RAINER MICHAEL PREISS: WHAT THE IMF

The story of Mongolia’s relationship with the International Monetary Fund is a tale of geopolitics, local greed, mismanagement and uneasy ties with Chinese and Western investors. The return of the IMF to Ulaanbaatar is a harsh wake-up call for Mongolians and investors alike.

Mongolia’s budget deficit is set to reach 20% of gross domestic product this year, and around $2 billion in public and private debt is scheduled to come due next year. With the Mongolian economy on its knees, Chinese creditors are making a case for greater investment concessions.

In recent years, Mongolia has severely mishandled relations with many foreign investors, most obviously with metals producer Rio Tinto, an investor in the Oyu Tolgoi gold and copper mine. Chinese interests have filled the void left by an exodus of Western investors.

Even if new IMF assistance helps Mongolia to avoid fiscal collapse, individuals and businesses in the country are still struggling with debt carrying high interest rates of over 22%. Banks in Mongolia typically lend money at annual rates of 22-28%. By comparison, shadow lenders offer loans at interests of about 36%.

But Chinese banks offer corporate lending against Mongolian collateral at an average of 5.6%, while the Chinese shadow banking market provides funding at rates of 10-20%. Because of the enticing borrowing differential, some worry that refinancing moves could further increase Mongolia’s dependence on China.

Bank of China (BOC) is seeking to open a branch in Ulaanbaatar. However, competition concerns have prompted Trade and Development Bank of Mongolia, Golomt Bank and Khan Bank to lobby the government to delay or reject Bank of China’s application for a full banking license.

SECOND CRY FOR HELP At the height of the global financial crisis in 2009, Mongolia called on the IMF for assistance and borrowed $232 million. The country was able to repay the loan early, as its main exports of coal and copper boomed due to strong demand from China.

To restrain dependence on China -- Mongolia’s largest export market and main creditor -- the Mongolian People’s Party government that took office in July has reached out to the IMF for help in restructuring debt and the economy.

Mongolia submitted a formal request on Sept. 30 for financial assistance from the IMF. Its total external debt is estimated at $23.5 billion, nearly double its GDP of $12 billion. Government debt makes up about $8.4 billion.

A $580 million bond issued by the Development Bank of Mongolia needs to be paid or refinanced by next March. Analysts say the government needs to repay a total of $1.7 billion-$1.8 billion over the next two years.

Source:http://asia.nikkei.com/magazine/20161013-Asia-s-new-vanguard/Politics-Economy/Rainer-Michael-Preiss-What-the-IMF-s-return-means-for-Mongolia