Argentina’s New Currency Crisis: What Happened This Time?

The peso crisis in Argentina: A risk analysis. What happened this time? Is any comparison with the previous crisis (1998 – 2002) possible? What impact could we expect in the close-term for President Mauricio Macri and the country’s political stability? The article tries to give some clues on what might be going to happen in the South-American State.

A history of debt crises

Argentina is no stranger to currency and debt crises. In the 20th century, periods of economic growth often led to trade deficits, pressure on the currency and the hasty adoption of fiscal austerity to tamp down the economy, creating an impoverishing and tiresome cycle of boom and bust. After a bout of hyperinflation in the 1980s, Argentina attempted to stabilize the Argentine peso by tying it 1:1 to the dollar in 1991 (the Convertibility Plan). Though successful in the short term, convertibility went disastrously awry at the century’s turn.

Argentina’s contemporary problems are a typical currency crisis. Those who hold Argentine pesos or peso-denominated assets are selling, partly to buy US dollars and dollar-denominated assets because the US Federal Reserve is raising interest rates. Argentina also runs a fiscal deficit, which it has to finance in dollars or another hard currency. As the peso falls, that debt becomes harder to service, increasing fears of default and creating a cycle of ever-increasing pressure on the peso. As the peso falls, prices rise – inflation currently runs at about 30 percent per annum.

The Argentine central bank attempted to stem the pressure on the peso by raising interest rates to extraordinarily high levels – they reached 27.25 percent at the end of April, and 40 percent in the first week of May. However, the peso continued its decline. The International Monetary Fund (IMF) was created just for situations like this. The Argentine government in May appealed to the fund for credit to reassure investors, obtaining a credit line of $50 billion, which the state can use to ensure its debts are paid and to support the peso. In return, the Fund has mandated Argentina take steps to reduce its budget deficit through fiscal austerity, including cuts and the reintroduction of taxes on exports. Argentina announced it would speed up this fiscal tightening on September 3.

Argentinian politics: A turn to the right

During the first decade of the 21st century, Latin America was seen as undergoing a left-wing transformation, with governments of varying left-wing ideologies, identities and programs coming to power in the majority of the region’s states. Since 2015, by contrast, there has been a turn to the right.

Argentina’s initial drift to the left began after the convertibility crisis of 1998-2002, which saw extreme austerity, an explosion in poverty and unemployment and the total discrediting of the IMF and economic orthodoxy more generally. The left turn in Argentina was represented by Néstor Kirchner (1950-2010), president between 2003 and 2007, and Cristina Fernández de Kirchner, his wife and successor as president between December 2007 and December 2015. The Kirchners introduced subsidies for utilities and public services, wage increases and, under Fernández de Kirchner, the nationalization of private pension funds to support public spending. Fernández de Kirchner also introduced capital controls, limiting the ability of peso-holders to exchange or sell their pesos on the open market, and thus the peso’s depreciation.

The Kirchners kept the peso reasonably stable, but prosperity during their tenure depended in large part on high prices for Argentine commodities (most notably soybeans). They also presided over a prolonged period of high inflation and considerable levels of corruption. In the 2015 elections, when Fernández de Kirchner could not run again, her left-Peronist faction ran Daniel Scioli, who in turn lost narrowly to Mauricio Macri, the mayor of Buenos Aires and representative of a center-right coalition, Cambiemos.

Macri succeeded in reducing subsidies and returning Argentine bonds to global markets – the country had been unable to borrow openly after the 2001 default. He also deregulated the finance sector. However, his attempts to cut inflation failed, while Macri failed to attract foreign investment. The currency crisis makes it harder for him to argue that his orthodox, conservative economic policies will succeed in restoring Argentine prosperity.

Economic risks

The immediate worry would be that Argentina would again default on its obligations. How likely is that? Well, the fact that the IMF credit line hasn’t prevented increasingly extreme attempts to reassure markets is certainly a bad sign. The Argentine central bank raised interest rates to a dizzying 60 percent at the end of August. There are significant doubts that Argentina will be able to meet the inflation and budgetary targets the IMF demands in return for its help.

The IMF learned during the 2001 crisis that it does not pay to continue supporting a country that is obviously going to become insolvent, so it is certainly possible that the IMF will cut off support – perhaps up to a 50 percent chance over the next year. This means that the danger of an Argentine default in the next year is probably almost as high, as it’s unclear who else might fund Argentina’s deficits.

Political risks

The immediate concern would be the sort of political chaos that attended the 2001 default. This led to a popular uprising and the flight of President Fernando de la Rúa from the Casa Rosada. The chances of this happening over the remainder of Macri’s current term (i.e. between now and December 2019) are probably very low – under 10 percent. The main reason is that the trigger for de la Rua’s downfall was neither inflation nor a default, but his order to freeze bank accounts (which prevented people from withdrawing their pesos and buying dollars). Macri is unlikely to issue a similar order simply to avoid recalling that precedent; rather, like Fernández de Kirchner, he would probably try to limit access to dollars in other ways.

The second political risk, especially from the purview of foreign investors, is Macri’s losing the next presidential elections, due at the end of 2019. This depends on a number of factors. Will Macri continue to pursue austerity and risk a recession, or limit cuts in a bid to save voters some pain?  Will Cristina Fernández de Kirchner be able to run, or will she be barred, legally or practically, by corruption investigations?

Because many Latin American countries do not allow presidents to run for immediate consecutive terms, there are relatively few precedents to apply. Macri is not accused of epic-scale corruption; indeed, his government has been rather vigorous in pursuing graft cases. His economic record is poor, but Fernández de Kirchner’s was not emphatically better. Given that Macri won his first term by a margin of three percent and his poor economic record, the chance of a left-wing victory would probably fall between 40 and 55 percent.

