Japan pledges $850mn in loans to help Mongolia revive economy

Japan pledges $850mn in loans to help Mongolia revive economy
By bne IntelliNews March 30, 2017

Japan has pledged $850mn in loans to assist an effort aimed at reviving Mongolia's ailing economy, the Mongolian finance ministry said on March 29.

The struggling Mongolian economy grew by only 1% in 2016, down from the 2.3% seen in 2015. The rates are extremely poor compared to what has been seen in some years of the past decade. For instance, a boom in FDI helped Mongolia rack up astronomical GDP growth of 17.5% in 2011.

Difficulties encountered in completing talks over the underground development of Rio Tinto's giant Oyu Tolgoi gold and copper mine and a subsequent freefall in commodity prices have badly hit an economy reliant on mining coal, copper and gold.

With deadlines looming for repayments worth $1bn in debt due by January 2018, Mongolia's leaders met with representatives of the International Monetary Fund (IMF), China, India and Japan for crisis relief talks.

Prior to obtaining Japan’s support - the conditions of will be further negotiated during a visit to Japan this week by the Mongolian parliament’s chairman, Miyeegombo Enkhbold - Mongolia reached a $5.5bn bailout agreement with the IMF in February.

The deal with Tokyo has been struck with just weeks to go before Mongolia's development bank faces a repayments deadline on a $580mn bond.

The IMF is to provide Mongolia with funds totalling $440mn, with the World Bank, Asian Development Bank, Japan and South Korea offering $3bn in preferential loans.

The Financial Times reported on February 18 that the ADB intends to lend Mongolia about $300mn in budgetary support per year over the next three years, replacing previous loans of an equivalent amount.

Mongolia is also requesting an extension of the Chinese government’s $2.2bn central bank swap agreement, its largest single source of foreign financing.

A net foreign direct investment (FDI) outflow of $4.28bn was registered by Mongolia in the first 10 months of 2016. However, the price of copper, which accounts for around a third of Mongolian exports, has grown by over 20% within the past three months amid supply risks and signs that US President Donald Trump will ramp up infrastructure spending. 

Mongolia is expecting FDI to sway the economy back to growth thanks to the $6bn underground expansion at Oyu Tolgoi copper mine, which began in 2016, following a deal reached in May 2015. The agreement ended two years of stalled talks between the Mongolian government and the Anglo-Australian miner Rio Tinto.

However, the underground expansion is only set for completion by 2019. Rio Tinto believes the expansion, when completed and launched, will account for 30% of the Mongolian economy. The IMF expects Mongolia's economic growth to recover by 2019, reaching 8% as foreign exchange reserves grow to $3.5bn, a level not seen since 2012.

The pivot of Mongolia towards Japan for additional support results from of its "Third Neighbour" policy. It is aimed at easing the country's dependence on Russia and China. Mongolia’s is one of the countries that has been hit hardest by China’s economic slowdown.

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