probably be refinanced.

However, the worry is that the situation could worsen before it improves and, as such, Mongolia could struggle to repay debt and face a ratings downgrade. Both will make refinancing more complicated and expensive.

"Mongolia's B2 rating suggests that a default is not imminent," said Anushka Shah, an analyst at Moody's, which cut its sovereign rating from B1 last July. "However, the rating is considered speculative and is subject to high credit risk.

"The government has a window to resolve these vulnerabilities, but, as time goes by, the window closes. Large repayments are due in 2017 and 2018, and that time horizon is not that far away."

The government has also given mixed signals over foreign ownership rights in certain industries. In particular, disputes over the vast Oyu Tolgoi mining project, a joint venture between Mongolia and Rio Tinto (Xetra: 855018 - news) , have spooked foreign direct investors.

This uncertainty has rattled FDI, which fell 81% year on year, according to the country's central bank.

The dispute over Oyu Tolgoi has been going on since 2012 and, while observers believe an agreement will eventually be reached, they say some sort of deal is needed soon.

"Activity has certainly slowed," said a Hong Kong-based foreign investor. "There are fewer expats there and less money. There are good-quality companies there, but nothing is really insulated from mining.

"It's also pretty clear to everyone there that the government spends on programmes that don't have much economic impact on the ground. The government's inability to finance those projects is stressing the economy. Then, the concerns over Rio Tinto are there, and investors ask themselves if Rio can't win an argument there, what chance do I have?" (Reporting By Spencer Anderson, editing by Steve Garton, Dharsan Singh and Daniel Stanton)