Egypt Struggles To Counterbalance Increasing Violence Amongst Disenfranchised Islamists

The state of the economy of Egypt has garnered the attention of the IMF. Investments are needed but will the escalating violence and increasing prices hamper such efforts?

The land of the Pharaoh’s is facing a double-edged sword. Following the ouster of former president Mohammed Morsi, many hoped the situation in Egypt would stabilize with current president Abdel Fattah el-Sisi.  The majority of Egyptians were seemingly exhausted after two Revolutions and years of uncertainty in the political, security and economic establishments.  After all, certainty is needed when it comes to investments, which in turn helps balance other sectors of the country.

However, the current climate in Egypt is filled with economic hardships on one hand and a rising threat of disenfranchised Islamists and the so-called Islamic State on the other.  Detailing some of these factors is crucial when analyzing the future state of Egypt.  Let’s first touch on the economy.

Egypt has been struggling since 2011 to attract both investments and tourists.  The former dropped by 40 percent throughout 2016 and CAPMAS stated that tourists to Egypt fell to 4.8 million in 2016 compared to 14.7 million in 2010.  Before 2011, one in ten people in the workforce worked in the tourism sector, generating approximately $12.5 billion in revenue.

With a budget deficit reaching 12.2 percent of GDP in the fiscal year which ended in June 2016 and unemployment hovering around 12.4 percent in the final quarter of 2016- leaders in Cairo looked to attract foreign investments to help stabilize the fragile economy.  One of the last scenarios many people desire, especially with the region in turmoil, is for Egypt to collapse.

In November 2016 the IMF stepped in attempting to address some of these issues with a 12 billion loan over three years.  Additionally, the Egyptian parliament recently passed the investment law to further attract direct investments to Egypt.  Will loans and favourable laws for international companies alleviate any pressure? Other concerns besides economic troubles loom on the horizon.

The security situation is proving to be quite a headache as well.  Following the removal of Morsi and subsequent dispersal of the sit-in at Rabaa al-Adawiya Square, young Islamists (likely affiliated or sympathetic to the Muslim Brotherhood), are beginning to show signs of organized violence directed against the state.  Although still in a relatively nascent stage, and seemingly sporadic, attacks mostly targeting security forces have occurred with increasing precision particularly in Greater Cairo and the Nile Delta.

Among the more notable groups to emerge is the enigmatic organization known as Hasm(“Decisiveness”) who entered the scene only a couple of years ago.  Widely believed to comprise of Egyptian Islamists largely associated with the Brotherhood, but also possibly elements of Salafi circles, this group has already conducted numerous high profile attacks.  Assassination attempts against police, army personnel, senior judges, lawyers, prosecutors and even the former Grand Mufti Sheikh Ali Gomaa by small tactical hit-and-run units as their preferred method is indeed unfolding.  Those targeted from the list just mentioned were somehow involved (even if just symbolically) in the removal, dismantling and imprisonment of the Muslim Brotherhood / Freedom and Justice Party (FJP) as a political party at the highest levels down to low ranking individual members.

In addition to this threat, there lives a mounting insurgency in northern Sinai.  Jihadists fighting for what was then called Ansar Bait al-Maqdis (ABM) before pledging allegiance to the so-called Islamic State in 2014 have unleashed constant attacks on Egyptian soldiers and their allied tribal fighters.  Moreover, and quite catastrophic for the Egyptian tourism sector, was the downing of a Russian plane packed with tourists over the Sinai.  The plane departed from Egypt’s popular resort town of Sharm el-Sheikh before being brought down by a bomb on October 31, 2015.

This strategic attack was claimed by the new ISIS affiliate in northern Sinai.  Strategic in a sense because as previously mentioned, the tourism sector is a vital source of income, as well as for the fact that Russians make up a significant proportion of tourists travelling to Egypt (nearly a third of all visitors in 2014).

Once a seemingly distant threat confined to northern Sinai’s desert, the downing of this plane suddenly triggered a reduction of tourists which ultimately deplete revenue flowing to Egyptian coffers.  Hence, terror threats and the overall condition of Egypt’s economy are intimately intertwined. The war in the desert waged between Jihadists, Bedouin tribes and the Egyptian army does not appear so secluded and alienated.

The start of 2017 does not appear to show any signs of this threat abating.  On the contrary, attacks are occurring with more frequency and deadliness.  Not to mention hitting closer to Cairo- as was exhibited with bomb attacks aimed against churches in December 2016 and the most recent Palm Sunday attack.

Security measures are attempting to deal with this threat while the IMF loan acts as a cushion to balance Egypt’s economy and attract overseas investments.  Foreign Direct Investments (FDI’s) will certainly ease the pain.  However, in 2015-2016, 53.2% of FDI was in the oil sector while the five biggest employing sectors in Egypt are agriculture and fishing (25% of the workforce); construction and building (12.4%); wholesale and retail (11.5%); manufacturing (10.7%); and education (9.6%).  The relevance here is that during the same time period only 3.4% of FDI’s went towards manufacturing and almost nothing for agriculture.  Investments are not flowing towards the industries employing the majority of Egyptians.

With subsidies being cut over the coming years and prices for staples (sugar, oil, fuel) increasing, austerity-hit Egyptians who mostly rely on such subsidy programs, will face tough times ahead.  This already on top of youth unemployment hovering around 30-40% in the Arab world’s most populous country.  After all, as previously touched upon, there are organizations gaining strength waiting with open arms for potential recruits.  With security comes investments. Then, it boils down to where those investments settle in order to flourish for the prosperity of society as a whole.

