Mineral-rich Mongolia plans to issue first sovereign bonds

Mongolia plans to issue its first sovereign bonds this month, marking a milestone for capital markets in this resource-rich democracy.

The newly created Development Bank of Mongolia will issue $700m in sovereign bonds to fund lending programmes, Chuluundorj Khashchuluun, chairman of the national development and innovation committee, has told the Financial Times.

Mr Khashchuluun said the issuance would take place in tranches beginning this month, with the first slice likely to be $100m. The bond will be in tugrik, the Mongolian currency, which has appreciated by 1.6 per cent against the dollar since January.

The Development Bank of Mongolia is set to be inaugurated on Thursday and has a mandate to do policy loans in areas that include infrastructure, industry, energy and roads.

“With the launch of the Development Bank we hope the investment system will be modernised,” said Mr Khashchuluun. “Policy loans have not been done for a long time in Mongolia and commercial banks cannot support these needs.”

Mongolia houses some of the world’s largest untapped mineral deposits and investment in the mining sector has soared in the past two years along with global commodities prices.

Government revenues from the mining sector are set to jump next year as the Oyu Tolgoi copper and gold mine comes online, and politicians in Ulan Bator are looking for ways to manage the coming influx into state coffers.

The Development Bank is being set up with training from the Korean Development Bank and the Development Bank of Japan. Two bankers in Ulan Bator voiced scepticism about the timing of the issuance, which has been under discussion for several months.

“It’s great for putting Mongolia on the map in terms of developing the capital markets here,” said Eric Zurrin of Rescap, a corporate finance advisory firm. “However, I struggle to see how it will happen so soon.”

He added that yields on the bonds could be quite low, perhaps 6-8 per cent.

The Development Bank may be the first Mongolian entity to issue bonds with sovereign guarantees, but it is not the only one. Politicians in Ulan Bator have talked about issuing bonds to support a variety of industries, including for a cashmere subsidy fund.

Mongolian sovereign debt has a B1 non-investment grade rating from Moody’s, the credit rating agency. “Mongolia’s rating has been constrained by susceptibility to destabilising boom-bust cycles,” noted Moody’s in its annual report on the country.

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