Back From Brink, Mongolia Markets Boom and Borrowing Reopens

(Bloomberg) -- A year after coming to the brink of default, Mongolia is seeing the benefit of a good housekeeping seal of approval from the International Monetary Fund.

The resource-rich country wedged between Russia and China has the best performing stock market benchmark in the world for 2017, and it’s able to borrow on the open market again. Last month, the country attracted more than $5.5 billion for an $800 million sale of bonds in dollars. Investors are looking past Mongolia’s gaping budget deficit, weak credit profile and political uncertainty, taking comfort in an IMF lending program approved in May.

“We are happy to hold Mongolia bonds as the IMF anchor and higher commodities prices will continue to support the economic recovery,” said Mark Baker, a Hong Kong-based portfolio manager at Aberdeen Standard Investments, who bought the sovereign’s new 2023 bond. “With short-term sovereign external debt maturities rolled over and the next maturity not due until 2021, refinancing pressure is off.”

That’s helped its stocks, as well. The Mongolia Stock Exchange Top 20 Index is up about 74 percent so far this year, the biggest gain among all the benchmarks tracked by Bloomberg. Venezuela’s advance incorporates a realistic exchange rate for the country that’s been declared in default. Leading the Mongolian gains have been resource companies including coal miner Tavantolgoi JSC.

Much of the gains in the country’s equities came in the wake of the IMF program signed in May that provided about $5.5 billion in assistance.

It’s all quite a turnaround for Mongolia, which last year garnered only $750 million of bids for a $500 million bond sale, despite a coupon more than 5 percentage points higher than the notes sold last month. In November 2016, Moody’s Investors Service cut its debt rating deeper into junk due to “heightened uncertainty” over the government’s ability to meet its debt service obligations. Fitch Ratings followed suit with a downgrade because of deteriorating fiscal conditions and increased external liquidity risks.

Yield Hunt

With backing from the IMF, Mongolia is now able to benefit from the continued abundance of liquidity in the global financial system, and the attendant hunt for securities that offer extra yield over safe-haven benchmarks. Premiums on speculative-grade dollar bonds as a class have continued to drop relative to Treasuries, and reached a record low earlier this year.

That hunt for yield troubles Guillermo Felices, a London-based senior portfolio manager at the asset management arm of BNP Paribas SA, who says demand has become out of whack with credit and economic fundamentals.

“People are comfortable extending the search for yield,” he said in an interview in Hong Kong on Nov. 10. “Investors need to put the money somewhere and in order to meet the yield target they extend risks, going to riskier countries that then compress those yields. This is without fundamental justification.”

Still, conditions in and out of the country look favorable, at least for now. The country welcomed its fifth president since 1992, when Battulga Khaltmaa took office in July with an anti-corruption agenda. The upturn in coal prices will help its borrowing requirements for 2018 decline to 14 percent of GDP versus previously expected 20 percent, Moody’s said in its Oct. 30 note. Some measures of coal prices have climbed 18 percent since the end of June.

Mongolia’s economy expanded 5.8 percent year-on-year in the first nine months of 2017, according to the data released by the Mongolian National Statistical Office on Wednesday. That’s an acceleration from 5.3 percent in the first half.

The bottom line for Baker at Aberdeen when it comes to the country’s bonds: “I wouldn’t expect significant spread gains given current valuations, but carry remains attractive.”

--With assistance from Colin Simpson and Nicholas Edwards

To contact the reporter on this story: Narae Kim in Hong Kong at nkim132@bloomberg.net.

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Ravil Shirodkar

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