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Eurasia
June 8, 2018 www.intellinews.com I Page 19
Eurasian commodities exporters at risk from China deleveraging
Clare Nuttall in Bucharest
Mongolia and other Eurasian commodities ex- porters were among the countries singled out
by rating agency Fitch in a new report as being vulnerable to a potential slowdown resulting from China’s efforts to rein in debt.
Beijing has been seeking to stabilise its corporate debt to GDP ratio as the debts of state-owned enterprises (SOEs) and local governments have soared in recent years, even though China’s gen- eral government debt remains modest by inter- national standards. These efforts are set to slow business investment and temper China's medi- um-term economic growth — and given the sheer size of the Chinese economy, the world’s second- largest, this would have a serious impact on the economies that supply it with raw materials.
Fitch projects a sharp capex slowdown that would reduce China’s GDP growth by around 1pp per year for several years relative to baseline. Fitch analysts further estimate that global oil and metals prices would be 5%-10% lower than under its baseline scenario — which again would have potentially dramatic consequences for Eurasian exporters, several of which have only recently emerged from economic contractions prompted by low oil prices.
While net commodity exporters across Eurasia would be affected by a decline in direct exports to China and weaker terms of trade, according to Fitch, the rating agency considers that within the region Mongolia would be most at risk from such changes.
A coal truck on the road from Mongolia's giant Tavan Tolgoi coal mine to the Chinese border. Rising coal exports to China have helped buoy the Mongolian economy recently.
“Mongolia, which has made progress under its IMF programme, would probably be the most vulnerable of Asia's net commodity exporters,” the report says. “China accounts for all of its coal and iron ore exports, and it would be difficult
to divert them to other markets.” Sandwiched between China and Russia, Mongolia is itself a major commodities producer, and with a small domestic population, exports to China are critical to Mongolia’s economy.
Trade with China accounts for approximately 60% of Mongolia’s total trade, while trade with Rus- sia makes up another 15-20%, according to data released by the statistics office in Ulanbataar last month. Highlighting the role the Chinese market plays in Mongolia’s economy, the recovery of GDP growth last year to 5.1% from just 1% in 2016 was largely due to higher Chinese coal imports, cou- pled with Mongolia’s $5.5bn bailout agreement with the International Monetary Fund (IMF).
Looking forward, the $6bn underground expan- sion of the flagship Oyu Tolgoi copper and gold mine is expected to be completed by 2019, and will further boost growth, said a recent IMF report on the country. But this too hinges on Chinese demand as almost all of Oyu Tolgoi’s production so far has been sent to China.
Both Mongolia and Russia have benefitted re- cently from the combination of China’s decision
to end coal imports from North Korea and the restructuring of the Chinese coal industry, bne In-