Is Mongolia an economy to invest in?

Mongolia: a fragile economy facing the next debt crisis?

In addition to an excessively loose spending policy by the Mongolian government, the decline in world market prices for the main export goods coal, gold and copper contributed to the crisis in 2017. Even before the rescue package was deployed, public debt at home and abroad amounted to 90% of economic output and total (private and public) foreign debt was as high as 232%. The latter is due to the particularly high indebtedness of the private raw materials sector to foreign lenders. But the Mongolian state also placed government bonds worth almost two billion US dollars on the international financial markets in 2015 and 2016 in order to cover its public budgets, which were heavily used by extensive subsidies for cement and gasoline. The diversion of public funds into the private pockets of public servants also contributed to the fact that more than half of all export revenues in 2017 already flowed into interest and repayments to foreign creditors.

Mongolia is not alone in this threatening international development. Similar developments can be observed in countries as distant and diverse as Mozambique, Venezuela, Angola or the Republic of the Congo: In times of persistently low global interest rates, these countries invested heavily in the exploration of some less exportable raw materials or closed existing budget gaps through international borrowing. Since they offered lending rates or bond coupons (significantly) in excess of 5% for this, banks and investment funds, which in the rich countries could hardly recover the inflation rate, took it all too willingly.

One can imagine the situation of such countries dependent on the export of raw materials like a small nutshell on the wide sea, propelled by an oversized sail. As long as the wind comes from astern, the boat sets a tremendous pace; that means: the national economies are showing impressive growth rates. But if the wind suddenly comes from the side or even from the front, the interest rates at which the ongoing debt service must be refinanced rise, or the prices for the few raw materials fall, the boat can hardly be steered and capsizing is likely.

Mongolia found itself in this situation in the summer of 2017. The injection of money from Beijing, Tokyo and Washington was able to keep the small boat on course for the time being, but of course only at the price of further growing debts, because the rescue came not as a lost grant, but as a relatively low-interest loan that has to be repaid nonetheless. It could become critical again for Mongolia as early as 2021 when the government bonds placed in 2016 become due for repayment for the first time. Given the current level of debt, it can be ruled out that Mongolia will be able to repay on its own. Rather, one will then have to look again for external rescue financing.

This situation is not only threatening for the country's economic survival. In Mozambique, the prospect of unprecedented income from exploring the natural gas off the coast had led to a dramatic erosion of the political system: the former FRELIMO liberation movement, which had ruled the country for over thirty years, engaged in a number of dubious deals with Swiss and Russian banks, in the course of which hundreds of millions of euros disappeared, never to be seen again. Only the IMF pulled the rip cord and - together with the most important Western donors - excluded the country from any further lending.

What can Mongolia do to prevent such a fatal development? First of all, only the repeatedly invoked but never implemented diversification of the Mongolian economy can remove the ground from such economic and political polarization. In the best of cases, however, this will be possible in the medium term. Until then, a solution for the country's existing over-indebtedness must be found quickly before the state bankruptcy threatens again in the summer of 2021.

In contrast to many low-income countries, which have been extensively discharged under the so-called HIPC / MDRI debt relief initiatives of the IMF and World Bank over the past twenty years, the international community currently has no theoretical idea of ​​how a negotiation process between Mongolia and its very different creditors from the IMF to the governments of neighboring countries to the thousands of borrowers scattered all over the world.

In previous debt crises, creditors and international financial institutions dealt with several steps: First, debt servicing to existing creditors - as in Mongolia in 2017 - was mainly refinanced with funds from the IMF and World Bank. This shifted the creditor structure from traditional creditors to international financial institutions. Then it was insisted that their loans should not be rescheduled under any circumstances, otherwise no lender would be available for crises. It was trusted that the implementation of structural adjustment programs of the IMF together with a miraculously improving global economy would lead to a recovery of the debtor. It was only when important time was lost due to this belief in miracles and the debts continued to grow that the rich countries also decided to allow the previously granted rescue loans to be waived.

In 2014, in the face of such experiences and the looming crisis, the developing and emerging countries made an attempt to develop an orderly state insolvency procedure for such situations in the General Assembly of the United Nations. As a neutral institution, which is neither a creditor nor a debtor, the UN would have been a basis for a comprehensive debt rescheduling process that would include all of these very different creditors. Specialist organizations such as the UN Conference on Trade and Development (UNCTAD) had carried out extensive conceptual preparatory work for this.

Unfortunately, the consultation process was stopped in 2015 by the resistance of some rich countries - including Germany prominently. The victims of this blockade could be the Mongolians along with many other indebted states around the globe.