Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Bond investors can sometimes be too sanguine, and Mongolia looks to be an example of that.

The country's sovereign notes have returned 1.5 percent over the past three months, the best performance among nine Asian markets, according to JPMorgan Chase & Co. The nation's 10.875 percent U.S. currency debentures due 2021 are trading at 105.3 cents on the dollar to yield 9.3 percent, while its 5.125 percent bonds that mature in 2022 yield 8 percent, down from 11 percent 12 months ago.

Risk Versus Reward
At a yield of 9.3 percent, Mongolia's bonds seem to be offering a decent return...unless you consider the likelihood of default
Source: Bloomberg

That's despite the Development Bank of Mongolia LLC facing a $580 million note repayment next month that would wipe out more than half the country's $1.1 billion in reserves. The possibility of a default's so real that people are even donating their jewelry to the government in the hope it gets over the line.

Thin Cushion
Mongolia's foreign currency reserves dropped below $1 billion last year and were at $1.2 billion at the end of December
Sources: IMF, Bloomberg

Investors are taking a more optimistic view, betting the International Monetary Fund will finalize a rescue package that will allow the payment to be made and give Mongolia sufficient credibility to sell new bonds to meet other maturities -- there's about $645 million coming due in 2018.

They're also emboldened by the fact that coal and copper -- Mongolia's two main exports -- have recovered from wild selloffs. Newcastle futures rose 87 percent last year while copper rose 16 percent, having plunged 47 percent from its peak in February 2013 to a low in January last year. But even after those rallies, the price of the two commodities remains depressed versus historic levels. Plus some 80 percent of exports are to China, where demand is slowing.

Things could go the way of Mozambique, which is on the verge of default after an expected IMF handout didn't happen. Even if multilateral organizations find no fault with Mongolia, political developments can push a nation over the edge.

As a young finance reporter, I remember attending a press conference with then Argentine minister of economy Domingo Cavallo in Sao Paulo in 2001. I recall being very impressed with his explanation of how he planned to avert a crisis by moving the peso's peg from the dollar to a basket that would include the euro -- then worth less than a buck -- and the yen. The market was buying it at the time, too. Unfortunately for Cavallo, Argentinians were more inclined to bang pots on the streets than donate riches, and one of the biggest sovereign defaults in history happened a few months later.

Mongolia doesn't have a pegged currency and like South Koreans during the Asian financial crisis, its citizens are willing to make personal sacrifices so the nation doesn't miss its obligations. But unlike politics, finance is more of an exact science and here, the math doesn't add up.

The last time Mongolia had a budget surplus was back in 2010, a meager $33.2 million. Last year's $1.5 billion deficit was the highest since at least 2000 and almost three times the figures recorded in 2014 and 2015.

Down the Drain
Mongolia hasn't recorded a surplus in six years and its latest deficit was a record
Source: Bloomberg

The tugrik's 20 percent drop against the dollar in 2016 was its worst one-year loss since 2000 as well. More than 10 percent of loans in the country are nonperforming and some say official statistics underestimate the problem.

It was perhaps figures like these that prompted Franklin Templeton to exit its investment in Mongolia last year. Michael Hasenstab might have missed the latest rally, but, as any savvy investor knows, chasing the last dollar can sometimes be a loss-making strategy.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net