Today’s dilemma: Short term tactics or long term strategy?

The article was published on UB Post, a Mongolia's national English newspaper on 14th of October 2015

By B.Zulbayar

In the last few weeks, the public has been bombarded with much bad news regarding public funds and the current economic situation in Mongolia. News of a shortfall of 800 billion MNT in planned state revenues, temporarily halted government expenditures (except for public officer salaries and benefit accounts) resulting from discussion of next year’s budget, a re-visiting of a savings account tax in 2016, and the introduction of a capital city tax gives everyone unpleasant thoughts about the financial outlook of Mongolia.

Of all the financial problems discussed above, the biggest one now is internationally sold Mongolian government bonds. Some of us are already very concerned about the repayment schedule for these bonds in 2017, 2018, and 2022. However, as I see it, this is not the priority concern for Mongolia at the present time.

Because the country is already struggling to put its house in order, in terms of its economic conditions, debt repayments with the help of tax collection and other state revenue is clearly out of the question. Therefore, it seems that a likely solution to resolve the current debt situation is to issue another international bond, let’s say “Chinggis 2″, when the first debt repayment is due. However, before issuing another bond, the government should pay more attention to improving its current credit rating in order to lower interest payment on the debt and negotiate a favorable repayment schedule.

It seems that the current conditions of international capital markets have turned in favor of Mongolia, especially if the country can manage its public financing and improve its credit rating as soon as possible to take advantage of the situation. As of now, developed nations such as the USA, Japan, and the UK are heavily indebted and not able to raise their interest rates.

Therefore, international investors are not interested in buying triple A rated bonds, even though they are considered to be the safest investments. Instead, their investments are flooding into emerging markets, which are able to offer better returns than developed economies can in the form of bond purchases or equity investments. I remind you that the interest rate is an inseparable part of any given bond valuation, therefore, the slightest change in the interest rate really affects public and private finances.

General goverment debt Total, % of GDP, 2013
Canada	105.7
France	110.4
Germany	81.6
Italy	143.2
Japan	239.3
United Kingdom	103.8
United States	122.7

Considering recent economic updates and news, I believe that Mongolia should pursue an economic policy of supporting growth instead of implementing austerity measures. Here, my logic dictates that 0 x 12,548,345 = 0, meaning any numbers multiplied by zero equal zero. Hence, simply introducing a belt-tightening policy is not going to help an already financially struggling country or attract any foreign investment.

Economic slowdown in China, disappearing commodity buyers, and other excuses frequently heard in Mongolian media should not be not be used by Mongolia. Since we are not like a far reaching province of China which is dependent upon their central government, Mongolia needs to have an independent economic policy, regardless of its neighbors’ economic conditions.

Hence, it is really a good time to hold public discussions and ignore any excuses of roadblocks to economic growth, such as commodity price plunges or a dramatic fall in FDI, in order to overcome the current challenging period.
If we can manage to improve our governance, budget deficit, and the state credit rating in the near future, it will then be easier and cheaper to raise funds from international capital markets. Let’s leave politically motivated brawls over the debt ceiling, at least for the time being, and let us focus on restructuring the debt and actively engaging in international capital markets by improving our credit rating first. We have debts to pay in 2017, 2018, and 2022.

Refinancing national debt with lower interest is obviously a better solution than a belt-tightening policy, which may bring the financially struggling country to its knees quickly.
International investment funds invest in developing countries which are able to meet with their criteria, in the form of bond purchases, equity investment, and financing of mergers and acquisitions.

In order to diversify their portfolio and mitigate risks, investment funds employ many strategies, such as investing in commodities, stock indices, buying stocks and bonds and allocating them geographically. If Mongolia is able to improve its credit rating to a more favorable investment grade, then those funds can be used to buy our sovereign bonds in order to diversify its portfolio. This will help Mongolia to lower its funding cost and get a favorable benchmark rate for our international corporate bonds.

Instead of gaining short term political support for the upcoming major election by putting a huge effort into saving some petty money from public finances, Mongolia urgently needs to pursue medium to long term economic policies and take advantage of the current international capital markets.

Zulbayar Badral is a Chevening Scholarship recipient currently pursuing an MSc in Global Finance at the University of Westminster in the UK. Previously, he was CEO of a consultancy firm in Mongolia and has worked in marketing, business development, and accounting in Mongolia and abroad. You can find him as @ZulbayarB on Twitter.