Mongolia plans to sell its debut dollar-denominated bond “in the near future,” to finance expansion of the mining industry and build roads and bridges, President Tsakhia Elbegdorj said.
The government is talking to investment banks in New York about underwriting the planned $500 million debt sale, said Naidansuren Zoljargal, deputy governor at the nation’s central bank, who is visiting the U.S. with the president. The $1 billion of 10-year debt that Sri Lanka, whose bonds carry the same B1 rating from Moody’s Investors Service as Mongolia, sold in September yield 6.252 percent, unchanged from their issue.
“Mongolia is in a good shape in terms of issuing bonds and paying back those things,” Elbegdorj, 48, said in an interview today at Bloomberg’s headquarters in New York. “Our economic growth is good.”
Mongolia’s MSE Top 20 Index rose 108 percent in the past 12 months, the world’s best performer among 91 stock benchmark measures tracked by Bloomberg, and the local currency gained 9 percent against the dollar as the country’s exports of coal and copper surged. Resource-rich Mongolia, where Elbegdorj said the economy is growing at a rate of 7 percent to 8 percent, needs to quadruple the size of its rail network, add power and water plant, and build more roads to boost metal and mineral exports.
The government is also negotiating with Russia to secure currency swaps, according to Elbegdorj, who received a degree from Harvard University’s John F. Kennedy School of Government in Cambridge, Massachusetts in 2002. He said he expects trade in local currency with Mongolia’s two neighbors, Russia and China, to increase.
A currency swap agreement signed with China last month paved the way for the planned five-year bond because the “safety belt” will boost investors’ confidence in its debt market, Zoljargal said in a telephone interview in New York.
The swap, worth 5 billion yuan ($772 million), allows Mongolia to tap the Chinese currency during an economic crisis. About 25 percent of trade between China and Mongolia is settled in the yuan, according to Zoljargal.
Policy makers are also keen to develop five-, 10- and 15-year benchmarks for its local-currency government bond market to secure financing and take advantage of growing interest from foreign investors, Zoljargal said. The Development Bank of Mongolia also plans to sell $700 million of domestic-currency bonds this year, he said.
A partnership agreement with the London Stock Exchange signed in January and aimed at overseeing the development of the Mongolian bourse and its sale to investors, will help spur international participation in the equity markets, where domestic investment is now dominant, Elbegdorj said.
“We are focusing on developing our stock exchange,” he said.
The planned bond sale would open the international capital markets for the government and local companies to raise funds to finance $50 billion of investment projects in the next decade, said Zoljargal. Mongolia’s B1 rating at Moody’s is four levels below investment grade, while S&P ranks it a step higher at BB-.
“We are watching the market carefully,” said Zoljargal. “The government really wants to have this. The benchmark itself is a very important thing for the private company to go to the market.”
Jeremy Brewin, who manages $3.3 billion of emerging market assets as a fund manager at Aviva Investors in London, said he’s interested in Mongolian dollar debt because of the nation’s debt levels and commodities-driven economy.
“We’re quite keen as it has very little debt outstanding and the resources, the declared resources, suggest that Mongolia is asset rich,” he said. “Until proven otherwise, we like idea of investigating the credit with prospects for participating in the deal.”
A mining boom in the world’s most sparsely populated nation promises the greatest influx of wealth for Mongolia since Genghis Khan conquered much of the known world in the 13th century.
Economic growth may surge to 23 percent in 2013, more than twice the forecast expansion in China, as large mining projects begin production, the International Monetary Fund said in a March report.
International companies such as Rio Tinto Group, the world’s No. 2 mining company, are flocking to the landlocked country to tap its natural resources. Rio Tinto is developing the nation’s natural resources Oyu Tolgoi copper and gold deposit, which it expects will account for 30 percent of Mongolia’s gross domestic product when completed.
Mongolia may award its Tavan Tolgoi coal mining project, one of the largest in the world, to a group of companies as soon as this month, Elbegdorj said.
Elbegdorj, a former journalist who led the peaceful revolution that ended more than 65 years of communist rule in Mongolia in 1990, said he’s concerned about how to “manage” the surge of foreign investment and ensure the windfall spreads among the nation’s citizens. More than 33 percent of Mongolians live below the poverty line, and per capita income in the nation of 2.7 million is $2,111, the IMF said in 2010.
“Earlier days, we focused on attracting investment,” Elbegdorj said. “One of the biggest challenges is how to manage the money flowing from the mining to the benefit of our people.”
Sandwiched between Russia’s far east to the north and the 1.3 billion-strong, resource-hungry China to the south, Mongolia is looking for ways to lessen its vulnerability.
China accounts for 80 percent of Mongolia’s imports and buys about 85 percent of its exports, according to Mongolia’s central bank data. The country depends almost 100 percent on Russian oil.
“Our best interest is to balance investments and trade between our two neighbors, Russia and China, and other parts of the world,” Elbegdorj said. “I’m trying to encourage investment from the United States of America.”