The Central Bank of Mongolia declares that the management of the debt is “No”. 1 task’
(Bloomberg) – The governor of Mongolia’s central bank has said keeping debt under control is the main objective right now amid a worsening foreign exchange crisis as reserves dwindle.
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“2023 is the most stressful year related to government debt,” Governor Lkhagvasuren Byadran told lawmakers on Thursday. “Debt management in 2023 seems like the No. 1 task ahead.”
Foreign exchange reserves of $2.8 billion were not at a “danger level”, he said, adding that reserves rose in September for the first time this year. The government could decide to repay some of its debt if reserves continue to rise, he said.
Mongolia’s foreign exchange problems are worsening after reserves fell 45% since their peak in April last year. Khan Bank, the country’s largest lender, began restricting the amount of foreign currency customers can buy in September, citing “liquidity concerns”. Other commercial banks have done the same, according to several clients.
Khan Bank said exceptions had been made for customers, including corporates and small and medium-sized enterprises, and that as of October 5, its foreign exchange liquidity ratio was almost triple what is required by the Bank of Mogolia.
The currency crisis stems from Mongolia’s current account deficit, the broadest measure of trade in goods and services, which has exploded this year as exports slumped and soaring energy prices caused drive up import costs. Mongolia’s shipments to neighboring China, its largest trading partner, have been severely disrupted by Beijing’s Covid Zero controls.
The current account deficit was $2.4 billion in the first eight months of the year, 43% higher than the same period in 2021.
Lkhagvasuren said the country needed to increase exports to ease pressure on its current account. Reducing transport costs by removing bottlenecks at the border would help ease pressures on exchange rates and rising prices, he said.
Mongolia’s public debt stood at 70% of gross domestic product, the central bank said in a June report. The World Bank estimates that the overall debt ratio, including off-budget items, stands at 92% for the whole of 2021.
George Xu, associate director of sovereign ratings for Asia-Pacific at Fitch Ratings Ltd., said state-owned companies pose “potential liability risks to Mongolia’s public finances given that a large number of companies are in deficit”.
He pointed to several factors that could justify a negative rating action: the inability to reduce the budget deficit or stabilize the public debt-to-GDP ratio, or a “crystallization of large contingent liabilities in the government’s balance sheet”.
The currency, the tugrik, has lost around 15% of its value against the dollar this year, with soaring US interest rates helping to weaken it. The Bank of Mongolia recently raised interest rates to 12%, which the governor said was aimed at “maintaining stability” in the economy.
Mongolia’s sovereign bond due in December is poised to shed 2.9 cents on the dollar this week, matching last week’s losses that were the biggest weekly declines since March 2020, according to prices compiled by Bloomberg. . But the bond is still trading at 94 cents, suggesting investors are pricing a low probability of default for the near-term payment.
Lkhagvasuren said the change in bond prices would likely be temporary.
(Updates with comment from Khan Bank in fifth paragraph)
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