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Mongolia Binges on Bond Bonanza

Mongolia, a country that has been rescued five times in 22 years by the International Monetary Fund, sold $1.5 billion in debt Wednesday in its first government bond offering.
The sale, equal to nearly one-fifth of the size of Mongolia"s economy, is akin to the U.S. government borrowing $2.5 trillion in one bite.
"This is a -bang entry into global capital markets," said Jan Dehn, co-head of research for Ashmore Investment in London, which manages $68 billion and had planned to buy the bond.
Mongolian officials, who have been visiting investors this week to drum up demand, sold more than 80% of the two-part deal. A $500 million, five-year bond sold at its launch price of 4.125% yield. A $1 billion, 10-year bond sold at 5.125%, according to people familiar with the deal.
The interest was a sign of the hunger among global bond buyers for any investment that offers a relatively high yield.
Buyers defied nagging worries about whether Mongolia, a country wedged between China and Russia, is a good investment. The nation"s foreign-exchange reserves are shrinking, inflation is at double digits and the stock market has fallen 30% this year. The government also has made several decisions seen as unfriendly to business.
Best known for its founding father, Genghis Khan, Mongolia was the emerging-market world"s wunderkind just a few years ago. Gross domestic product rose 17% to $8.6 billion in 2011, just two years after the country needed a loan from the IMF to bailout its banking system.
"Mongolia was the hot place to be two to three years ago," says Laurent Ettedgui, a portfolio manager at Quam Asset Management in Hong Kong.
Emerging-market countries have issued a record $85 billion in sovereign debt in 2012, according to data firm Dealogic. Zambia and Bolivia also became first time issuers this year.
The money from the Mongolia bond will go to pay for roads, mining investment and electricity production, according to a presentation reviewed by The Wall Street Journal.
Investors already had shown a strong appetite for Mongolian debt. The country"s state-owned development bank sold $580 million of bonds in March in an offering that was oversubscribed by 10 times. The bond, which is backed by the government, has an interest rate of 5.75%, but demand has driven up prices and pushed down the yield to 4.5% in the secondary market.
By comparison, Italy"s benchmark 10-year bond trades with a yield of about 4.75% and Zambia"s 10-year bond, sold in September, yields 5.625%.
Standard & Poor"s Ratings Services rates Mongolia BB-, a noninvestment grade rating, similar to Bangladesh and Georgia. Moody"s Investors Service rates Mongolia B1.
The attraction of Mongolia is that it is rich in resources such as copper, uranium and coal. The country"s gest copper mine, owned by Rio Tinto PLC and the Mongolian government, is set to start producing next year. Analysts predict Mongolia will be the world"s second-largest copper exporter after Chile in coming years, generating tax revenue to support bond payments.
But the country has run into unanticipated speed bumps. Growth is expected to "slow" to 12.7% this year, according to the IMF. The government"s deficit is expected to rise to almost $650 million, or 7% of GDP.
Falling global commodity prices have hit Mongolia"s mining industry hard. Meantime, government spending increased 42% in the first eight months of the year, according to the World Bank. To cover a drop in tax receipts, the government borrowed $145 million from the central bank, while giving civil servants pay increases of more than 50%. Inflation is running at 15%.
Robert Abad, manager of the $516 million Western Asset Emerging Markets Debt fund, said he didn"t participate in the Mongolia bond issue. He said a first-time sovereign issuer with rapid growth but an unstable fiscal history needs to provide higher premiums to justify the risk. "That premium was not there in this issue," he said.
A weakening currency also could hamper Mongolia"s ability to pay back the bond. The Mongolian central bank has spent $800 million in currency markets to prevent the togrog from losing value against the dollar. Net currency reserves have dropped to $1.4 billion, a two-year low, according to the IMF.
Government moves have soured the foreign-investment climate. Foreign direct investment is expected to be around $3 billion this year, said a Mongolian government official, down from $4.6 billion last year.
The government effectively blocked an attempted takeover of a major Mongolian coal producer by a Chinese state-owned enterprise. The company, Rio Tinto-controlled SouthGobi Resources Ltd., had its mining license suspended for months, and an Australian lawyer for the company is being prevented from leaving the country as part of a corruption investigation. SouthGobi has said no charges have been filed and that it is cooperating with authorities.
Another concern: In May, Mongolia"s Parliament changed the foreign-investment law, requiring foreigners to get cabinet approval for small projects and parliamentary approval for ones in mining and other sectors.

Wall Street Journal

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