Page 4 - AsiaElec Week 33 2022

AsiaElec COMMENTARY AsiaElec

Mongolia frets over

prospect of default

ASIA When the Economist Intelligence Unit (EIU) territory before the recent depreciation, any
recently focused on sovereign debt challenges further decline presents the threat of politically
in Asia, it concluded that Mongolia is one of the destabilising levels of inflation; large demon-
emerging markets plainly at risk of a default in strations have already been staged in the capital,
the near future. The news that Sri Lanka was Ulaanbaatar, in April.”
defaulting rattled and unnerved some Mongo- s observed by the EIU, under these conditions,
lians as warnings of possible sovereign defaults there is a high likelihood that the government
in Asia frontier markets began to flare up. will extend additional fiscal relief. “The authori-
Mongolia’s finance minister, Javkhlan Bold, ties,” it advised, “are already adding to inflation-
quickly stepped into the picture, reassuring the ary pressure and jeopardising the long-term
public via the media that Mongolia was not at stability of the public finances through an off-
risk of defaulting anytime soon. budget mortgage-subsidy programme (financed
His talking point was that Mongolia had by the central bank) and the redirecting of funds
passed the “most dangerous period” of 2016- from the Future Heritage Fund (a sovereign
2017 when global commodity prices were at an wealth fund) to untargeted welfare initiatives.
all-time low, putting pressure on the country’s The potential for a loss of investor confidence
coal exports. “At that time, the debt of the gov- coinciding with a depletion of foreign-exchange
ernment of Mongolia was 78.8% of GDP, but reserves, as commodity prices decline, means
it was reduced to 55.1% in 2019 and 50.8% in that the risk of repayment difficulties from 2024
2021,” noted the minister. However, Bold did is high, even with no large principal repayments
not account for the financial burdens brought coming due.”
about by the pandemic and the war in Ukraine, With Mongolians increasingly jittery over the
two rude realities that were pivotal points in Sri gathering dark economic clouds, it is a pertinent
Lanka’s decline and default. moment to recap on how, since 2012, Mongo-
What’s more—in contrast to 2016-2017, when lia has issued seven international bonds worth
there weren’t any widespread protests in Mongo- $5.2bn, with all but the first sovereign bond, the
lia—in 2021, a large group of protesters ventured Chinggis Bond—named after founder of the
into the cold to protest against the mishandling Mongol Empire, Chinggis Khaan, or Genghis
of the pandemic, while this year, the streets have Khan—used to finance state budget deficits. It’s
seen big youth protests at economic hardship also a time to once more observe that the Ching-
exacerbated by China’s coronavirus border clo- gis Bond, the only bond used to finance projects,
sures and the economic impacts of the Ukraine has been mismanaged. Issued in part to address
conflict. falling coal exports in 2013, it has not yielded
he EIU’s observations included this sobering positive results.
passage: “Mongolia will be reliant upon new debt The government of Mongolia, it would seem,
inflows in 2022-23 to meet interest payments on is counting on old-model approaches to recover
external public debt and to compensate for a the economy, models that Sri Lanka also counted
persistent current-account deficit. Access to suf- on to restore its economy. Economist Paul Kru-
ficient financing is put at risk by high domestic ger, meanwhile, noted in a New York Times
inflation and the possibility of further currency op-ed mistakes made by global economists in
depreciation. using old economic models. Used in the global
“The Bank of Mongolia (BoM, the central financial crisis year of 2008, they should, in the-
bank) held off a decline in the value of the cur- ory, work. But they do not account for the cur-
rency, the togrog [or tughrik], against the US rent situation driven by the pandemic and the
dollar throughout 2021, at the expense of its invasion of Ukraine; it is misguided to rely on
foreign-exchange reserves. Despite the BoM these old models.
permitting a correction in February-May, the Kruger’s sentiments were echoed by Mongo-
local currency still appears overvalued on a real lian economist Lakshmi Boojoo. For Lakshmi,
effective basis. With inflation in double-digit the Mongolian government not only faces a

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