Bond Market in Mongolia

Introduction

Mongolia, a heavily export-oriented country, was the world’s fasted-growing economy in 2011, expanding at a 17% rate as prices of bulk commodities soared. With the prospects of vast untapped mines rich with copper, gold, and iron ore, Mongolia’s debt levels swelled 264% in the five years ended 2015. However, due to the continuous falling of commodities prices since 2012, Mongolia’s sovereign bond market has suffered a major setback in recent years, and  its government finance minister has officially announced that the country “is in a deep state of economic crisis”. This report would go through Mongolia Bond Market history, analyze its current situation, explore reasons behind economy crisis and forecast its developing trend in the near future.

Bond Market in Mongolia before 2012

Bond market in Mongolia officially came to life in 1991, after democratization in 1990 with the fall of the Soviet Union. As part of moving from a planned economy to a more market oriented economy, the country instituted its first bond market by issuing in a first step government bonds for 300 million tugriks with the nominal price of 50, 100, 200, 500 tugriks with interest rates of 8% and 8-year maturity. Almost 20 percent of the issued bonds would be paid back in USD instead of the local currency and all the bonds were sold through a public offer at the Mongolian Stock Exchange.

The Mongolian Government then issued further bonds in 1996, so called discount bonds, with a face value of 15 billion tugriks. The bonds had a face value of 10000 tugriks, with maturities of 30, 90 ,180 days and 5 years, with a 3% interest rate. They were issued at a price of 9150 tugriks each.  Of these, only 144.3 million tugriks worth of bonds could be sold. These government bonds were the last bonds to be issued up until the year 2000, as the government changed policies and instead of publicly selling bonds on the Mongolian Stock Exchange, they sold bonds directly to commercial banks through closed offers, as there was a much higher potential to sell a larger volume of bonds this way. This led to the consequence that there were only a limited availability of government bond offers to be bought publicly. From 1996 to 2000, the Mongolian government could issue bonds worth 88.6 million tugriks in this way directly to commercial banks.

The Mongolian government then restarted selling government bonds through the Mongolian Stock Exchange in the year 2000, hoping to cover government budget shortages this way and increase the availability of bond supply for potential investors. During the period from 2000 up to 2006, the Mongolian government continuously issued government bonds with yields ranging from 2.88% up to 15.6%, with differing maturities. Issuances peaked during the years 2001 and 2002, where there were 42 issuances combined in these two years.

[pic 1]

Figure 1 Government Bonds

Due to irregular issuances of government bonds, it was hard to draw yield curve for Mongolia. In practice, it caused uncertainty of exchange dates, which was followed by a limited number of investors or interested parties.

As Mongolia was a country with a relatively underdeveloped capital market, in part due to its small population with poor financial literacy, it was hard to implement liquid and attractive markets to attract international investors. After the establishment of a Financial Regulatory Commission (FRC) in year 2005, the Mongolian Government issued various legal reforms in order to make the Mongolian capital markets more attractive to institutional investors. Amendments to the Companies Law that were approved by Parliament in October 2011 introduced sound corporate governance standards, strengthened minority shareholder protection in clarifying and broadening the definitions of related-party transactions, and conferred the FRC with enforcement power against breaches of these provisions. Since year 2008, the Mongolian government has tried to issue its bonds on a more regular basis, therefore tackling the uncertainty factor in the local government bond markets.

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Figure 2 Corporate Bonds

All in all, the Mongolian bond market until 2012 was comprised mostly by government bond issues, with corporate bonds being near non-existent, due to a lack of local companies seeking financing in the local capital markets due to its underdeveloped status. While government bonds issued had a value of around 200 billion tugriks during the period of 1996 to 2012, during the same time period the total value of issued corporate bonds reach only around 13 billion tugriks. Therefore it becomes obvious that the Mongolian bond market up to 2012 was still very much focused on government bonds, and not at all on corporate bonds.

Bonds Market in Mongolia from 2012 to 2016

Mongolia experienced a high annual GDP growth rate at 10% or more before 2012. Since 2012, the growth rate began to fall continuously with a current level of 2.3% in 2015 and an expected growth of 0.7% in 2016 according to the World Bank. Mongolia, however, faces certain challenges, including high rates of inflation, a growing dependence on the production and export of commodities, trade dependence on China and Russia, a growing need for foreign direct investment (“FDI”) to develop infrastructure projects, and fuel and energy requirements.

Copper, coal, iron, ore, gold and zinc account has always been a vast majority of Mongolia’s export and nearly 88% of country’s exports are to China. According to the Asian Development Bank, Mongolia’s economic growth (GDP growth rate) has reduced from 11.7% in 2014 to 1.4% in the first half of 2016 (shown in Figure 3), indicating that Mongolian economy is precariously exposed to the drop in global commodity prices and slump in the Chinese demand for its commodities. This claim is supported by Figure 4 where it shows a decrease in both Real Annual GDP Growth and in Copper Price.

[pic 3][pic 4]

                 Figure 3 GDP Growth Rate                                           Figure 4 Commodities Slump   

From Figure 5 below, we can clearly see that Mongolia has been facing an increase in Government debt to GDP ratio. From the year 2012 (Mongolia Bond issuance), the Debt to GDP ratio has risen significantly from 63% to a high level of 77.4%. This data set suggests that Mongolia might be facing difficulties in paying back external debts and may lead creditors to seek higher interest rates when lending.