Rio Pact Primes Mongolia for $1 Billion Government Bond Sale

Mongolia’s government plans to sell as much as $1 billion of international bonds, a potential economic boost for a country that has struggled to raise capital amid weak commodity prices and investor disputes.

Mongolia’s Ministry of Finance has been authorized to sell the bonds, the government said on its website Thursday. The Development Bank of Mongolia will choose a technical adviser and payment agent for the deal, according to the statement.

A two-year dispute between Mongolia and Rio Tinto Group over funding an expansion of the Oyu Tolgoi copper mine contributed to an economic slowdown. Inbound foreign direct investment plummeted to $382 million last year from $4.45 billion in 2012. GDP growth is forecast to slow to 3 percent in 2015 from 7.8 percent last year, the Asian Development Bank said in March.

“The government is pressed financially, so there is an acute fiscal necessity for,” the bond sale, Dale Choi, founder of Independent Mongolian Metals & Mining Research, said by telephone from Ulaanbaatar. Mongolia has a “window of opportunity” created by the Oyu Tolgoi pact, he said.

Rio and the government reached a resolution on the Oyu Tolgoi project last week, opening the door to a $4 billion financing package to help fund the underground mine. Mongolia’s currency, the tugrik, rose to 1,914 to the dollar on Thursday, gaining more than 2 percent since May 1.

The opportunity to raise $1 billion in new debt is due to “favorable market conditions” created by the deal, the government said. The country’s risk factor has been lowered, according to the statement.

Bridging Deficit

The bonds will help fund the nation’s fiscal deficit at low cost and provide long-term funding, the government said. They will also support the balance of payments and extend the payment time of international securities issued and guaranteed by the government, it said.

Mongolia sold its first international government debt, $1.5 billion of dollar-denominated Chinggis Bonds, in November 2012. Repayments are due in 2018 and 2022. The Development Bank of Mongolia has a $580 million bond due in 2017 and Mongolia’s Trade & Development Bank sold $500 million of government-guaranteed notes earlier this month.

The Trade & Development Bank deal was structured to circumvent parliamentary approval and inclusion in the debt ceiling under Mongolia’s Fiscal Stability Law, according to Fitch Ratings.

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