Rated the world’s fastest growing economy only four years ago, Mongolia’s commodity-powered economic miracle has almost completely faded, and concerns are mounting over a possible default in 2017, when more than $1bn in foreign currency debt repayment is due.

According to the latest estimates published by the World Bank, the country will grow by 2.3% in 2015, down from 7.8% in 2014, and will further slow down to only 0.8% in 2016 as “mining production is projected to decline in 2016-17 with lower mineral concentration in ores produced by the Oyu Tolgoi mine and the weak global commodity market conditions”.

After booming on the back of an FDI bonanza mostly focused on the country’s vast endowment of mineral resources, the country is now facing quickly deteriorating external conditions. The commodity market remains weak and neighbouring China, the almost exclusive buyer of Mongolian mineral productions, is adjusting to its “new normal” mode, which translates into less growth and demand for imported inputs.

Meanwhile, foreign direct investment (FDI) dried up amid flagging investor sentiment, driving down internal demand. The construction boom that shored up economic growth in the last few years also seems over, with large stocks of brand-new apartments in capital city Ulaanbaatar reportedly remaining unsold.

International observers are revising downwards their economic forecasts – the World Bank had put 2016 estimated economic growth at 4.1% only in October - and ringing the alarm bell over the country’s increasing external debt. Credit rating agency Standard & Poor’s downgraded Mongolia’s long-term sovereign rating to B from B+ on November 3.

The local business community is losing confidence in the current economic cycle too. “Everybody here thinks Mongolia is bankrupt and that we are going to default in 2017,” Ariguun Bat-Ochir, an Ulaanbaatar-based entrepreneur with interests in the telecommunications and agriculture sector, tells bne Intellinews. “The government cannot afford to make repayments due in 2017, they are left with no money.”

Mongolia’s sudden spotlight in the frontier market arena gained the country access to the international debt market, where it was able to make a first-ever placement of a $1.5bn bond, redubbed a Chinggis bond, at very favourable terms in 2012.  However, falling FDI, which decreased from over $4bn in 2011 and 2012 to only $76mn in 2015 (according to the World Bank), forced the government to increasingly rely on external debt to finance recurring current account and fiscal deficits.

Overall, the external debt to GDP ratio jumped to 62% in June from 45% a year earlier. Meanwhile, foreign reserves fell to $1.4bn at the end of September, from a peak of over $4bn in early 2013. With over $1bn in dollar-denominated debt repayment due in 2017 alone, and other hundreds of million of dollars due through 2022, it is unclear where Mongolian authorities will find the resources to honour these repayments.

Additional external financing may come through and allow scheduled repayment to be rolled over. The State Great Khural, the Mongolian unicameral parliament, is in the process of ratifying a $1bn loan agreement with China’s Export-Import Bank, and other Asian partners such as Japan have recently pledged support. Yet, the high concentration of external debt repayment between 2017 and 2022 poses “substantial” roll-over risks, the World Bank’s report highlights. The bond market is already mirroring these risks, with the country’s 10-year bonds trading at a yield of around 9%, from an original yield of 5.125%.

On the other hand, Mongolia remains a small economy with a 2014 GDP of $12.1bn and things can change on a dime should a number of development currently on hold finally come unfold.

“Two large mining project could markedly transform the country’s external and fiscal profile in three to four years if its terms of trade improve and the projects come online as planned,” Standard & Poor’s says in its November 3 statement.

After almost two years of negotiations, the government and Rio Tinto agreed a multi-billion dollar underground expansion of flagship copper and gold mine Oyu Tolgoi in May. The announcement did not immediately spark a new FDI bonanza, although signs of an improved business sentiment emerged straight away. After experiencing net outflows of reinvested earnings for over two straight years, foreign investors started reinvesting their profits locally from May onwards, as shown by figures from the Bank of Mongolia.

Rio Tinto is now in the process of raising over $4bn in financial among a pool of international and local bank and is expected to issue a final green light over the project in 2016. A final approval by the State Great Khural over a $4bn concession granted to China’s Shenhua Energy Japan's Sumitomo Corporation and Ulaanbaatar-based Mongolian Mining Corporation for the development of Tavan Tolgoi, the country’s largest coking coal mine, is also pending.

“An announcement of the OT underground mine financing deal would give further support to Mongolian assets and pave way for long term positive returns,” Fund Management Group (FMG), which launched a fund on Mongolia in 2012, wrote in a note to its investors in October. “Although most data points are negative, one should remember that Mongolia is a small market and it doesn’t take much to move this market.”

Standard & Poor’s estimates a quick recovery of FDI to over $2bn already in 2016, whereas the World Bank is more cautious and sees FDI picking up more gradually to $885mn in 2016 and on to $2.2bn in 2017.

A recovery in FDI would not only reignite economic growth through domestic capital investment, but also help the current policy reforms “to continue with less adjustment costs and mitigate the balance of payments risks”, the World Bank report reads. The government passed a Comprehensive Macro Adjustment Plan (CMAP) aimed to improve the macroeconomic framework in February. Besides the amendment of the Fiscal Stability Law (FSL) in January and the adoption of the Debt Management Law (DML) in February provided a legal framework for medium-term fiscal adjustment.

With general elections coming up in June 2016, the continuity of the reforms outlined by the government of Prime Minister Chimed Saikhanbileg appears uncertain though. Mounting popular discontent over the current economic situation risks prompting a shift in the balance of power within the State Great Khural to the detriment of Saikhanbileg’s Democratic Party.  Whatever the case may be, any new parliamentary majority emerging from the 2016 elections will face the hard task of breathing new life into the Mongolian economic miracle and avoid a default whose spectre is now looming over the horizon of the Mongolian economy.