 

Jesse McDonald is Political Risk Analyst at Global Risk Insights. As originally appears at: http://globalriskinsights.com/2017/09/egypt-looming-concern-increasing-violent-unrest-fragile-economy/

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

IMF Approved $134 Million To Ivory Coast as Economic Outlook Remains Strong

IMF to extend $134 million to Ivory Coast

On Monday, June 19, the IMF (International Monetary Fund) completed the first reviews of Ivory Coast’s economic program and its statement for the extended arrangement. The program is supported by three-year arrangements under the Extended Credit Facility (ECF) while the extended arrangement falls under the Extended Fund Facility (EFF) of the IMF. The IMF would thus, be disbursing $133.8 million in credit to this frontier market (FM) (FRN) under the ECF. Additionally, the IMF has also approved an augmentation of fund access to Ivory Coast under two existing credit arrangements by 25%, bringing the total lending under these 3-year arrangements to around $900 million.

The ECF and EFF programs of the IMF are aimed at supporting local government efforts to achieve a sustainable balance of payments, inclusive growth, and poverty reduction in the countries where the program is approved and extended. The credit would also help the African (ZAR) (GAF) (AFK) economy catalyze both public and private financing.

Need to address vulnerabilities

In the past, Ivory Coast has been hit by substantial bouts of trade shocks and was hit by social tensions earlier this year. The economy has recovered though and has been taking steps to build resilience to future economic shocks. Fiscal consolidation in the country is underway with new revenue measures to be implemented in 2018 along with the containment of current spending while protecting outlays to the lower-income segment. However, the report noted that “the authorities will need to address vulnerabilities in the energy and financial sectors.”

Nonetheless, the IMF’s outlook on the economy remains positive, as discussed in the next part of this series.


 

Three Reasons The Low-Growth Stage In Which The Global Economy Is Stuck Is The ‘New Normal’

Low-growth trend

The world (ACWI) (VTI) economy is currently stuck in a low-growth environment. Bill Gross believes we’re stuck in a 2% real GDP world, regardless of Trump’s policies. Gross believes that the world may soon start accepting this ‘new normal’.

An IMF report, as highlighted by Gross in his investment outlook for April noted, “The current trend is an offspring of the financial crisis.” The report highlighted three main reasons for the low-growth ‘new normal’ growth trend that the economy is stuck in:

  1. Slowing business investment/trade

Business investment in the US (SPY) (IWM) (QQQ) has slowed. And since the US is a major trading partner to most economies, globally, the impact can be seen beyond the US. From about $570 billion in January 2015, net domestic business investment in the US was down to about $430 billion as of October 2016 (see chart above). This is despite the fact that interest rates being largely zero-bound in the economy over the past 8 years. For real growth to pick up in the economy, businesses need to start investing more.

  1. An ongoing level of low to negative interest rates

Every time the US Federal Reserve chose to maintain interest rates at their zero-bound level, it sent a signal to the markets that the monetary authorities are not yet confident about the state of the US economy. So, an ongoing level of low to negative interest rates has, in effect, suppressed investment confidence.

The above two listed reasons have together resulted in the misallocation of capital to low-risk projects (under a risk-off situation) coupled with a slowdown in small business creation (also reflective of the lack of aggregate business investment).

  1. Aging population

An often ignored yet important characteristic affecting world economic growth is demographics. Currently, most part of the developed world sports aging demographics. This affects growth, as older consumers consume less of almost everything except health care. Less consumption implies less spending, which is detrimental to growth.

Nigerian Currency Still Highly Overvalued Even After A 36% Dive

IMF: The naira is overvalued by 20%

The Nigerian (NGE) economy is in immediate need of reform and restructuring. With lower oil prices having impacted its fiscal budget, and militant activities having impacted production in the economy, this African (EZA) frontier market (FRN) (FM) needs to quickly implement its economic recovery and growth plan.

Chart: Nigeria’s average local-currency bond yields vs naira

Gene Leon, the International Monetary Fund’s mission chief in Nigeria sees the naira as overvalued by as much as 20% currently. This is after the currency has depreciated by 36% against the dollar since June 2016 — when the central bank removed the currency peg to let the currency free float. Currently, the central bank has put certain trading and import restrictions in place to prevent the naira from dropping further. Leon believes that Nigeria should look at further foreign exchange adjustments, lest the economy experiences a disorderly depreciation.

Banks have benefitted from a falling naira

Yields on naira-denominated debt have been soaring over the past year; rising from less than 12% to over 16% currently, given the plunge in the naira’s value.

Banks, in particular, have been a beneficiary to the falling naira over the past year. The locally listed stocks of Nigerian banks such as The United Bank for Africa, Guaranty Trust Bank (GUARY), Access Bank, Zenith Bank, FCMB Group, and NPF Microfinance Bank have returned 93%, 93%, 86.4%, 51.6%, 32.6%, and 23.4%, respectively over the past 1 year (as of April 6, 2017). The US OTC market listed GDR of the Guaranty Trust Bank trades under the ticker GUARY.

[stockdio-historical-chart stockExchange=”LSE” width=”100%” symbol=”GRTB” displayPrices=”Lines” performance=”false” from=”2017-01-01″ to=”2017-04-06″ allowPeriodChange=”true” height=”350px” culture=”English-US”]

On the London Stock Exchange, the bank trades under the ticker GRTB. GRTB is up 14.6% for the year ending April 6.

For investors in the region, it becomes very pertinent to understand the impact of the current and expected currency slide in Nigeria on portfolio holdings, as discussed next.

Nigeria’s Central Bank Fights Unwinnable War In $30 Billion Debt Crisis

Africa’s largest economy, Nigeria, is in the throes of a major multibillion-dollar banking crisis coming exactly 8 years after the country’s last financial sector meltdown in 2009. That crisis saw 40% of the country’s 24 banks become suddenly under-capitalized with five succumbing to insolvency. This time it is the stability of the country’s central bank itself that is at stake. The Nigerian Central Bank, which is ultimately the lender of last resort is itself under enormous financial strain – and unlike in 2009 – this time it will have to ultimately reach for an IMF bailout if the country’s deepening financial crisis is to be contained. An IMF bailout for Nigeria will possibly have to be on the scale of Ukraine’s 2015 $17.5bn deal to be meaningful.

