Mongolia to Raise $500 Million in First Dollar Bond Sale

Mongolia is planning its first sale of sovereign bonds, seeking some $500 million, to help companies from the resource-rich nation located between China and Russia raise funds from credit markets.

“We’re looking at an issuance of inaugural sovereign bonds in order to set up a benchmark and open up a window for private companies to go and raise money,” Vice Minister of Finance, Ganhuyag Chuluun Hutagt, said yesterday in an interview in Ulan Bator. The sale will “probably” take place this year, pending parliament’s approval.

The bond sale would mark a turnaround from 2010 when Mongolia scaled back and then dumped plans to borrow $1.2 billion abroad to survive the global economic slump. The plans have been revived as gains in the tugrik trim returns from rising copper and coal prices, Mongolia’s biggest exports, and the nation faces a 10 percent budget deficit.

“There is a compelling story in Mongolia with its mining industry,” Krishna Hegde, Asia credit strategist at Barclays Plc, said in a phone interview from Singapore. “It would provide much needed diversification. Asia has a small set of issuers in the high-yield sovereign dollar bond space.”

Mongolia also wants to sell domestic currency denominated bonds this year to “soak up extra liquidity” in the banking sector that amounts to about 1.5 trillion tugrik ($1.2 billion), Hutagt said, adding the sale would fight currency appreciation pressure arising from soaring commodity exports.

The tugrik has gained by 15.4 percent against the dollar since Jan. 1 last year and 19.2 percent versus the euro.

Tugrik Rising

The currency’s climb endangers domestic industries outside of mining, such as cashmere production and agriculture, said Stephen Kreppel, who was charged by the Mongolian government this year to start a task force to help promote the nation’s non-resource-based industries abroad.

“We need to be cautious because of the pressure on the tugrik” due to rising foreign direct investment and revenue from commodity exports, Hutagt said. “To find ways to mitigate that risk the government will issue tugrik-denominated bonds locally. Investors are also interested.”

Mongolia is trying to stop inflation from exceeding 10 percent this year as the government raises investment in infrastructure and seeks to meet election promises of four years ago to transfer more wealth to citizens. The budget deficit is expected to be 10 percent this year, Hutagt said.

Inflation Forecast

Inflation may run to 20 percent by the year’s end, hurting private business and strengthening the tugrik, according to a Feb. 17 report by the International Monetary Fund, which lent money to Mongolia last year. Economic growth is forecast at 10 percent this year, from 6.1 percent last year, on a rapid increase in coal production, the IMF said, noting that one-third of Mongolians live below the poverty line.

Mongolia is rated B1 by Moody’s Investors Service, four levels below investment grade and on par with Fiji and Papua New Guinea. Standard & Poor’s rates the nation BB-, the third- highest non-investment ranking.

Oyu Tolgoi, a copper and gold mine being developed by Rio Tinto Group with Ivanhoe Mines Ltd. and the Mongolian government, will account for 30 percent of the country’s gross domestic product when fully operational, according to a presentation by the mine development company. Oyu Tolgoi will reach full capacity in 2020, the company said in the presentation distributed at a forum in Ulan Bator this week.

Erdenes Tavan Tolgoi, the state-run company developing half of the nation’s biggest coal field, plans to start mining the fuel this year and may produce about 1 million metric tons, Lkhagva Ganbat, a company board member, said yesterday. Annual output may reach 15 million tons in three years, he said.

Sovereign Wealth Fund

Until Mongolia adds a rail link to the Tavan Tolgoi field, which is estimated to hold 6.4 billion tons of coal used to make steel and burn in power stations, transportation will be done by trucks, Ganbat said.

Output from the projects could push the Mongolian tugrik to appreciate as much as 10-fold, a factor the country must mitigate with a sovereign wealth fund sterilizing foreign currency denominated commodity revenue, Hutagt said.

‘It’s not a ‘we’d like to,’ we need to” create the sovereign wealth fund, Hutagt said. “To manage the economy, we need to steer the economy, we need to be in control”

The finance ministry, central bank, financial regulator, and development and innovation committee are engaged in preparing the framework for the sovereign fund, Hutagt said, without giving a deadline for when it will be complete. Finance Minister Sangajav Bayartsogt said in September 2009 that such a fund would be set up.

To contact the reporters on this story: Yuriy Humber in Ulan Bator, via the Tokyo newsroom at yhumber@bloomberg.net; Katrina Nicholas at knicholas2@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net

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