Event

A 3-year IMF ‘Extended Fund Facility’ of USD 440 m has been reached with Mongolia and is to be approved by the IMF’s Executive Board this month. In addition, Mongolia will get a significant financing package of about USD 5 bn from other multilateral (World Bank, ADB) and bilateral creditors (South Korea, Japan) to meet huge upcoming (external debt and budget) financing needs and ease liquidity pressures. China, its largest trade partner, will extend the existing RMB 15 bn swap agreement for the next three years, thereby saving foreign exchange reserves for Mongolia’s non-Chinese international transactions.    

Impact on country risk

The IMF bailout and extra foreign loans were in the pipeline as they are crucial for Mongolia to honour heavy external debt repayments scheduled for this year. The IMF programme aims to reduce Mongolia’s wide fiscal and external imbalances and to return to macroeconomic stability while preserving priority social expenditures. There is confidence that the government will stick to the programme based on its pro-business and FDI-friendly stance and simply because Mongolia is against the wall and has no other choice than putting forward difficult reforms. However, the goal of bringing external and public debt on a sustainable foot will be particularly tough given high debt levels caused by Mongolia’s entrenched debt dependence and excessive public spending. Also, the fact that the IMF only accounts for a small share of the financial package means Mongolia is not vitally bound to a strict implementation of the programme, even though failure to comply and record progress might affect investor confidence for a long period. Last but not least, the commodity slump – despite the recent price rebound – makes the challenge daunting for an overwhelmingly commodity-reliant economy. Hence Credendo is maintaining Mongolia’s MLT political risk rating at 7/7.

Analyst: Raphaël Cecchi, r.cecchi@credendo.com