In less than a year the US dollar value of the balance sheet of the Nigerian Central Bank has shrank by nearly 40% following the devaluation of the country’s currency from almost $100bn to about $60bn. Despite this, the central bank has expanded its quasi fiscal activities to unprecedented historic levels and increased its lending to the government by over 500% in less than two years. In recent weeks despite having foreign exchange reserves of only $30bn, the central bank has accelerated its sales of US dollars into the local economy at a clip of about $2.5bn per month – implying that by early 2018, the bank’s forex reserves would have virtually run out – just like Venezuela’s. The country’s local banks have between $20bn to $30bn in bad debts, threatening nearly half of the total capital base of the sector.

A conservative estimate issued by the Nigerian Deposit Insurance Corporation in early 2017 estimates the current bank losses stand around $7bn, with total private sector bank asset base of about $60bn – implying NPLs of 12%. However, if the 2008/2009 crisis is any guide, NDIC’s estimates are too conservative. Thus an estimate of $20bn – $30bn is likely more accurate with a bias towards the higher end of the spectrum.

Signaling the depth of the financial crisis facing the country, since 2015 the Nigerian central bank has dramatically increased its lending to government to finance the country’s growing fiscal deficits as oil prices have plunged. Nigerian government securities, as a percentage of total central bank assets/liabilities, have increased by over 500% in the past two years. During the 2008/2009 crisis, federal debentures constituted only 1%-2% of the central bank’s assets. The current level of central bank lending to the government is the highest it has ever been on record. Up until now the average historical exposure of the central bank to government financing during the recent democratic era was about 2%.

In 2008 at the height of the last banking crisis, Nigeria’s FX reserves stood at over $40bn, with the federal government deficit at less than 1%. Oil prices in 2008 averaged at $97 per barrel; they currently trade at around $48 per barrel, a decline of 51%. The Nigerian stock market was worth about 50% of GDP, it is today worth about 7%. Thus even if the Nigerian Central Bank still has the will to absorb the cascading multibillion-dollar NPLs from the private sector – it simply does not have the capacity to do so.

Despite the gathering storms, the central bank continues to act as if all is well. In early 2009 despite repeated denials by the then central bank governor, Charles Soludo, that the nation’s financial system was not at risk of collapse, within weeks of Soludo’s departure in May 2009, the central bank had to finance a $4bn bank bailout from its own balance sheet, with over $6bn of debts re-packaged into a government-owned ‘bad bank,’ AMCOM which is itself now nearly broke. With a much weaker macroeconomic environment, and already over exposed central bank balance sheet, the current crisis will be much harder to resolve. Even the bad bank, AMCON, which was set up in 2010 to recover the bad debts of the banks that were re-capitalized using public funds is itself today on life support. AMCON has recently had to absorb debts from several other collapsing businesses in the manufacturing, energy and aviation sectors – beyond the narrow scope of its original mandate focused on just financial institutions. With no credible lender of last resort, the current financial sector crisis may yet wipe out several billions from the local stock market and expose the country’s pension funds and insurance companies, who are heavily exposed to local bonds and equities to significant losses.

Beyond the central bank’s own stresses, there are other larger exogenous factors that indicate that the looming banking crisis may be much harder to resolve.

Unlike in 2009 where President Umaru Yar’Adua was firmly in control of the country’s political landscape, Nigeria’s current President Muhammadu Buhari is effectively a lame duck, with a vastly diminished prospect of re-election as the ruling party presidential candidate in 2018. His ill health and abysmal economic record since taking office has left many middle-class Nigerians, including his own wife, vowing to not support him for re-election in 2019. The 25 February 2017 statement by the National Leader of the ruling party Bola Tinubu that he may yet throw in his own hat into the presidential race is signal enough that Buhari, even if he recovers from his still unknown illness will not be allowed by his party to run in the 2018 party primaries. Having once lost the presidency to a southern Christian, Goodluck Jonathan, after Umaru Yar’Adua’s untimely death barely 3 years into his term, key northern Muslim political elites are determined to keep the presidency in northern Muslim hands for 8 years and won’t support Buhari for 2019 fearing he may die in office. Thus, unlike in 2008/2009, where there was national political will to address the growing financial sector crisis, this time it does not exist.

Secondly, unlike in 2009 where the then central bank governor, Charles Soludo’s term was up, and therefore easier to replace him, the current central bank governor Godwin Emefiele still has two years under his belt, and technically somewhat harder to summarily boot out of office. Thus, Buhari cannot easily remove him without further deepening the financial sector instability. Within a month of Soludo’s denial of a second term at the central bank, interbank call rates had surged by 33%. Emefiele’s departure could be even more consequential.

Beyond politics, Nigeria’s current banking crisis could not have happened at a worse time. The country’s economy is in recession with all key macroeconomic variables effectively negative when adjusted for inflation and currency depreciation. Inflation has surged to 10-year highs, FDI has collapsed by 70% and even GDP per capita in US dollar terms has regressed to below 1980 levels.

So, if the Nigerian Central Bank is unable to stem all the losses from the current crisis, will foreign investors swoop in to recapitalize the banks? No. Even in 2008/2009 despite initial hopes of several white knights picking up ‘cheap’ equity in local banks, virtually none appeared on the scene of the bank bloodbath, forcing the central bank to fork out $4bn of reserves to stabilize the banks, and packaging the rest of the bad debt into AMCON. This time may be even direr. The US has begun a multi-year process of raising interest rates to re-normalize its monetary policy. The change in US interest rates has structurally made all frontier and emerging assets relatively more risky than OECD assets. Europe is in the throes of a major political earthquake adjusting to Brexit, having barely escaped Nexit and possibly looking at a Frexit and an Italexit. With the US budget under severe strain and another debt ceiling crisis looming, the stretched Bretton Woods Institutions are unlikely to help unless formally petitioned by Nigeria. The IMF and World Bank remain largely gun shy to offer unsolicited help and will demand many stringent structural reforms of the Nigerian economy if it is approached by the Buhari government in the absence of more viable options.

