Mongolia’s dollar bonds dropped the most in a week after Moody’s Investors Service cut the nation’s credit rating, a decline that prompted ING Groep NV to recommend buying the securities.
The yield on the government’s 5.125 percent notes due December 2022 rose 12 basis points to 7.93 percent as of 1:28 p.m. in Hong Kong, according to data compiled by Bloomberg. The premium investors demand to hold the Asian nation’s debt over similar-maturity Treasuries has widened 57 basis points this month to 534, the biggest gap since April. Mongolia’s currency, the tugrik, fell as much as 0.3 percent to a record 1,841 per dollar today.
Moody’s lowered the rating yesterday by one step to B2, five levels below investment grade, citing a sharp drop in foreign reserves and expansionary polices that have fueled inflation. Reserves fell to $1.6 billion in May from $2.2 billion at the start of the year, the ratings company said. The decline reflected the drawdown of proceeds from Development Bank of Mongolia’s international bond sales and has nearly run its course, said Tim Condon, the Singapore-based head of Asian research at ING.
“We think $1.5 billion will be the floor” for the reserves, he said in a phone interview. “Mongolia will also benefit from improved sentiment toward China” as the mainland is the destination of 90 percent of its exports, he said.
China is the world’s second-biggest economy and reported this week a 7.5 percent increase in gross domestic product for the April-June period, more than the 7.4 percent gain predicted by economists in a Bloomberg survey. Citigroup Inc. and JPMorgan Chase & Co. were among banks that boosted their 2014 growth projections for China following the data.
Mongolia’s dollar notes handed investors a return of 5.5 percent this year, the fifth-lowest among 12 regional debt indexes compiled by HSBC Holdings Plc.
Moody’s is the second rating company to downgrade Mongolia this year after Standard & Poor’s lowered its assessment on April 29 to B+ from BB-, or four levels below investment grade. Fitch Ratings, which ranks Mongolia at B+, warned on July 8 on the growing economic and financial risk in Mongolia due to the decline in reserves, which provide only 1.8 months of external payment coverage.
Mineral-rich Mongolia is seeking to boost the economy after almost two years of declining foreign direct investment, including a 52 percent slump last year and 64 percent in the first five months of 2014. Mining disputes, including a high-profile spat with the Rio Tinto Group over the Oyu Tolgoi copper and gold mine it shares with the government, have chilled foreign interest in the sector.
Prime Minister Altankhuyag Norov unveiled in April a stimulus bill, dubbed a“100-day action plan” to promote investment and cut imports. Since then Mongolia’s parliament has approved changes to the nation’s 2006 Minerals Law and passed a new law on energy to help expand the sector.
The authorities “have been trying to do what they can to prop up growth with the Development Bank of Mongolia spending, hoping there will be a revival of FDI,” Condon said. “They view the reserve loss as something that’s fully within their control. The other thing they can do concretely is try and improve the environment for other foreign investors to come to Mongolia.”
As recently as 2011, Mongolia’s growth was a world-beating 17.5 percent. That moderated to 11.7 percent last year, amid a collapse in foreign investment that has continued into 2014.