The Land of Genghis Khan Is Having an Epic Economic Meltdown

  • Mongolia declares crisis as commodity bust pummels finances
  • Debt-burdened government on austerity drive to cut spending

Commodity Bust Weighs on Mongolia's Finances

Back in 2008, Mongolia honored its revered national hero Genghis Khan with an enormous, stainless steel statue on the bank of the Tuul River about a half-hour’s drive outside of the capital of Ulaanbaatar. The 13th century conqueror’s name graces the capital’s international airport and his image is also plastered on the tugrik, the local currency. 

Right now, Khans aren’t getting much respect. 

Genghis Khan statue

Photographer: Joel Saget/AFP via Getty Images

The government, having burned through much of its foreign currency reserves, faces a crushing debt burden and is having trouble meeting its civil service payroll. On Thursday, the central bank hiked its benchmark interest rate by a remarkable 4.5 percentage points to 15 percent to prop up the tugrik, the world’s worst performing currency in August.

Mongolia, a mineral-rich and landlocked $12 billion economy bordering Russia and China, is staring at a full-blown balance of payments crisis. It’s caused barely a ripple in global financial markets, but the nation’s economic meltdown offers instructive lessons to far bigger resource-reliant economies like Brazil, Venezuela, Russia and Saudi Arabia. 

This is an economy that gives new meaning to what economists call the resource curse. An overabundance of natural resources can result in lopsided economic growth, government waste and boom-bust cycles that can leave a country’s finances in tatters.

“Mongolia should be much richer than it is," said Lutz Roehmeyer, a money manager at Landesbank Berlin Investment who helps oversee about $12 billion of investments including local-currency Mongolian debt. "There is nowhere else in the world where it is so easy to dig up resources without any problems and sell the commodities to China with such low transportation costs."


During the commodity super-cycle that peaked in 2011, Mongolia had an epic run. In an International Monetary Fund working paper published last year, the country’s mineral wealth -- including coal, copper and gold -- was valued at between $1 trillion to $3 trillion.

Stoked by a booming Chinese economy and brisk foreign direct investment flows, Mongolia was one of the fastest-growing economies in the decade that ended in 2015. Its economy clocked in with an average real GDP growth rate of 8 percent, while per capita income surged to about $4,000.

It all went bad when China’s growth throttled back from double-digit levels in 2011, just as a coalition government led by Altankhuyag Norov went on a debt-fueled spending binge.

In 2012, Mongolia was living large in the global debt markets. The country sold $1.5 billion in sovereign debt, known as Chinggis Bonds (the Mongolian rendering of Genghis), that year to largely finance road projects across the country. When the boom went bust, the country’s path to its current crisis was set.

In June elections, the Mongolian People’s Party unseated the Democratic Party in a landslide election win, returning to office the party that ruled the former Soviet bloc satellite unopposed during the nation’s Communist Era. In his acceptance speech, the country’s new prime minister Erdenebat Jargaltulga didn’t mince words about the task ahead. "The focus will be on urgent stabilization of the economy, plus fiscal discipline."


Then came the collapse of the currency this month.

The nation’s finance minister, Choijilsuren Battogtokh, used a national television address to declare an economic crisis. Local media have carried reports of overcrowded hospitals and kindergartens as officials say they cannot afford to finish existing projects. Foreign exchange reserves tumbled to $1.3 billion at the end of June , a 23 percent decline from a year earlier.

Steep salary cuts of up to 60 percent are being forced on some staff on the state payroll. Money that’s already allocated to buy office furniture is being recalled.

The central bank was forced to hike interest rates to defend the tugrik after lowering them in May. Yields on 10-year government notes have jumped more than 2 percentage points since they were issued in 2012 and now trade above 7 percent. Soaring borrowing costs have fueled speculation the government may need aid from the International Monetary Fund, whose officials arrived in Ulaanbaatar for talks this week.

It isn’t hard to find a cause for Mongolia’s woes. Much of it can be pinned to an over reliance on demand for its deep reserves of copper, iron, coal and gold. The slowdown in China -- which takes more than 80 percent of Mongolia’s exports -- is hurting the nation.

"That all spells bad news for Mongolia, which doesn’t have an easy plan B," said Kerry Brown, a professor of Chinese studies and director of the Lau China Institute at King’s College London. "It has very little services, and largely relies on agriculture as a backup. It is also of course very very sensitive about being over reliant on China, because of the complex and fractious history."

Investors were then rattled when the finance minister unveiled forecasts showing that the country’s ratio of government debt to gross domestic product will reach 78 percent this year. This would take the country’s debt-to-GDP ratio close to that of Ukraine, which had to restructure its dollar debt last year and still has an 18 percent probability of default, according to a Bloomberg measure.

The prime minister has promised to push through an action plan that centers around spending cuts, debt reduction and attracting foreign investment. While the government said it wants to avoid a default, the risk is becoming a source of concern.

The government is scheduled to repay about $650 million of its sovereign foreign-currency bonds in 2018 and another $1.5 billion in in 2021 and 2022, according to data compiled by Bloomberg.

In total, Mongolia has about $5 billion in general government debt, according to the finance minister.

"It seems unlikely that the country will be able to avert the need to restructure its debts or seek a bailout from the IMF,” said Renata Lagierska, a senior associate at a Alaco, a London-based business intelligence consultancy.

Bailouts Galore

Mongolia, home to about 3 million people and more than 70 million livestock, has had repeated bailouts and assistance from the IMF. The most recent was during the global financial crisis in 2009 after which the economy recovered to post a growth rate of 17 percent, spurred by construction of the first phase of the giant Oyu Tolgoi copper and gold mine.

The Oyu Tolgoi copper-gold mine.

Photographer: Taylor Weidman/Bloomberg

To be sure, by talking up a crisis, some suspect the new government is looking to win support for austerity measures.  

"It was politically motivated to really bring a sense of urgency to convince the IMF and investors that they are on the right track," said Yerlan Syzdykov, a London-based emerging-market bond manager at Pioneer Investment Management, who has an overweight position on Mongolian debt. "The high debt-to-GDP number gives them good ammunition to devise a program of austerity and increase GDP."

While it’s possible that Mongolia navigates its latest crisis, the risk of a protracted downturn is looming large for world’s most sparsely populated country that’s best known for its rolling plains -- and the legend of Genghis Khan.