While the Nigerian Senate and the National Leader of the ruling party are all very likely to strongly oppose an IMF bailout and all the attached conditionalities, Nigeria is still likely set to enter an IMF program before the end of 2017 if its socio-political stability is to be maintained. However, while Nigeria dithers, the central bank trots out short-term currency manipulation gimmicks, and the increasingly cash-strapped population prays at mosques and churches that the growing banking sector nightmares will simply vanish, several local banks are likely collapse before even an IMF deal is inked.

 

DaMina Advisors is a preeminent Africa-focused independent frontier markets risk research, due diligence and Africa M&A transactions consulting and strategic advisory firm.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Tunisia Is Tapping International Bond Markets, but Investors Are Worried About Default

Tunisia Eurobond

Tunisia had tapped international bond markets in February in continued efforts to procure financing to rebuild its economy. The 850 million euro seven-year Eurobond saw a yield of 5.75%. Prior to this, the country had tapped international markets in 2015 via a $1 billion dollar-bond which had drawn a lot of investor interest.

Reports indicated that global coordinator Natixis and joint lead managers to the issue, Commerzbank and JP Morgan, had been unable to find better pricing, though there were views that tighter pricing could not be obtained because of the euro denomination of the bond vis-à-vis a dollar denomination.

Another reason investors were not completely sold on the bond was because they did not find the reform initiatives convincing. For instance, the graph below shows how the government’s indebtedness has increased over the past few years. According to the IMF, Tunisia’s public debt was over 60% of GDP in 2016.

Investors’ fears are not completely unfounded.

Rating downgrade

Just before the global coordinator and lead managers were to set out for roadshows for the bond, rating agency Fitch downgraded the country’s long-term foreign and local currency ratings, and senior unsecured bonds, to ‘B+’ from ‘BB-.’ It kept its outlook ‘stable.’

Fitch noted that “The collapse of tourism in the context of elevated security risks, slowdown in investment amid frequent government changes and episodes of strikes and social unrest have weakened economic growth performance and prospects.” These, the agency held, will have negative impact on external and public finances and can be seen in the country’s increasing budget and current account deficits.

Bloomberg’s assessment

Bloomberg counts Tunisia as among four countries most likely to default on their payments in Africa. According to its sovereign credit risk model, which incorporates “budget deficits, foreign reserves, non-performing bank loans and political instability,” Tunisia’s probability of default is 3.5% – the third highest in Africa.

Tunisia to issue more bonds

Even in face of default risk and delayed financial assistance from the International Monetary Fund (IMF) citing the lag in reforms, the country intends to approach international bond markets again in 2017.

Reuters reported Finance Minister Lamia Zribi saying that the country plans to issue $500 million Sukuk Islamic bond. She was quoted as saying “If we don’t manage to fulfill our external financing needs of 6.5 billion dinars ($2.85 billion) then without a doubt we’ll go to capital markets again this year.”

At this juncture, it is extremely essential for the country to go full throttle on the economic reform process so that the IMF disburses its delayed and upcoming loan tranches. This would infuse confidence in the minds of international investors and would provide more desirable yields to the government if and when it goes to international markets again this year.

Tunisia Reforms Forced By IMF Expected to Cause 10,000 Job Losses

Action warranted

Financial assistance from the International Monetary Fund (IMF) is cheaper than tapping international bond markets. However, it comes with several conditions and promises of reforms, failing which the un-apportioned part of the loan can be suspended.

That is precisely what has happened with Tunisia whose second tranche of the approved $2.9 billion loan was suspended given the unsatisfactory progress on reforms on areas of public finances, wage bill, and the banking system.

Public wages reforms

According to Björn Rother, IMF mission chief to Tunisia, “The public wage bill as a share of GDP is among the highest in the world, and the external current account deficit remains elevated.” Reuters reported Tunisia’s Finance Minister Lamia Zribi saying that the wage bill of the country is 14.4% of the gross domestic product (GDP). She said that the country intends to cut this to 14% by 2017-end and to 12.5% by 2020.

Tunisia intends to slash up to 10,000 public sector jobs which would help it to reduce its wage bill. It wishes to do so via an early retirement program.

Banking system reforms

Tunisia’s banks are burdened by large deficits. So much so that injecting 800 million Tunisian dinars, or $350 million, in 2015 was not enough to satisfactorily recapitalize three government banks – Societe Tunisienne de Banque, Banque Nationale Agricole, and Bank de l’Habitat.

In an interview with Reuters, Finance Minister Zribi informed that the government had studied the possibility of merging the aforementioned banks into one. However, it did not find this option realistic. Hence, the government may look at selling stakes in these banks to strategic partners.

According to her, the government may sell its share in seven banks where it has a minority stake.

Among other options is selling companies seized from erstwhile President Zine El Abidine Ben Ali and his family after the country’s pro-democratic uprising in 2011. However, Zribi expects less than $300 million from these companies which are from the “telecommunications, media and service sectors.”

The country has tapped international bond markets this year. However, there are concerns regarding its bonds. Let’s look at this aspect in the next article.

With Economic Growth Expected to Double This Year, Why Is Tunisia In Trouble?

