World Economy

Mongolia Running Out of Cash

The collapse in commodity prices has taken a toll on the country’s  once-dominant mining sector.The collapse in commodity prices has taken a toll on the country’s  once-dominant mining sector.

In 2012, Mongolia marked its debut in international capital markets with a stunning dollar bond sale that was meant to usher in a new era for the country.

Four years later, the currency is in free fall and concerns are growing that the cash-strapped government will struggle without external assistance, CNBC reported.

The reversal of fortunes for this sparsely-populated country underscores the impact the slowdown in China is having on economies that have for years depended on supplying raw materials to Chinese factories.

The collapse in commodity prices has taken a toll on the country’s once-dominant mining sector. Foreign direct investments into the country’s coal and gold mines have slowed as investors closed their checkbooks.

In the first half of 2016, Mongolia’s gross domestic product grew 1.3%, compared with the 2.3% growth seen in 2015, according to data from Moody’s.

Late Friday, ratings agency Standard & Poor’s Global downgraded the country’s long-term rating to B-minus from B on a weakening fiscal and growth outlook. It also cut its GDP forecast to an average of 3.2% over 2016-19 from a previous estimate of 4%. It cut its GDP growth forecast for 2016 to 1.3% from a previous estimate of 2.6%.

By comparison, World Bank data showed Mongolia grew by as much as 17.3% in 2011 at the start of the global mining boom.

The Mongolian tugrik has plummeted nearly 12% against the dollar this year, which prompted the Mongolian central bank to lift its policy rate on Thursday by 450 basis points to an all-time high of 15%.

   Pay Cut for Executives

The government also announced some austerity measures, in terms of pay cuts for executives and management-level staff at state-owned enterprises.

As of June 2016, Mongolia’s foreign reserves stood at $1.296 billion, central bank data showed, which would be equivalent to roughly four months of imports, according to Trinh Nguyen, a senior economist with Natixis.

“Mongolia is having a difficult problem funding itself,” Nguyen told CNBC by email.

“We don’t know how much they have left [but] in 2015, Mongolia imported $3.8 billion and in 2014 $5.2 billion ... if we assume they still have $1.3 billion now, then it covers four months ... if that dropped to $1 billion, then the coverage is much lower at three months,” she explained.

The precarious foreign exchange position has heightened concerns over the government’s ability to repay borrowers.

Thomson Reuters data showed government bonds worth $664.8 million are set to mature in 2017, another $653.27 million in 2018, and $1 billion in 2022.

Many investors have already started yanking funds out of the country.