A slowing economy, thanks in large part to an ongoing and acrimonious dispute with mining company Rio Tinto, has caused the formerly red-hot economy of Mongolia to slow alarmingly. As a result, the government has announced plans to issue up to $1 billion in samurai bonds this year, which will give foreign investors access to its largest coal project.
The announcement was made by Prime Minister Norovyn Altankhuyag as part of his plan to relight the fire under the Mongolian economy. The Rio Tinto dispute has cooled the relationship between the miner and the government, as Mongolia seeks to reap a greater share of the profits for its natural resources and Rio Tinto has presented officials with cost overruns. It has also spooked foreign investors, who see the country’s efforts to reap a greater share of the profits on its own resources as a harbinger of trouble for future investments.
That has added to the slump in the country’s growth. In 2011, the Mongolian economy was growing at the lightning-fast clip of 17.5%; that slowed in 2012, with the onset of the dispute and a slowing in Chinese demand for coal, to 12.3%, according to the World Bank. This year, growth has dropped further, to 11.3% in the first six months—not exactly a crawl, but certainly not the breakneck pace it formerly experienced—because foreign direct investments shrank by $1 billion as the country enacted tougher laws to govern them.
The 42% decrease in investments has put Mongolia in the position of possibly seeing its credit rating downgraded, according to its central bank, since the government is spending more than it is taking in.
The samurai bonds are expected to help change that. According to Jay Jacobs, research analyst at Global X Funds, which launched the Central Asia and Mongolia ETF earlier this year, going through Japan for the bond issue “makes a lot of sense.”
Mongolia “started with an issue in America and Japan was the next logical choice,” Jacobs said. “With quantitative easing going on in Japan, which is way more expensive than in the U.S., investors are looking for more yield. European banks have been issuing more samurai bonds, too; they’re looking at it in the same way. Japanese investors are older, looking for more yield and looking for more risky assets with a nice yield.”
And a nice yield is just what they may get. Yields on the so-called Chinggis bonds, the American issue last November for $1.5 billion denominated in U.S. dollars, have risen 273 basis points in 2013 to 8.171% as of Sept 13.
Despite the Mongolian government’s current troubles, Jacobs said that Global X is “still very bullish on the macro trends in Mongolia in the long term. This is short-term positioning. Definitely the government/Rio Tinto negotiations are pretty aggressive, but it seems to be more posturing to see who will reap the rewards of the resources in Mongolia,” he said.