Mongolia Hikes Interest Rate to 15% Protect CurrencyMichael Kohn and James Mayger
New government announced spending freeze, salary cuts today
Reverses decision in May to cut benchmark borrowing costs
The central bank of Mongolia raised its key interest rate to 15 percent to protect the currency, reversing a cut in borrowing costs to 10.5 percent in May.
The Mongolian tugrik initially rose after the announcement. By 4:26 p.m. in Ulaanbaatar it was falling again, and traded at 2,268 per dollar. The currency is headed for its 24th straight daily decline.
The increase follows the new government’s decision earlier Thursday to freeze some spending as part of an austerity plan to stave off an economic crisis. The decision was taken to improve yields on tugrik-denominated assets in order to protect the currency and ensure mid-term stability, the bank said in a statement on its website.
The landlocked nation between China and Russia has been hit hard by the slump in commodity prices and the slowdown in its larger neighbors. A newly elected government roiled markets when it announced this month that the nation was in a "deep state of economic crisis," with the finance minister saying it may not be able to pay salaries.
“The currency is symptomatic of its balance of payments crisis. The fiscal coffer is running dry with the government having to admit that it can’t pay its civil servants," said Trinh Nguyen, a senior economist for emerging-market Asia at Natixis SA in Hong Kong. "It will need IMF help. All of this is because Mongolia has too much of its eggs in one basket -- reliance on mining, which remains subdued."
Mongolia sold $1.5 billion in sovereign debt in 2012, know as Chinggis Bonds, largely to finance road projects across the country. The government is scheduled to repay $500 million in 2018 and the rest in 2022. The Development Bank of Mongolia faces a $580 million repayment next year. In total, Mongolia has about $5 billion in general government debt, according to Finance Minister Choijilsuren Battogtokh.