Earlier this month, the Finance Minister and Central Bank Governor of Mongolia traveled to Washington. D.C. to hold initial discussions with the IMF regarding a loan to ease the country’s fiscal pressure. The details of Mongolia’s request to the IMF are not publicly available, but the discussion centered around an amount of up to $1.5 billion. The IMF is now reviewing the request and will be sending a technical team to Mongolia for further evaluation.
But there are senior-level voices within the Mongolian government that are against the country pursuing the IMF route, believing that IMF financing will come with too many strings attached. These voices are advocating that the country instead look to China for money that they believe would be easier and cheaper. But what these Mongolian government officials seem not to realize – and what many other countries have learned the hard way – is that Chinese money comes with just as many strings attached. The strings are less obvious, but they are ultimately more insidious and would damage Mongolia’s economic and geopolitical prospects.
Mongolia is facing a 2016 budget deficit of 20 percent of GDP. The overall debt burden, meanwhile, has reached around 200 percent of the country’s total GDP. Much of this debt has been accumulated during the past few years. Mongolia’s economy is heavily dependent upon exports of key commodities like copper and coal. When prices for those commodities began to slump in 2012, Mongolia’s growth slowed from a high of 17 percent in 2011 – when it was the fastest-growing economy in the world – to a low of 2.3 percent in 2015. This slowdown hit the country’s balance of payments and put a tight squeeze on the government’s budget.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
In the mid- to long-term, Mongolia’s debt is more than manageable. The country will see a dramatic spike in its capital inflows over the coming years as commodities prices begin to recover. Indeed, just this year alone, coal prices increased 150 percent and copper prices have also stabilized, recording modest gains for 2016 after a multi-year slide. Meanwhile Oyu Tolgoi, the country’s largest copper mine (and by many accounts the second largest copper deposit in the world), is now embarking on Phase 2 of its development – a $5 billion capital expenditure (capex) program to develop the underground portion of the mine. This capex program will in and of itself provide a lift for the country’s economy over the coming years, independent of the actual revenues the mine generates from its mineral exports once it is fully up and running. Indeed, by 2018 analysts project that Mongolia will see GDP growth of around 7 percent and by 2019 growth should be back in double-digit territory.
But in the near-term, Mongolia’s ongoing balance of payments deficit poses challenges. Growth is likely to remain anemic in 2016 and 2017. At the same time, some of the debt incurred by the Mongolian government to close its fiscal gap over the last few years comes due very soon. In fact, in March of 2017 – just five months out – Mongolia must repay $580 million to lenders on a bond that was issued by the Development Bank of Mongolia. And in May 2018, it must repay another $500 million for the Chinggis Bond, which is held by a variety of institutional investors around the world.
What Mongolia needs, then, is bridge financing to allow it to comfortably weather the next couple of years.
But Chinese financing would do much more than that. Several Mongolian news outlets have published articles suggesting that China may be offering up to $4 billion of debt relief. That kind of indebtedness would give China tremendous political and commercial leverage over Mongolia; and as China has demonstrated time and again in countless markets across other parts of Asia as well as in Africa, it does not hesitate to use that leverage to its advantage.
Indeed, China’s offer must be understood within the context of its “One Belt, One Road” policy. As part of that policy, China is seeking to advance its own commercial and strategic interests across the Asian landmass. In the case of Mongolia, this means making sure that any financing China provides would be used to finance infrastructure that would serve the needs of the Chinese economy, such as transit corridors for Chinese goods, and it would require Chinese that Chinese companies receive the contracts to construct that infrastructure. It also means China will make sure that its state-owned-enterprises receive preferential access to Mongolia’s attractive mineral assets. And China may even use its leverage to put limits on Mongolian relations with the United States and Europe, in an effort to undermine Mongolia’s “third neighbor policy” – which refers to the country’s strategy of maintaining good relations with the United States and Europe as a hedge against the country’s two actual neighbors, China and Russia.
The IMF financing, on the other hand, would more squarely address Mongolia’s current needs. At approximately $1.5 billion, the package would relieve significant fiscal pressure over the next two years. Yes, it would come with some strings attached: specifically, the IMF would require belt-tightening steps to reduce government spending and increase government revenues. But these would be prudent steps for Mongolia to take in any event, and the IMF could serve as a convenient scapegoat in the event that any of the measures are not popular with the Mongolian public. The IMF financing package would also do much to bolster investor confidence – particularly private sector investors and international financial institutions like the EBRD, all of whom are concerned that a bail-out provided by China would make it more difficult for non-Chinese firms and organizations to operate in Mongolia.
To be sure, Mongolia need not put all of its eggs in the IMF basket. There is no harm in pursuing a solution in which an IMF package serves as the main form of relief, while countries like South Korea and Japan provide supplemental financing. China could, in a limited way, also play a role in such a diversified financing solution – so long as it does not serve as the linchpin.
But if Mongolia wants to avoid making the same mistake as some of its peer nations in other parts of Asia and Africa, the IMF loan should be at the center of its efforts.
Alexander Benard is CEO of Schulze Global Investments, a private equity firm focused on frontier markets with an office in Mongolia. He is the author of a Foreign Affairs article on U.S.-China competition across frontier markets in Asia and Africa.