Mongolia—Assessment of the Risks to the Fund and the Fund’s Liquidity Position

This paper focuses on proposed Stand-By arrangement (SBA) for Mongolia. This proposed SBA would aim to smooth adjustment to the catastrophic terms-of-trade shock, restore health to the country’s fiscal finances, and allow for exchange rate flexibility in line with market conditions. In addition, the IMF program would outline a clear macroeconomic framework to provide the basis for the authorities to approach the broader international community for financial support. Monetary policy will be calibrated to lower inflation while maintaining a flexible exchange rate and safeguarding international reserves.

Abstract

This paper focuses on proposed Stand-By arrangement (SBA) for Mongolia. This proposed SBA would aim to smooth adjustment to the catastrophic terms-of-trade shock, restore health to the country’s fiscal finances, and allow for exchange rate flexibility in line with market conditions. In addition, the IMF program would outline a clear macroeconomic framework to provide the basis for the authorities to approach the broader international community for financial support. Monetary policy will be calibrated to lower inflation while maintaining a flexible exchange rate and safeguarding international reserves.

1. This note assesses the risks to the Fund arising from the proposed Stand-By Arrangement (SBA) for Mongolia and its effects on the Fund’s liquidity, in accordance with the policy on exceptional access.1 The authorities are requesting an 18-month SBA with access of SDR 153.3 million (300 percent of quota). The arrangement would be front-loaded with a first purchase of SDR 51.1 million (100 percent of quota) upon approval and a purchase of SDR 25.6 million (50 percent of quota) in June 2009. The remaining resources would be phased in five quarterly purchases of SDR 15.3 million (30 percent of quota), with the last purchase scheduled to take place in September 2010 (Table 1).

Table 1.

Mongolia: Proposed SBA—Access and Phasing

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Source: Finance Department.

Reviews are assumed to take place at the end of each month shown on the table. Purchases are assumed to take place on the first day of the month following the review.

I. Background

2. Mongolia has had four financial arrangements with the Fund since becoming a member in February 1991 (Table 2 and Figure 1). An initial SBA in 1991, at a time when Mongolia was not yet eligible to use concessional resources, laid the foundation for later ESAF arrangements. Mongolia made purchases under the SBA amounting to just over half of the approved amount of SDR 22.5 million. From 1993 to 2005, Mongolia had two ESAF arrangements and one PRGF arrangement, and in all cases it was unable draw upon all of the available resources. Under Mongolia’s most recent PRGF arrangement, which started more than a year after the previous arrangement had lapsed, only the first and second reviews were completed, with a year’s delay in 2003. At that time the arrangement was extended, but no further reviews were completed despite broad achievement of the macroeconomic objectives, reflecting governance concerns at the Bank of Mongolia. Mongolia’s ex-post assessment in 2005 noted that the failure to complete the Fund-supported programs, even when many of the key objectives were met, suggested lack of sustained ownership. Mongolia has made repurchases and repayments in a timely fashion, and its outstanding obligations to the Fund have been on a declining path since 2001. As of end-February 2009, Mongolia’s outstanding obligations, all to the PRGF Trust, were SDR 12.4 million.

Table 2.

Mongolia: IMF Financial Arrangements, 1991–2015

(In millions of SDRs)

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Source: Finance Department.

As of end-December, unless otherwise stated.

As of end-February 2009.

Figures under the proposed program in italics. Assumes repurchases on an obligations basis.

Figure 1.
Figure 1.

Mongolia: IMF Credit Outstanding, 1991–2009

(In millions of SDRs)

Citation: IMF Staff Country Reports 2009, 130; 10.5089/9781451826982.002.A003

Source: Finance Department.

3. Mongolia’s external debt is moderate and consists predominantly of public sector debt to multilateral and bilateral creditors. At end-2008, Mongolia’s total external debt was estimated at about 35 percent of GDP, i.e., below the corresponding ratios for most of the exceptional access cases since the exceptional access framework was put in place in 2003.2 Likewise, Mongolia’s external debt service ratio to exports of goods and services is lower than nearly all of the previous exceptional access cases, reflecting its large mineral exports and its high share of concessional debt. Mongolia’s external public debt ratio of 33 percent of GDP is higher than the corresponding ratios for all except four of the previous exceptional access cases (Table 3, Figure 3, Panel B), reflecting its reliance on public and publicly guaranteed external borrowing.3 At end-2008, three-fifths of Mongolia’s public external debt was due to multilateral creditors (Figure 2).

