Chinggis Bonds on the march 2012-12-18 10:38

By B. Enkhtsetseg

The Wall Street Journal could not wait to report on the release of Mongolia’s so-called “Chinggis bond” on the international market.
“Mongolia, a country that has been rescued five times in 22 years by the International Monetary Fund, sold $1.5 billion in debt Wednesday in its first government bond offering”, reads the Journal’s article covering the event.

Nyamjav Batbayar, minister of economic development, and Finance Minister Chultem Ulaan, proudly announced the success two days after the sale. They said it was the first time in Mongolia’s history that it had successfully released its bond on the international market. This proves that Mongolia’s prestige on the global financial market was sensational, they said. Now that the country has the money, all that is left is to spend it wisely.

However, their plans on building infrastructure such as roads and railways and factories are rather vague at the moment. Although, the projects have reportedly been presented to investors, Mongolia still has yet to hear specific details on these matters. After issuing a bond that has put the global financial market in awe, hopefully policy makers have more than a Christmas list for infrastructure and technologies.

“There are only a few projects to be financed. It is not easy to find a project that would bring enough returns to pay back the expenses in five years”, said Parliament Member R. Amarjargal.
“We better have done our homework well. Specific projects must have been listed, ranked based on specific criteria, and technical economic analysis must have been made. Unfortunately, we must pay up to USD 140,000 for each day that passes when that money is unused”.

The State Great Khural approved the release of the USD 1.5 billion bond offering to finance projects for constructing infrastructure in the coming years. In addition to this, a total of USD 5 billion in bonds has been planned for.
An official knowledgeable in the matter noted that releasing the bond in 2012 was a necessity because the environment in the market was as favourable as it would ever be. During times of economic turbulence, government bonds usually have lower yields. So as not to let the opportunity pass it by, the government might have rushed into this bond offering.

The government sold a USD 500 million tranche as a five-year bond with a yield of 4.125 percent, and another USD 1 billion tranche at 5.125 percent. That will cost USD 196,000 a day beginning December 6. In five years that debt will come knocking on the door, along with daily interest of USD 140,000 for the USD 1 billion bond. The remaining debt will be paid after another five more years. In total, this USD 1.5 billion bond will cost the country USD 605 million with interest.

A weakening currency could also hamper Mongolia’s ability to pay that money back.
Ministers who said bond yields could not exceed 3.5 percent returned trumpeting the close of a deal with even better terms than European debt crisis instigator Spain had—which has much more experience on the debt market and has a higher sovereign rating from Standard & Poor’s than Mongolia to boot.

Is it a good sign or a bad omen comparing Mongolia to Spain? The irresponsible regimes of countries such as Greece and Spain could not manage their expenditures, which is why they needed to be pulled out of the chaos their debt created.
Economist D. Jargalsaikhan wrote in an article, “Other European countries are doing their best to pull these counties out of debt and stabilise their economic conditions. But what countries will be pulling out Mongolia”?

Wise spending could make the bonds fruitful, but squandering that money could lead to disaster. Over 400 financial organisations expressed interest in buying Mongolia bonds, while only about 120 were able to purchase them, demonstrating their lustre and appeal. This has some policy makers thinking the next round of bonds will go flawlessly.

Somehow even with inflation that continues to run in the double digits, sovereign ratings falling to BB- Standard & Poor’s, economic growth projections by the International Monetary Fund (IMF) declining to 12.7, and a government deficit rising to 7 percent of gross domestic product, Mongolia still managed to attract international attention using its natural resources as incentive.
Issuing bonds is not a forbidden game. Developed countries have long relied on financing using the capital market. The Australian government, for example, had always had budget surpluses before the 2008-2009 economic crisis. That justified it to release bonds only to pay off the interest of others.

“In times when there is no budget expenditure, releasing bonds would establish a model for interest on the capital market”, said S. Tsevegmid, an officer at the Securities Market Department of the Financial Regulatory Commission. “For long-term evaluations of financial tools, there is no such thing as one, two or five-year models for interest. Thus, the government released the bond [to set the benchmark], not to collect debt”.
Some say governments should stabilise their bond issuances. Five-or ten-year bonds enable possibilities to finance big domestic projects. If the feet are put facing the right direction, these bonds could bear their benefits.