In economic jeopardy

If one was to go by International Monetary Fund (IMF) estimates, Tunisia is expected to see economic growth rise to 2.5% in 2017 from 1.3% in 2016. Further, in February, Björn Rother, IMF mission chief to Tunisia, stated that “The Tunisian economy has remained resilient in a difficult domestic and international environment.” This flies in the face of any claims of ‘economy jeopardy’ as stated above.

The context in which such an observation is tabled for discussion is that the IMF did not release the second tranche of its assistance to the country. The institution had provided Tunisia a loan amounting to $2.9 billion, spread over four years, in May 2016. The first tranche of that loan, valued at about $320 million, was released in June. However, the second tranche, worth $350 million, scheduled to be released in December, was held back.

Lagging on reforms

The IMF did not think that the country had made enough progress on reforms to qualify for the second tranche. The govrnment was supposed to show positive changes on high public sector wages, public finances, and its banking sector.

Tunisia’s finance minister, Lamia Zribi, informed Reuters that an IMF delegation is expected to visit the country in March to talk about reforms as well as the third tranche of the loan. However, if they were not convinced about progress on expected reforms, they may choose not to visit at all. If this happens, it would force other international lenders to reconsider their own financial arrangements with the country.

The IMF noted that Tunisia’s macroeconomic challenges were “significant.” The country’s public debt stood at over 60% of GDP (gross domestic product) in 2016. The institution also noted that even though the 2017 budget law can help reduce the fiscal deficit to 5.6% of GDP this year, down from 6% in 2016, the projected figure is still higher than targeted.

In face of the aforesaid problems, what does Tunisia intend to do? Let’s look at that in the next article.

China’s Growth Results for 2016 Anonymously Leaked, IMF Projections Follow

Upgrade on economic growth projection

The International Monetary Fund (IMF) has some good news for China’s economy. In its January 2017 Update of the WEO (World Economic Outlook), the agency upgraded its forecast on economic growth in China in 2017. It now expects the country’s economy to grow by 6.5% this year, up 0.3 percentage points from its October forecast. For 2018, the IMF expects China to grow at 6%, unchanged from its previous forecast.

China is expected to have grown 6.7% in 2016 according to some Chinese officials who have spoken to news agencies anonymously because official data has not yet been released.

The WEO report noted that “the growth rate in China was a bit stronger than expected, supported by continued policy stimulus.”

As noted in the previous article, according to Reuters, China’s banks lent a record 12.56 trillion yuan ($1.82 trillion) in loans in 2016. This is the stimulus which is being referred to by the IMF. This lending has been encouraged by the government which is trying to support the economy at a time when its exports continue to decline and it is trying to grow from within instead of relying on external investment and trade.

IMF cautions about debt

We had noted in the previous article that though credit expansion can boost economic activity, it also gives rise to a burgeoning debt burden.

The IMF cautioned about China’s credit rise in the WEO report. It stated that “continued reliance on policy stimulus measures, with rapid expansion of credit and slow progress in addressing corporate debt, especially in hardening the budget constraints of state-owned enterprises, raises the risk of a sharper slowdown or a disruptive adjustment.”

It was also noted that capital outflows could increase the risk of an economic slowdown.

Investor takeaway

The renewed focus on domestic consumption will work well for China in the medium to long-term. However, trying to support the economy by means of cheap credit is a risky proposition.

Though manufacturing is stabilizing and will support economic growth in 2017, devaluation of the yuan against the US dollar and capital outflows due to the expected rate hikes in the US in 2017 pose significant risks to China’s economy. Donald Trump’s stance on China, once he assumes office, will be crucial as well.

If Trump does not come down heavily on China, then investors in Chinese equities (FXI) (MCHI) can expect a strong year. However, keeping an eye on the yuan is crucial as many believe that the recent rebalancing of the RMB Index may not reduce the impact of the dollar’s strength in good measure.

The Global Economy Remains Unbalanced

Discussions around large current account imbalances among systemically relevant economies as a threat to the stability of the global economy faded out in the aftermath of the global financial crisis. More recently, some signs of a possible resurgence of rising imbalances have brought back attention to the issue. We argue here that, while not a threat to global financial stability, the resurgence of these imbalances reveals a sub-par performance of the global economy in terms of foregone product and employment.

Are global imbalances rising again?

For five years now, the International Monetary Fund (IMF) has produced an annual report on the evolution of global external imbalances – current account surpluses and deficits – and the external positions – stocks of foreign assets minus liabilities – of 29 systemically significant economies. Results for 2015 showed a moderate increase of global imbalances, after they had narrowed in the aftermath of the global financial crisis (GFC) and stabilized in the interim (IMF, 2016) – see Chart 1.

 

chart1

The evolution of imbalances in 2015 depicted in Chart 1 is explained by the IMF as mostly reflecting three major drivers:

First, the recovery among advanced economies proceeded in an asymmetric fashion. Stronger recoveries in the U.S. and the U.K. relative to the euro area and Japan led to divergence in expected paths for monetary policies and appreciation of the dollar and sterling (pre-Brexit). The deficits of the U.S. and U.K. widened whereas surpluses increased in Japan and both debtor and creditor countries of the euro area (Chart 2).

Second, the fall of commodity prices – especially oil – transferred income from commodity exporters to importers. Overall however, it made only moderate contribution to narrowing imbalances.

Third, prospects of monetary policy normalization in the U.S., as well as bouts of fears about the softness of China’s rebalancing, contributed to a slowdown of capital inflows and depreciation pressures in emerging markets (Canuto, 2016a).