Table 3.

Mongolia: Total External Public Debt, 2004–2008 1/

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Source: Mongolian authorities and IMF staff estimates.
Figure 2.
Figure 2.

Mongolia: Composition of Total External Public Debt, end-2008

(in percent)

Citation: IMF Staff Country Reports 2009, 130; 10.5089/9781451826982.002.A003

Source: Mongolian authorities and IMF staff estimates.
Figure 3.
Figure 3.

Debt Ratios for Recent Exceptional Access Arrangements 1/2/

Citation: IMF Staff Country Reports 2009, 130; 10.5089/9781451826982.002.A003

Source: Mongolian authorities and IMF staff estimates, and World Economic Outlook.1/ Year in parenthesis corresponds to the year of approval. Ratios are for the year indicated in parenthesis, with the exception of Belarus, El Salvador, Armenia and Mongolia, for which 2008 ratios are shown. Asterisks indicate PRGF eligible countries.2/ For arrangements approved since September 2008, estimates as reported in each staff report on the request of the Stand-By Arrangement.

4. This external public debt accounts for virtually all of Mongolia’s total public debt (Figure 3, Panel C). At end-2008, total government and government-guaranteed debt was estimated at about 33.1 percent of GDP, which is below the corresponding ratios for most of the previous exceptional access cases.

II. The New Stand-By Arrangement—Risks and Impact on Funds Finances

A. Risks to the Fund

5. Access under the proposed arrangement would greatly exceed that in previous arrangements for Mongolia:

  • If all purchases are made as scheduled, Mongolia’s outstanding use of GRA resources would rise to over 200 percent of quota with the first four drawings, and then to 300 percent of quota in October 2010, remaining at 300 percent of quota through July 2012.4 In terms of quota, this projected peak exposure would be the same as that of El Salvador—the lowest peak exposure for recent exceptional access cases (Figure 4). Including outstanding PRGF loans, the peak exposure, at 311 percent of quota (SDR 159 million) occurs from October 2010 to February 2011. In SDR terms, this peak level of credit outstanding would be more than three times larger than the historic peak in Mongolia’s outstanding credit.

  • Under the proposed SBA, Mongolia’s total outstanding use of GRA resources will be 1.9 percent of GDP following the first purchase, and 5.4 percent of GDP after the final disbursement (Table 4). This peak relative to GDP would be close to the median of the exceptional access cases approved since September 2008.

  • In SDR terms the peak GRA exposure of SDR 153.3 million would be the lowest of the recent exceptional access cases (Figure 5, Panel A). In particular, Mongolia’s peak credit outstanding would be the lowest of the PRGF eligible countries among recent exceptional cases, with Pakistan being the highest, and Armenia and Georgia being the other countries in this group.

Figure 4.
Figure 4.

Fund Credit Outstanding in the GRA around Peak Borrowing 1/

(in percent of quota)

Citation: IMF Staff Country Reports 2009, 130; 10.5089/9781451826982.002.A003

Source: IFS, Finance Department, and IMF staff estimates.1/ Peak borrowing ‘t’ is defined as the highest level of credit outstanding for a member. Repurchases are assumed to be on an obligations basis. Asterisks indicate PRGF eligible countries.2/ The authorities have expressed their intention to treat the arrangements as precautionary, as balance of payments pressures have not materialized.
Table 4.

Mongolia: Capacity to Repay Indicators

(In millions of SDRs, at end of period unless otherwise noted)

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Sources: Mongolia authorities, Finance Department, World Economic Outlook, and IMF staff estimates.

Repurchases follow the obligations schedule.

Includes surcharges and service fees.

Staff projections for external debt, GDP, gross international reserves, and exports of goods and services, as used in the staff report that requests the proposed SBA. For April 2009, projections for external debt, GDP, gross international reserves, and exports of goods and services are as of end-December 2008.

Total debt to the Fund comprises balances outstanding on GRA credit and PRGF loans.

Figure 5.
Figure 5.

