The staff’s debt sustainability analysis shows that Mongolia is at low risk of external debt distress. Although the debt ratios will rise significantly over the next two years as the government receives front-loaded foreign financing to recover from a major terms of trade shock, the debt outlook is expected to recover and improve over the medium term. Key medium-term risks involve large debt service in 2012–15 associated with the repayments to the International Monetary Fund (under the proposed SBA). Mongolia hardly has any domestic debt. If Mongolia manages its existing debt well and contracts new debt prudently, it should be able to ride out the effects of the adverse commodity shock and move to a new medium-term development path underpinned by the commodity sector.
The DSA has been produced jointly by the staffs of the International Monetary Fund and the World Bank, in consultation with the Asian Development Bank and the Mongolian authorities (Ministry of Finance, Debt Management Division). The fiscal year for Mongolia is January-December 2009.
The DSAs presented in this document are based on the common standard LIC DSA framework. Under the Country Policy and Institutional Assessment (CPIA) Mongolia is rated as a medium performer, and the debt sustainability analysis uses the indicative threshold indicators for countries in this category. See “Debt Sustainability in Low-Income Countries: Proposal for an Operational Framework and Policy Implications” (http://www.imf.org/external/np/pdr/sustain/2004/020304.htmandIDA/SECM2004/0035,2/3/04) and “Debt Sustainability in Low-Income Countries: Further Considerations on an Operational Framework, Policy Implications” (http://www.imf.org/external/np/pdr/sustain/2004/091004.htm and IDA/SECM2004/0629, 9/10/04) and “Applying the Debt Sustainability Framework for Low-Income Countries Post Debt Relief,” (http://www.imf.org/external/np/pp/eng/2006/110606.pdfandIDA/SecM2006-0564,8/11/06).
The average interest rate has increased and the average grace and maturity have become shorter.
Conducted by the World Bank in June 2008, available at http://siteresources.worldbank.org/INTDEBTDEPT/Resources/468980-1226602826665/DeMPAMongoliaFinal EN.pdf
IMF Country Report No. 08/200.
Oyu Tolgoi is a copper and gold mine. In addition, the Tavan Tolgoi (TT) deposit, close to the border with China, if developed, would transform Mongolia into a major world coal producer. The TT project has not been incorporated in the underlying baseline macroeconomic framework due to the uncertainties about its size and time frame for development. Once TT materializes, it is projected to have an important short-term impact via increased equipment imports, FDI and loan inflows, and a medium to long-term beneficial impact on the current account, similar to OT.
WEO projections are used for copper prices through 2014 and then assumed at US$4,500/tonne through 2029.
Mongolia has already reached middle-income status according to IDA definition.
The debt burden thresholds for medium policy performer are 150,40, and 250 for the PV of debt in percent of exports, GDP, and revenue, respectively. Under the same medium policy classification, thresholds for debt service are 20 percent and 30 percent of exports and revenue, respectively.
The Staff Guidance Note on the Application of the Joint Fund-Bank Debt Sustainability Framework for Low-Income Countries defines a “low risk of debt distress” when: “All debt indicators are well below relevant country-specific debt-burden thresholds. Stress testing and country-specific alternative scenarios do not result in indicators significantly breaching thresholds. In case where only one indicator is above its benchmark, judgment is needed to determine whether there is a debt sustainability problem or some other issues, for example, a data problem.
The DSA is conservatively undertaken on a gross rather than on a net basis.
Assuming the benchmark interest rate, the U.S. Treasury bond, to be 3 percent.