All in all, larger U.S. deficits and augmented surpluses in Japan, the Euro area and China more than compensated for smaller surpluses in oil exporters and smaller deficits in deficit emerging markets and Euro area debtor countries. Hence, global current account imbalances widened last year, even if “moderately”.

chart-2

A picture of higher global imbalances, however, emerges if one focus on the rising surpluses of two systemically relevant groups of economies. Chart 2 exhibits how in the euro area deficits in debtor countries have shrunk in tandem with the maintenance of surpluses in creditor countries (slightly increasing in the case of Germany). While the net foreign asset position (liabilities) of debtors has not diminished as much, their current account adjustment has added to the soaring surpluses the euro area as a whole runs with the rest of the world. Setser (2016) in turn has called attention to how the six major East Asian surplus economies – China, Japan, South Korea, Taiwan (China), Hong Kong (China), and Singapore – have reverted their post-GFC decline of surpluses and are currently topping even the euro area (Chart 3).

chart-3

Such double trajectory of rising surpluses gives ground to those who have expressed concerns about a revival of rising current account imbalances as a source of risks to the global economy. While Eichengreen (2014) had declared “the era of global imbalances” to be over, more recently others believe they are “back” and claim that “rising global imbalances should be ringing alarm bells” (HSBC, according to Verma and Kawa (2016). To address this issue, however, it is worth first reviewing how the profile of current imbalances differs from the one prior to the GFC.

Global imbalances have evolved

The “era of global imbalances” up to the GFC (Chart 1) had two distinctive-yet-combined processes at its core:

On the one hand, credit-driven, asset bubble-led growth in the U.S., along with wealth effects, intensified the existing trend of domestic absorption (particularly consumption) growing faster than GDP. This resulted in falling personal saving rates and increasing current account deficits (Chart 4) (Canuto, 2009; 2010).

On the other hand, the accelerated structural transformation and rapid growth in China, led to high and rising savings and investments and producing ever larger current account surpluses (Chart 5) (Canuto, 2013a).

 

chart-4

 

chart-5

Two caveats about these distinctive-yet-combined processes are needed. First, the bilateral U.S. deficit with China in the period shrinks by a third when measured in terms of value added, as China became a “hub or a stroke” of value chains with intermediate stages supplied from abroad (Canuto, 2013b). The U.S.-China bilateral imbalance therefore constituted outlets for production beyond China.

Second, while often linked as mirror images of each other – as in the hypothesis of an Asian “savings glut” causing low interest rates and asset price hikes in the U.S. (Bernanke, 2005) – the U.S. asset bubbles were more strongly associated to the “excess elasticity of the international monetary and financial system”, rather than to Asian current account surpluses (Borio and Disyatat,2011) (Borio, James, and Chin, 2014). Global current account imbalances cannot be blamed for the U.S.-originated GFC. As stressed by Eichengreen (2014):

“…the flows that mattered were not the net flows of capital from the rest of the world that financed America’s current-account deficit. Rather, they were the gross flows of finance from the US to Europe that allowed European banks to leverage their balance sheets, and the large, matching flows of money from European banks into toxic US subprime-linked securities.”

A parallel to that China-U.S. relationship can be traced within the euro area, including its later experience with a second dip of the GFC. The entry into effect of the euro as a common currency was followed by a risk premium convergence toward German levels and to cross-border banking flows at extremely easy conditions. Consequent asset bubbles creating wealth effects and excess domestic absorption – besides inflated financial intermediation – in southern Europe and Ireland led to the subsequent debt crisis. The pattern of intra-euro area current account imbalances exhibited in Chart 2 was primarily a consequence of euphoria taking place under conditions of “excess elasticity” of its financial system.

The commodity super-cycle also helped shape global imbalances in this period seen in Chart 1. However, it was to a large extent a consequence of extraordinary global growth prior to the crisis, one in which commodity-intensive emerging market economies maintained growth trends above those of advanced economies (Canuto, 2010).

While such a pattern of global imbalances was unfolding prior to the GFC, much discussion took place about its potential to spark a crisis on its own when faced with a sudden stop. China’s current account surpluses were boosted by depreciated levels of the exchange rate only sustained with a piling up of foreign reserves. The same evolution was interpreted by some as an expression of a savings glut unmatched by enough domestic availability of safe-and-liquid assets like U.S. Treasuries.

Regardless of the emphasis of causality one might establish between export-led strategies and saving-glut-cum-safe-asset-scarcity, analysts were split into two champs, as described by Eichengreen (2014). Some analysts feared a possible crisis of confidence in the dollar bringing capital flows to a sudden halt, while others saw imbalances as an exchange of cheap Asian goods for safe and liquid U.S. assets. In the latter case, imbalances might gradually unwind as export-led strategies reached exhaustion and/or the desire for asset accumulation approached satiation.

In any case, the GFC happened before that dispute was settled and global imbalances started to unwind in its aftermath. U.S. personal saving rates began to climb, borrowers reduced leverage, the dollar devalued and the U.S. current account deficit shrank from almost 6% of GDP in 2006 to much lower levels from 2009 onwards. At the same time, as shown in Chart 5, China initiated its rebalancing from an exports and investment-led growth model towards higher domestic consumption and services, including an appreciation of the RMB and lower growth rate targets. This has not meant a straightforward change of trajectory, as caution against a post-GFC hard landing favored continued high investment in domestic housing and infrastructure as a component of the transition (Canuto, 2013a).

As we already approached, deficits also diminished in the euro area in the aftermath of its debt crisis. The decline in commodity prices also helped global imbalances to shrink.

So, global imbalances did not spark a crisis and have returned in different configuration. Since current account balances are neither expected nor desired to be zero, how to make an assessment of whether the recent “moderate” uptick detected by the IMF might be a bad omen? Do those who have voiced concern over rising surpluses in East Asia and the euro area have a point? To answer these questions, it will be useful to look at the IMF exercise of judgement on whether global imbalances have been “in excess“, i.e. inconsistent with “fundamentals and desirable policies” (IMF, 2016, Box 1).

How misaligned with fundamentals have current account imbalances been?