Exceptional Access Levels and Credit Concentration 1/

Citation: IMF Staff Country Reports 2009, 130; 10.5089/9781451826982.002.A003

Source: Finance Department.1/ Asterisks indicate PRGF eligible countries.2/ Credit outstanding as of March 9, 2009 plus the first purchase under the proposed arrangement with Mongolia.

6. Mongolia’s external public debt ratios will rise significantly over the next two years as a result of front-loaded foreign financing, including from the Fund, and also owing to depreciation of the exchange rate (Table 4):

  • By end-2010, public external debt would increase to just under 50 percent of GDP, with Fund credit being 5.4 percent of GDP. Mongolia’s outstanding use of GRA resources would account for about 11 percent of its projected public external debt and 22 percent of international reserves.

  • Mongolia’s projected debt service to the GRA would peak in 2014 at about SDR 61 million (and debt service to the PRGF Trust would fall to zero), at which time it would account for about half of public external debt service.5 (At current SDR interest rates, Mongolia would pay an effective interest rate of about 1.8 percent over the duration of the loan, not including service charges or commitment fees, but the actual interest rate paid will depend on future developments in the SDR interest rate.)

  • In terms of exports of goods and services, external debt service to the Fund on GRA credit would peak at 1.8 percent in 2014, lower than the peak in all of the recent exceptional access cases. Total public external debt service would peak at a relatively low 3.9 percent of exports of goods and services in 2012, partly reflecting high projected growth in exports as mineral resources are developed.

B. Impact on the Fund’s Liquidity Position and Risk Exposure

7. Given the comparatively low access in nominal terms under the arrangement, the impact on the Fund’s liquidity and credit risk exposure is relatively small (Table 5):

  • The proposed arrangement would reduce Fund liquidity by less than 0.2 percent. Commitments under the proposed arrangement would reduce the one-year forward commitment capacity (FCC) of SDR 95.4 billion by SDR 153.3 million.67

  • Fund credit to Mongolia as a share of total current Fund credit from the GRA would increase to 0.3 percent with the first purchase (Figure 5, Panel B). The share of the top five borrowers of total outstanding credit would decrease marginally to just over 85 percent.8

  • Were Mongolia to accrue arrears on charges under the proposed arrangement, the Fund’s remaining burden sharing capacity would be somewhat reduced.9 Projected charges on the GRA obligations will peak at about SDR 3 million in 2011–12 or about 15 percent of the Fund’s current estimated residual burden-sharing capacity.10 However, the impact on the Fund’s burden sharing capacity of potential arrears from this arrangement would decline if the Fund’s loan portfolio were to expand further.

  • Potential GRA exposure to Mongolia would be small in relation to the current level of the Fund’s precautionary balances. After the first purchase, Fund credit to Mongolia would be about 0.7 percent of the Fund’s current precautionary balances, and the total access amounts to about 2 percent of current precautionary balances.

Table 5.

Mongolia: Impact on GRA Finances

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Sources: Mongolia authorities, Finance Department, World Economic Outlook, and IMF staff estimates.

The Forward Commitment Capacity is a measure of the resources available for new financial commitments in the coming year, equal to usable resources plus repurchases one-year forward minus the prudential balance. FCC determined on basis of available quota resources only; in addition, the Fund has access to SDR 34 billion under the NAB/GAB borrowing arrangements and $US 100 billion under the borrowing arrangement with Japan.

A single country’s negative impact on the FCC is defined as the country’s sum of Fund credit and undrawn commitments minus repurchases one-year forward.

As of end-April 2008.

Reflects total Fund credit outstanding plus the first purchase of Mongolia.

Burden-sharing capacity is calculated based on the floor for remuneration at 85 percent of the SDR interest rate. Residual burden-sharing capacity is equal to the total burden-sharing capacity minus the portion being utilized to offset deferred charges and takes into account the loss in capacity due to nonpayment of burden sharing adjustments by members in arrears.

III. Assessment

8. The proposed program, and its front-loaded financing, aim to forestall an impending crisis in response to a major shock to the price of Mongolia’s main export commodity. Economic imbalances were already present as a result of past procyclical policies, and reserve losses have been rapid. Accordingly, the main elements of the program include large upfront fiscal adjustment, flexibility in the exchange rate, a tightening of monetary policy, and efforts to restore confidence in the banking system.

