Photographer: Taylor Weidman/Bloomberg

Crisis-Hit Mongolia Has an Unlikely Investment Winner

  • Copper rallying on supply risks, Trump infrastructure plans
  • Probable IMF program not fully priced in: AllianceBernstein

With a shrinking economy, ballooning budget deficit and debt downgrades, Mongolia wasn’t an obvious place to put your money last year. But a rebound in copper and the prospect of an IMF rescue package has turned the country’s dollar bonds into an investment winner.

The notes returned 1.5 percent in the three months through Thursday, the most among nine Asian markets, according to JPMorgan Chase & Co. indexes. The price of copper, which accounts for around a third of Mongolian exports, is up 20 percent over the period amid supply risks and signs U.S. President Donald Trump will ramp up infrastructure spending.

Speculation the International Monetary Fund will soon finalize a relief program has AllianceBernstein LP and Morgan Stanley Investment Management predicting the bond rally can continue. The IMF mission has arrived in Mongolia and a relief program of around $500 million could be completed before the end of February, Citigroup Inc. said in a Jan. 26 note.

“The current level is yet to price in the prospects of external support and FDI inflows,” said Vincent Tsui, an economist at AllianceBernstein in Hong Kong. The IMF package will be accompanied by support from the World Bank, Asian Development Bank and others, likely to be worth more than $1 billion, he said.

The Mongolian notes have beaten a 0.8 percent drop in a JPMorgan index of emerging-market and frontier sovereign global paper over three months. The yield on Mongolia’s dollar debt due April 2021 fell 156 basis points to 9.29 percent from a three-month high on Nov. 29.

There’s a “strong likelihood” the nation will tap international markets after getting the IMF package, Citigroup said in the note.

See also: Mongolian Bonds May Look a Winner Now, But at What Cost?: Gadfly

The yields spiked to a high shortly after Moody’s Investors Service and Fitch Ratings cut their ratings on Mongolia, citing rising debt and the risk of a balance-of-payments crisis. S&P Global Ratings had already lowered its assessment of the country in August.

Mongolia is struggling with:

  • A 1.6 percent contraction in the economy in the first nine months of 2016, compared with 9.1 percent growth over the same period of 2014
  • A budget deficit amounting to 19.5 percent of GDP last year, from 5 percent in 2015
  • A 20 percent plunge in the tugrik against the dollar in 2016 and a drop in foreign-exchange reserves to a seven-year low in October

The copper rally, which started in late October, is generating optimism the country can recover. The global market for the metal could swing to a deficit amid supply risks from the world’s largest mine in Chile as well as in Indonesia, according to Barclays Plc.

The U.S. election has been positive for copper in terms of sentiment, as has China’s latest five-year plan, said Sam Spring, the chief executive officer of Kincora Copper Ltd., a miner with exploration rights in Mongolia.

‘Nice Narrative’

“It’s a nice narrative that the two largest economies in the world might, for the first time, be undertaking significant infrastructure expansion programs at the same time,” said the Melbourne-based Spring. Although, the bull market in the metal is being driven more by supply risks, he said.

The rally in Mongolian sovereign bonds means valuations are a “little less attractive,” said Philippe Petit, a Singapore-based senior investment manager at Pictet Asset Management, who said he’d taken profits in the past few weeks. The IMF deal needs to be agreed, followed by a successful dollar bond sale, to trigger further gains before a presidential election in June, he said.

Investors are also watching to see whether the state-owned Development Bank of Mongolia will be able to redeem a $580 million bond that matures in March. The country’s liquidity position is strong enough to fully repay the notes, the finance ministry said in a statement on Jan. 20.

“We have maintained a long-risk position in Mongolian sovereign and quasi-sovereign bonds,” said Warren Mar, the New York-based head of emerging-market credit strategy at Morgan Stanley Investment Management. He said he was watching for two key signposts: the IMF announcement and the repayment of the development bank notes.

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