Mongolian Debt: Structural Reform and an Improving Outlook

Lee M Cashell
Lee M Cashell
3 min read

Mongolia’s indebtedness both relative to its Gross Domestic Product (GDP) and in terms of its longer term obligations weighs heavily on public policy makers. This was a fundamental part of the story when the International Monetary Fund (IMF) formulated its package of support in 2017, and it remains a pressing question in light of coronavirus. A bit like the financial crisis, COVID forced governments to make funds available for afflicted citizens and businesses, with the ramifications likely felt far beyond the resolution of the health emergency.

To consider debt, first, though requires an understanding of the government’s position in terms of revenues. April 2021 saw the highest revenue recorded over the last five years, and although it has been more bumpy since, they were up by 17% in October relative to a year earlier. In fact, the first ten months of 2021 saw revenues jump 50% compared with the same period of 2020. If you consider tax revenues alone- which includes, income and social security- there was also significant outperformance in the same reporting period, with October recording a 21% increase. In spite of government support for the real economy, this does point to an increasing ability of authorities to accurately monitor (and collect) taxes payable.

National Statistical Office of Mongolia

National Statistical Office of Mongolia

In absolute terms, Mongolia’s debt has increased over the last few years. It peaked in Q4 2020 and has since fallen by around 3%. It sits at a relatively stable level and this is heartening given the economic calamities suffered over the last twelve months. In isolation, though, neither dataset provides an accurate reflection of Mongolia’s current position. Instead, it is important to consider debt as a percentage of GDP. Earlier in the year, Fitch affirmed, and then re-affirmed, Mongolia’s sovereign rating at ‘B’, and debt service was a big consideration.

It found it was possible to maintain a stable rating at this level because even accounting for disruptions caused by rising COVID numbers since March 2021, a recovery was on track enabling for an improvement in the government debt/GDP ratio. In its assessment, it predicts general government debt would fall by two percentage points to 74% of GDP by the end of 2021. Interestingly, even though the report authors note this is ahead of the 68% recorded by comparable ‘B’ rated sovereigns, the robust growth prospects would be able to counteract further deterioration. It also noted how prior to the pandemic, the government was performing better at ensuring fiscal policy aligned with approved budgeting.

Delving into the specifics of Mongolia’s ability to pay, helps defend Fitch’s analysis. At Q1 2021, foreign reserves stood at US$4.8bn, a record high for the country. In July, Fitch believed this could increase to as much as US$5bn by the end of the year, equivalent to nearly six times current external payments. These figures are themselves positive, but more importantly, the structure of debt payments has alleviated some of the pressure on Mongolia. The issuance of a sovereign bond in late September 2020 means important headway was bought, especially since there are no external maturities until December 2022. In isolation, these headlines may be unremarkable to somebody with global interests, however, for Mongolia it points to significant improvement relative to the recent past.

Though they are private organizations, the opinions of the ratings agencies influence confidence, not simply at government level, but for the wider economy and those who invest in it. Tentatively, it seems the structural reforms to the economy since 2017 are laying firmer foundations, even in the face of coronavirus. It may yet be possible to improve on this position by narrowing further the budget deficit and accumulate greater foreign currency reserves to provide a buffer in the face of exogenous shocks to the economy. Even if this proves challenging in the near term, restructuring existing debt to render it more serviceable could yield benefits for Mongolia as a whole.

This future could be in grasp. It is notable that in Fitch’s assessment, Mongolia technically would be B+, prior to a qualitative adjustment. A big part of its downgrade to B, reflects continued overdependence on the Chinese economy where the majority of exports go. As the country continues to push relations with ‘third neighbours’ and external parties, it may be able to reduce this in the future. The general performance of exports will have an appreciable effect on Mongolia’s ability to continue to increase reserves and support its downside protection in the event of unwelcome externalities. The good news is the basic fundamentals now seem to be in place to enable a measured recovery from a challenging year.

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