9. There are substantial risks to the proposed arrangement for Mongolia. Achieving the upfront fiscal and monetary tightening will be challenging, implying downside risks to international reserves and the exchange rate, with potential consequences for the health of the banking system and for depositor confidence. Uncertainties surrounding the timing and magnitude of donor support needed to meet overall financing needs add to these risks. Political developments in the run-up to the May presidential elections add to policy implementation concerns, elevating the risks stemming from the front-loaded nature of the Fund’s financing, particularly given Mongolia’s past mixed track record of program implementation. The global economic environment is highly uncertain, and copper prices could well fall further, putting additional pressure on the economy. There is also a risk that Mongolia’s mineral wealth will be commercialized at a much slower pace than currently envisaged, undermining medium-term growth and balance of payments prospects.

10. These risks may adversely affect Mongolia’s capacity to repay the Fund, although the impact on the Fund’s finances would be contained by the relatively low level of access in nominal terms. While prospects for key debt and debt service ratios appear manageable, this outlook depends on rebuilding international reserves and on export growth reliant on international mineral prices and on investments to develop the country’s mineral resources. In these conditions, the authorities’ commitment to firm implementation of the program, particularly their willingness to take further policy measures if needed, will be crucial to the success of the program and Mongolia’s ability to repay the Fund.

1

See IMF Concludes Discussion on Access Policy in the Context of Capital Account Crises; and Review of Access Policies in the Credit Tranches and the Extended Fund Facility, Public Information Notice (PIN) No. 03/37; available via the internet: http://www.imf.org/external/np/sec/pn/2003/pn0337.htm).

2

No comprehensive data on Mongolia’s private external debt are available, and while the amount is estimated to be small, it is expected grow in line with the anticipated development of mining projects.

3

The previous exceptional access cases used as comparators in this paper are four of the five arrangements approved since the exceptional access framework was put in place (Argentina, Brazil, Turkey, and Uruguay), and the recent cases approved in 2008-09. The 2008 extended arrangement for Liberia also involved exceptional access. However, this arrangement was different from other exceptional access cases since, in this case, exceptional access was granted in the context of Liberia’s clearance of arrears to the Fund.

4

Debt service to the Fund is calculated on an obligations basis, in line with the guidelines stipulated in Review of Fund Facilities—Proposed Decisions and Implementation Guidelines (available via the internet: http://www.imf.org/external/np/pdr/fac/2000/02/). Under the obligations schedule, the first repurchase is scheduled to take place in July 2012, 3¼ years after the first purchase under the arrangement.

5

Currency holdings resulting from scheduled purchases under the proposed SBA would be subject to level-based surcharges of 100 basis points over the basic rate of charge (adjusted for burden sharing) on credit outstanding exceeding 200 percent of quota from May 2009 through October 2013.

6

The FCC is the principal measure of Fund liquidity. The (one-year) FCC indicates the amount of GRA resources available for new financing over the next 12 months. Following the creation of the Short-Term Liquidity Facility (SLF), the calculation of the FCC will exclude repurchases falling due under the SLF—see A New Facility for Market Access Countries—The Short-Term Liquidity Facility—Proposed Decision (available via the internet: http://www.imf.org/external/np/pp/eng/2008/102708.pdf).

7

Data as of March 9, 2009. This FCC is determined on the basis of available quota resources only; in addition, the Fund has access to SDR 34 billion under the NAB/GAB borrowing arrangements and US$100 billion under the borrowing agreement with Japan.

8

Given the possibility of new financing operations, including some that will involve exceptional access, the concentration of the Fund’s lending portfolio is likely to change in coming months.

9

Under the burden-sharing mechanism, the financial consequences for the Fund that stem from the existence of overdue financial obligations are shared between creditors and debtors through a decrease in the rate of remuneration and an increase in the rate of charge, respectively. The mechanism is used to accumulate precautionary balances in the special contingent account (SCA-1) and to compensate the Fund for a loss in income when debtors do not pay charges. The Executive Board has set a floor for remuneration at 85 percent of the SDR interest rate. No corresponding ceiling applies to the rate of charge.

10

Burden sharing capacity has declined recently, despite the increase in credit outstanding, reflecting the steep decline in the SDR interest rate.

Mongolia: Request for Stand-By Arrangement: Staff Report; Staff Supplements; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Mongolia
Author: International Monetary Fund