Market
Welcome ‘Standby’
2016-09-14
The Mongolian Mining Journal /Aug.2016/
S. Bold-Erdene
In 2010-2011, Mongolian economy had been hungry for investment. At that time we were excited about mega projects like Tavantolgoi, railway project, Sainshand industrial complex, all together were estimated for MNT17 trillion and we were hoping to raise money by issuing international bond and get loan as fast as we could. Then, it seemed that there was not any useless program like ‘Standby’. Almost everyone and every economist have told that this program was becoming a tether to the growing economy. Even for me, the journalist of The Mongolian Mining Journal, also understood, and wrote so in my article Bye Bye, Standby.
However, after 6 years, we don’t have any other choice except to welcome the Standby program. Our currency is listed in the top of the worst performing currencies and Chinggis bond is catching up the Ukraine bond, where there is a conflict. Economic indicators from the Finance minister, actions by the Mongol bank and PM statement that said “will cut corners” etc., all indicating the pre-condition for joining the Standby program.
The year 2013. We did not suddenly enter into the current economic crisis. Such crisis was forecasted in 2013 and certain choices had to be made. Decline of FDI, and falling price of iron ore and coal were starting to impact the balance of payments negatively. Two people-N. Zoljargal, President of Mongol Bank, and N. Altankhuyag, Prime Minister, they realised that the situation would further deteriorate in the future, thus had only two choices. First was to join Standby program and adhere to a strict financial discipline. Second was to maintain the economic growth in stable but low level by printing tugrug and increasing money supply. It was termed as “a soft landing”. At that time, two, who had the power over ‘money’, made a decision to implement the second option. They decided that we should not loose the country’s reputation by joining the Standby program again just two and half years later. However, it seemed that they considered the country’s reputation but in reality it was clear that they did not want to limit their power of money spending under someone advise. Anyway, those two agreed to a soft landing and print more money.
With Prime Minister gave promise to enter Oyu Tolgoi, Tavan Tolgoi and Gatsuurt mine into the economic circulation and open the US dollar stream fully to the Mongol Bank and then N. Zoljargal started to print more money. We know it through his ‘Price stabilization program’ and ‘8 percent mortgage program’.
Unfortunately, N. Altankhuyag did not fulfill his promise. Following the complain that the financing of the second phase was breaching the Investment Agreement the “Rio Tinto” underground mine development was halted. It should be reminded during that time the increase of dollar rate was a strike. Also Tavan Tolgoi has been stuck till present. Since the money was already printed and projects were started and N. Zoljargal had to continue his doing. Because of trillions of tugrug flooded into the market and US dollar rate was easily past the planned rate 1700MNT and reached to 2000MNT. They tried to offset the impact of the money print by increasing the gold production, and made a swap agreement of US$1.8 billion equalled yuan with Bank of China.
The year 2009. The currency reserve was less than US$400 million and the exchange rate for United States Dollar to Mongolian Tugrug reached to 1700MNT, and budget deficit was out of control, we did not have any other choice but to join IMF Stand-By arrangement. Then we borrowed over US$220 million and at the same time, had been begging money equal to US$50 million from the countries like Japan. So after 18 months or in October 2010, Mongolia announced that it was quitting Standby. Unfortunately, just after 75 days of that event, we started to make the next mistakes. The Finance ministry submitted the state budget proposal with deficit of 2.5 percent of GDP which increased to 9.9 percent by the time it was approved. It means that the budget deficit increased from MNT200 billion to MNT900 billion. Generally, as soon as we got out of Standby, we started to dig for the next Standby. This situation has been aggravated year by year, and as of the first half of this year, our country’s budget deficit reached to MNT2 trillion. In 2010, first time coal revenue has outperformed copper’s revenue, and spent the money like water.
The year 2016. The budget loss reached to MNT1.9 trillion and non-performing and overdue loans reached 1.9 trillion MNT. Dollar against tugrug exchange rate reached to 2300MNT and except GDP growth, main economic indicators show historical worst level. There is no hope to recover from crisis as easy as 2009. The situation is totally different from 2009. When we quitted Standby in 2010, we external environment was very welcoming, where mega project Oyu Tolgoi had already started and coal and copper price was skyrocketing. Therefore, we passed the 2009 crisis with small loss. But the current external environment is not as pleasant. We don’t have attractive projects like Oyu Tolgoi to attract investment. We should wake up from our fairy tale that we can attract investment on our Tavan Tolgoi deposit. In this case, we do not have any other options except to rely on ourselves.
Why Standby?
“Do we have other choice?” is the answer. In addition, it is important that how much money does the state need. MNT2 trillion that has to compensate the budget deficit in addition to the billion dollar that has to be paid for bond payment are needed in the short term.
Probably the government seek to raise some bond money. Lenders are not kind of people who always give money for every asking. After the statement by the Finance minister, Chinggis Bond yield already passed 10 percent and S&P downgraded our rate to ( B- ). The government tricked the lenders that we will build railway and Sainshand Industrial Complex when we raised the money. In the last April, during the raise of US$750 million, the government said they will replace the domestic high interest rate loan with low rated one. Because of the election, they did not have other choice except to take 10 percent interest loan.
Now there is no country in the world that raise bond money with over 10 percent yield to recover the budget deficit. Unless the bond “cupid” blesses, there is not a chance to raise money through bond.
There are people who still keep a faith in the Tavan Tolgoi and Railway projects. It is unlikely that there would be an investor to invest US$4 billion to the Tavan Tolgoi. Even if we found one, Tavan Tolgoi alone cannot recover the economy. Let’s highlight here that the former minister M. Enkhsaikhan said “since we have already lost the momentum of Oyu Tolgoi and Tavan Tolgoi can remove the default of the country. Therefore, we should see the projects’ benefits as it would make default time shorter.”
Today, whether we want it or not, we don’t have any other choice except “Standby”. It is one-sided if we only talk about the money. Careful examination since 2009 reveals that the current crisis roots in the lack of budgetary and financial discipline. What we need most from the Standby is the financial discipline. Because of the Standby in 2009, we could prepare and approve Fiscal stability law and Stabilization Fund. Although we did not observe the law, these laws were the most useful tools for a developing country like ours. If we join Standby, at least our 4 separate budget will be combined into one and we might get rid of the glitch of the system where the Parliament changes the government’s budget proposal by up to MNT1 trillion. Hence we can not observe discipline ourselves we might learn to be disciplined by others which would save us from the upcoming crisis.
What’s the Standby? It is not an enemy. If we consider our country as bed ridden patient, the treatment is this program. The diagnosis, is the heavy food poisoning by uncontrolled eating and drinking. The doctors to save us from it are the prime minister, finance minister and president of Mongol Bank. And the IMF is consultant doctor. It does not mean every country that joined Standby shall be healed. It depends on doctors. In 2009, skillful doctors-S. Bayar, S. Bayartsogt treated successfully through Standby program but today, doctors’ skill and capacity might not meet the requirement. Truly, major doctor is a man who worked in aimag’s hospital for his life. But if the treatment is successful, by the first half of 2018, the country’s economy can recover.