Tuesday, May 24, 2011
Friday, May 6, 2011
Because the sovereign bonds are issued not by individuals or private companies but by the Government that can raise taxes, the investors buy the bond and take back the invested money with its interests at maturity.
These investors are major financial market players such as individuals, companies, funds and national governments. If the government manages to issue such bonds and penetrate into international sea of finance, then it opens door to local private companies to follow this route.
The government’s bond issuing creates information and a system that can be used to measure the economy of that country, the efficiency of its public management and its governance of discipline. So national governments and their private companies raise a good deal of capital in this way.
Prior to releasing the bond, an internationally-recognized independent firm gives assessment of the credit worthiness of that country and provides a rating as compared to other countries.
There are two or three firms specialized in this field, one of which is Standard and Poor’s (S&P). In January, 2010, this credit rating agency rated Mongolia as BB which means not investment grade and assessed Mongolia’s debt issues as junk bonds.
For this reason, Mongolian government still cannot issue its bonds at international market. Mongolia needs to establish why it is in this rating and what should be done to raise its rating.
International and local experts claim that a number of target actions should be taken in Mongolia with respect to stability of politics and macro economy, transparent environment for business, fighting of corruption and open governance.
Some noticeable steps were taken last week by authorities to issue long-term sovereign bonds for domestic market and provide guarantee to bonds to be issued by the Development Bank.
The finance minister asked the Parliament to permit the Government to issue two packs of bonds for domestic market. Of the income from first MNT127 billion bond, 55,5 billion will be spent for compensating the state budget deficit and remaining 72 billion for issuing housing soft loans for public servants and other citizens.
The income from second MNT110 billion worth of bonds will be granted to “Mongol Cashmere” Corporation – an association of twelve wool and cashmere companies – for its efforts to improve competitiveness, penetration to international market and creating jobs.
It means the total debt will be paid from subsequent state budgets. The question is if the corporation will redeem the debt.
Next significant event related to bonds was the government’s decision to issue guarantee to the bonds of the state-run Development Bank for the first time in the country’s history. The soon-to-operate Development Bank first will issue MNT300 billion worth of bonds for the period of five years, MNT250 billion worth of bonds for ten years and MNT300 billion worth of bonds for 15 years, to raise funds from domestic market.
In case if the Development Bank cannot pay off principal debt and interests of own bonds, then the Government will pay for the Bank. Taking a credit equivalent to almost 10% of GDP in order to invest in infrastructure projects for construction, energy, road and heavy industry and paying principal loan and interests for 15 years by placing it in the state budget means that the investment is made through credits in principal.
Officials say that construction of massive infrastructure facilities in a short period and creating business environment in rural areas exerts positive affect to the development of private sector and improvement of their competitiveness and creates more taxpayers. On the other hand, because the government cannot afford to finance ambitious projects from the budget, it intends to implement these projects on credit and pay back in installments.
Annual interest rate of the Development Bank’s bond is 4, 75-7, 0 percent. But annual deposit interest rate of commercial banks is two times higher that it. For this reason, this bond will not directly attract the interests of individuals, commercial banks and companies.
Initial market or bond’s first trading will not be as active as expected. But already-traded bond holders will trade with each other or commercial banks will be active in secondary market, helping to build proper ratio of capital composition.
Or if it is permitted to take the above bonds from compulsory reserve of commercial banks, then it is possible to grant housing loans with annual interest rate of 6, 0 percent to citizens, which is equivalent to the rate applied to buy bonds. It means the half of real market interest will be compensated by bonds’ interest.
It can attract foreign banks, as well financial and investment banks interested in operating in Mongolia. US$700 million is not a big deal for big foreign banks. Fund raising through issuing bonds at international market means credit taking and it can yield more profits than trading shares at capital market. Fundraising through share issuance means the selling the ownership and sharing of profits always.
But in a country like Mongolia, where there is a big conflict of interest between the public and the private, we should make perfect contract and make all the process open and transparent in order to make these ambitious construction projects by credit. Otherwise, it is highly possible that it would expand and enlarge “the corruption fund”.
On the other hand, if we fail to implement the ambitious projects in a timely and efficient manner as to plan, then the credit worthiness of our Government would be even worse, which could delay Mongolia issue its bonds in international market.
Mongolian government needs to take immediate actions to reduce the budget deficit, stop compensating the deficit by foreign loans and aids, and cease co-exercising the authority to dispose of the budget by the Government and the Parliament, in order to issue its bonds abroad.
Issuing sovereign bonds is vital for financial infrastructure of the country.
Translated by P.Shinebayar