Daily Management Review

An Epic Economic Meltdown in the Land of Genghis Khan


An Epic Economic Meltdown in the Land of Genghis Khan
The Mongolian government faces a crushing debt burden and is having trouble meeting its civil service payroll as it has burned through much of its foreign currency reserves.
Very recently, to prop up the tugrik, the world’s worst performing currency in August, the central bank hiked its benchmark interest rate by a remarkable 4.5 percentage points to 15 percent.
Mongolia is staring at a full-blown balance of payments crisis despite a mineral-rich and landlocked $ 12 billion economy bordering Russia and China. The nation’s economic meltdown offers instructive lessons to far bigger resource-reliant economies like Brazil, Venezuela, Russia and Saudi Arabia even though it’s crisis caused barely a ripple in global financial markets.
A new meaning to what economists call the resource curse is given by this economy. Lopsided economic growth, government waste and boom-bust cycles that can leave a country’s finances in tatters can be caused by an overabundance of natural resources.
“Mongolia should be much richer than it is. There is nowhere else in the world where it is so easy to dig up resources without any problems and sell the commodities to China with such low transportation costs," said Lutz Roehmeyer, a money manager at Landesbank Berlin Investment who helps oversee about $12 billion of investments including local-currency Mongolian debt.
Mongolia had an epic run during the commodity super-cycle that peaked in 2011. The country’s mineral wealth was valued at between $1 trillion to $3 trillion  and  included coal, copper and gold, according to an International Monetary Fund working paper published last year.
Mongolia was one of the fastest-growing economies in the decade that ended in 2015, driven by a booming Chinese economy and brisk foreign direct investment flows. While per capita income surged to about $4,000 its economy clocked in with an average real GDP growth rate of 8 percent.

It all went band just as a coalition government led by Altankhuyag Norov went on a debt-fueled spending binge and when China’s growth throttled back from double-digit levels in 2011.
In the global debt markets, Mongolia was living large in 2012. To largely finance road projects across the country, the country sold $1.5 billion in sovereign debt, known as Chinggis Bonds (the Mongolian rendering of Genghis). The country’s path to its current crisis was set when the boom went bust.
The party that ruled the former Soviet bloc satellite unopposed during the nation’s Communist Era was brought back to power in June elections when the Mongolian People’s Party unseated the Democratic Party in a landslide election win. Words about the task ahead weren’t minced by the country’s new prime minister Erdenebat Jargaltulga in his acceptance speech. "The focus will be on urgent stabilization of the economy, plus fiscal discipline," Jargaltulga said.
This month the currency of the country collapsed.
A national television address to declare an economic crisis was made by the nation’s finance minister, Choijilsuren Battogtokh. As officials say they cannot afford to finish existing projects, local media have carried reports of overcrowded hospitals and kindergartens. Noting a 23 percent decline from a year earlier, foreign exchange reserves tumbled to $1.3 billion at the end of June.
Some staff on the state payroll are being given steep salary cuts of up to 60 percent. To defend the tugrik, following the lowering of rates in May, the central bank was forced to hike interest rates. Since they were issued in 2012, the yields on 10-year government notes now trade above 7 percent and have jumped more than 2 percentage points. Officials of the International Monetary Fund arrived in Ulaanbaatar for talks this week which have fuelled speculation the government may need aid from it due to soaring borrowing costs.

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