Both the bond and the overseas pitches are expected to encounter skepticism. A nationalistic pushback against multinational miners such as Rio Tinto and mounting government debts, combined with an investor retreat from emerging markets, will make Mongolia a tougher sell.
The Top 20, the Mongolia Stock Exchange”s main index, is down by more than half from its February 2011 peak, when it was the world”s top performing market. Yields on Mongolia”s debut sovereign bond, issued a year ago, have climbed. The five-year, 4.125% note trades at around 6.75%. Foreign direct investment into the country for the first 10 months of the year came to $1.96 billion, half the level seen a year earlier.
Regulation relegated
An emergency session of parliament called in September by freshly re-elected President Tsakhiagiin Elbegdorj passed several laws geared at reviving foreign investment.
One new law removed a restriction, imposed a year earlier, requiring official approval for investments by foreign private companies into designated strategic sectors, including mining. Another new law, which takes effect in January, eliminates preferences for local securities investors. Oscar Mendoza Natividad, managing partner of hedge fund manager Mongolia Asset Management, said this had been a sticking point.
The new securities law will also allow for dual stock market listings. This means foreign-listed Mongolian companies, such as SouthGobi Resources, can trade on the local market too.
Elbegdorj, speaking last month in Hong Kong on his way back from Southeast Asia, said new reforms would cut red tape and restrain the role of state-owned enterprises. “Our government tends to get bigger and bigger and that”s really not good,” he said. “When you have a big government, it competes with the private sector. The government should serve your interest, but not be boss of your business.”
The traveling officials also plan to visit London and New York. “It seems the government”s message is, “We”re trying, give us a chance to show you,”” said Sara Phillips, an attorney with the U.S. firm Anderson & Anderson in Ulaanbaatar.
The response to Mongolia”s bond issuance will show whether investors buy the reform story. The Development Bank of Mongolia plans to issue up to $1 billion worth of yen bonds, though an official said the institution is trying to start with a tranche of $300 million to $400 million this year.
With the benefit of a guarantee of repayment from the Japan Bank for International Cooperation, Ulan Bator brokerage National Securities forecasts that the bank notes” coupon rate could be set around 2.25%. “Japan has been printing money left, right and center. I”m expecting lots of liquidity in Japan,” said Tuya Uyanga, the brokerage”s lead economist.
The Development Bank last March sold its debut bond, a $580 million, five-year dollar-denominated issue, with a coupon of 5.75%.
Local news reports last week indicated that the government plans to renew efforts to raise a legal cap on government debt, set at 40% of gross domestic product, to 60%. The aim is to clear the way to issue $3.5 billion more of government bonds. Parliament initially rejected the debt ceiling proposal last month.
“The Mongolian government has borrowed heavily in recent years,” rating agency Moody”s commented in a November report. It said the ratio of external borrowing by the public and private sectors in Mongolia as a proportion of GDP is far higher than that of comparably rated countries. With much of this borrowing denominated in foreign currencies, Mongolia”s debt servicing costs will climb if the tugrik, the local currency, continues to weaken, the agency said, while applauding parliament”s stand.
