What a difference five years can make. In 2011, Mongolia had an economy that was growing at more than 17% annually. The bonanza that had been created by mining, was supposed to enrich a nation of former nomadic herders enough, to permit a boom in mega construction. The building of a modern system of infrastructure, would bring the country hurdling into the 21st century.
Sukhbaatar Batbold the former leader of Mongolia made a prediction in 2012, that the exceptional rate of economic expansion could well continue for a decade. Of course when he made this forecast, the developing world was basking in the glow of prosperity. The global demand in commodities was surging, thanks to the rapid growth in China and a number of other emerging markets.
Mongolia a landlocked country possesses mineral wealth, that is estimated to be worth anywhere from $1 to $3 trillion USD (United States Dollars). The size of the trove is so large, that the country has become known as Minegolia by investors. In the decade that ended last year, the country had average growth of 8%. This was one of the fastest rates in the world.
The natural resources of the country became a big draw for foreign investors, which sparked the boom that began in 2010. The Oyu Tolgoi mine for example,has become the largest underdeveloped reserve of copper in the world. Unfortunately, the prosperity would begin to fade just two years later. Copper prices are now back to where they were in 2005. After surging to $10,000 USD a metric ton, they have fallen by some 50%.
GDP (Gross Domestic Product) exceeded $12 billion in 2012 and would peak at $12.58 billion in 2013. In 2014, the total size of the economy fell to $12.22 billion and then contracted even further to $11.76 billion in 2015.
Mongolia with a population of just 3 million, became overly dependent on exports to China. Their neighbor to the south, absorbs more than 85% of the total. Agriculture alone can no longer sustain the population with the rising living standards they have come to expect, since the peaceful revolution of 1990.
The populace has come to demand, reliable water and electricity supplies for example. Their hopes have now been dashed, with many of them doing without some of the most basic amenities.
More than half of the population is under 30. They have grown up in a society that has undergone dramatic change, since breaking free from outside control. These young people will grow progressively restive, in a country that lacks economic opportunities.
The previous strong demand from China and massive foreign investment, allowed GDP per capita to in Mongolia to reach the equivalent of near $4,000 USD. In PPP (Purchasing Power Parity) this would be a little under $11,500 USD.
As growth in China began to slow in 2011, the government in Mongolia decided to borrow money to finance road construction around the country. In 2012 alone, the country sold $1.5 billion USD in sovereign debt to pay for these projects. The country took on ever more debt in the subsequent years, as growth continued to slow. The previous boom was rapidly fading.
In the June parliamentary elections this year, the Democratic Party was swept from power. In an election landslide, the Mongolian People’s Party (MPP) returned to office. Voters had become increasingly anxious about the economic deterioration and were ready for a change. The latter had ruled the country unopposed, during the time of Communist domination. This was when Mongolia was a satellite of the former Soviet Union.
The new Prime Minister Erdenebat Jargaltulga is facing a daunting task. He has pledged to work for economic stabilization and fiscal discipline. The last time the MPP was in the majority, was during the years 2008 to 2012. The economic success of their previous administration was made possible by the amount of foreign investment, that poured into the country during those years.
There is no doubt by the election results, that voters blame the Democratic Party for the excesses that have led to the present economic meltdown. The MPP captured 65 seats out of a total of 76, giving them a 85% majority. In contrast, the Democratic Party representation slid from 37 down to just 9 seats.
Growth for 2016, is expected to be a meager 0.4%. The MPP has gained politically from blaming the ousted Democrats, for excessive borrowing and poor economic management. However, much of what has occurred, was beyond the control of the Mongolian government.
The Democratic Party’s electoral chances were further damaged, when Mongolia had been given a negative economic outlook by the American credit rating agency Moody’s. Standard and Poor another United States credit agency, has reduced the rating on the outstanding debt to a B. This is after two previous reductions that have taken place since 2012.
The downgrade in credit worthiness is the effect of rising budget deficits, caused by declining mining revenues and the interest accumulating on the growing sovereign debt.
The electoral results saw an increase in the rate of return for Mongolian bonds, but the new optimism would not last. Just a few weeks later, the extent of the financial calamity is becoming clear. Foreign exchange reserves have plunged 23%, from a year earlier. At the end of the first half of 2016, only $1.3 billion USD remained.
With reserves largely spent, the government is now having trouble meeting its civil service payroll. In response, the government is now being forced to cut salaries. In many cases, the reduction is being reported to be near 60%.
In August, the local currency began to collapse. The government in response, was forced to increase interest rates by some 4.5%. This brought the benchmark to a whopping 15%. The tugrik has now become, the worst performing currency globally. It has undergone a devaluation against the American dollar by 12%, in 2016 alone.
Mongolia has accumulated some $3 billion USD in sovereign debt. It is in the form of hard currency bonds. As a result, the debt to GDP ratio which had been targeted for 55%, has ballooned up to 78%. Borrowing costs in this increasingly unstable environment, have ratcheted up to 7.14%. This is an increase on the yields of 2 percentage points, since 2012. They are now mostly due in 2022.
The higher costs associated with servicing the debt, is raising the speculation that the government will be forced to return to the IMF (International Monetary Fund) in order to remain solvent. According to the Mongolian Finance Ministry, the country has accumulated around $5 billion USD in general government debt. Gross external debt already exceeds $20 billion USD.
Mongolia needs to repay $650 million USD in 2018 and another $1.5 billion USD in 2021 and 2022.
Worse yet, foreign investment had virtually come to a standstill starting in 2015. In the first half of this year, over $4 billion USD is being withdrawn, making foreign currency increasingly scarce. Investors have become increasingly anxious, over the rising debt levels in relation to GDP.
Mongolia has gone through a number of assistance packages and bailouts since 1990. The most recent was during the financial crisis of 2009. By admitting to a crisis, the government is preparing the country to accept further austerity. This is the first step in getting outside help for the present disorder.
This in turn creates the environment to persuade foreign investors and the IMF, that the country is moving in the right direction, to deal with the present economic and financial circumstances.
Unlike other resource dependent rich countries like Brazil, Canada and Russia, the country has so far escaped recession. Although growth for 2016 was forecast to be 7.7% just two years ago, circumstances have now dramatically changed . The Mongolian economy is still expanding, but barely. However, negative growth is likely in the second half of this year.
Many Mongolians now face the prospect of falling below the poverty line, once again. Unemployment which was 6.3% for most of 2015, surged to 8.3% by the end of the year. In the first part of 2016, it had reached 11.6% and had dropped only slightly to 10.6% in the last quarter. More troubling, 25% of young people are unable to find work.
The problem for Mongolia is that outside of China, the country remains isolated from the rest of the world. With no access to the sea and an incomplete transportation system, it cannot compete as well for outside investment. Countries like India and Southeast Asia are in a far better position in attracting crucial foreign investors.
The immediate future for Mongolia remains bleak. In the long term, commodity prices will recover and the country will pay down much of the present debt. When economic growth returns, it will be important that the country learn to live within its means. Politicians will need to resist the temptation of spending money for foolish initiatives or to win popularity as has occurred in the past.