National economies are not expected to exhibit zero current-account balances and stocks of net foreign assets. At any period of time, domestic absorption – consumption and investment – can be larger or smaller than the local GDP, triggering inflows or outflows of capital, due to “fundamental” factors:

(i) Differences in intertemporal preferences and age structures of their populations mean different ratios of domestic consumption to GDP;
(ii) Differences in opportunities for investment also tend to lead to capital flows;
(iii) Differences in institutional development levels, reserve currency statuses and other idiosyncratic features also generate capital flows and imbalances;
(iv) Cyclical factors – including fluctuations in commodity prices – may also cause transitory increases and declines in balances; and
(v) Countries’ outstanding stocks of net foreign assets also have a counterpart in terms of service payments in their current accounts.

When global imbalances – and corresponding real effective exchange rates (REERs) – reflect such fundamentals, economies are in a better place than they would be in autarky (isolated with zero balances). There are situations, however, in which such imbalances may be gauged as in excess and countries should reduce them – as approached in Blanchard and Milesi-Ferretti (2010; 2011).

There is the straightforward case of imbalances being magnified by domestic distortions, the removal of which would directly benefit the economy. For instance, this is the case when deficits are higher because of lax financial regulation fueling unsustainable credit booms or excessively loose fiscal policies. It is also the case of surpluses that reflect extremely high private savings due to lack of social insurance or investments being curbed because of a lack of efficient financial intermediation. It is worth noticing that, while excessive deficits eventually face a shortage of external finance, surpluses suffer less automatic pressures toward dissipation and can therefore persist for longer.

Furthermore, as pointed out by Blanchard and Milesi-Ferretti, there are also situations in which the multilateral interdependence of economies calls for restricting current-account deficits or surpluses. Unsustainable deficits of large, financially integrated economies are such a case, as a crisis associated to them may trigger cross-border effects.

Blanchard and Milesi-Ferretti additionally point out two conceivable situations in which surpluses can be deemed as in excess:

(i) When current-account surpluses are the result of deliberate strategies of curbing domestic demand and deliberate exchange rate undervaluation, crowding out foreign competitors. On the other hand, given the simultaneous determination of savings and current account balances, it is always hard to disentangle such a strategy from other determinants of the current-account balance.
(ii) When an increase of one economy’s surplus takes place while others face difficulties to absorb it without suffering adverse, durable effects on their demand and output. This is the case when part of the world is caught in a “liquidity trap”, unable to resort to lowering domestic interest rates as an adjustment policy, or face obstacles to use countervailing fiscal policies.

The IMF “External Sector Report” aims to gauge to what extent current account balances and corresponding REERs are out of line with “fundamentals and desirable policies”, as well as whether stocks of net foreign assets are evolving within sustainable boundaries. What did the latest issue show?

Chart 6 displays its assessments of how intensively individual economies have exhibited current accounts – and REERs – out of line with their “fundamentals”, i.e. those features that would normally lead them to feature current account imbalances within certain estimated country-specific ranges. Stronger (weaker) corresponds to REER “undervaluation” (“overvaluation”). Stronger (weaker) also means that a current account balance is actually larger (smaller) than that “consistent with fundamentals and desirable policies” (IMF, 2016, Box 1).

 

chart-6

The report notices that the evolution toward less excess imbalances after the GFC has stopped and recent movements give motives for concern (IMF, 2016, p. 23):

First, those economies with external positions considered “substantially stronger” (Germany, Korea, Singapore) or “stronger” (Malaysia, Netherlands) have remained as such for the last 4 years. Also noticeable has been the shift toward stronger positions in the cases of Thailand and Japan.

Second, at the bottom of the distribution, while some countries reduced – or suppressed – degrees of “weakness” (Russia, Brazil, Indonesia, South Africa, and France), others remained (Spain, Turkey, United Kingdom) – with the addition of Saudi Arabia to this group after the oil price decline.

Third, on-going trends of current account imbalances are bound to lead to a further widening of some external stock imbalances accumulated since the GFC. While China’s external stock position is expected to stabilize, other large economies are projected to exacerbate their debtor (U.S., UK) and creditor (Japan, Germany, Netherlands) positions. Furthermore, the net foreign asset position of some euro-crisis countries remain highly negative despite years of flow adjustment with high unemployment and low growth.

In our view, although not giving reason to fears of a collapse in major financial flows, global imbalances have not gone away as an issue, as they reveal that the global economic recovery may have been sub-par because of asymmetric excesssurpluses in some countries and output below potential in many others. The end of the “era of global imbalances” may have been called too early. Lord Keynes’ argument about the asymmetry of adjustments between deficit and surplus economies remains stronger than ever.

Bottom line

The IMF report has a point in calling for a “recalibration” of macroeconomic policies from demand-diverting to demand-supportive measures. This will be particularly the case for countries currently able to resort to expansionary fiscal policies instead of relying mainly on monetary looseness – which has become increasingly ineffective at the margin. On the other hand, one must acknowledge that there are limits to extensive recalibration of national macroeconomic policies, as well as doubts about the extent to which national fiscal policies can deliver cross-border demand-pull effects. Huge savings flows – like German or U.S. corporate profits – may not be easy to redeploy.

Hence the priority to be given to country-specific structural reforms addressing obstacles to growth and rebalancing. Which could be aided by cross-border dislocation of pools of savings currently parked in low-return assets. Paradoxically, global imbalances demand more globalization in a moment in which the latter faces hurdles (Canuto, 2016b).

Otaviano Canuto is the executive director at the board of the World Bank Group for Brazil, Colombia, Dominican Republic, Ecuador, Haiti, Panama, Philippines, Suriname, and Trinidad & Tobago. The views expressed here are his own and do not necessarily reflect those of the World Bank Group or any of the governments he represents.

Ten-Point Plan to Fix Mongolia

Mongolia set a foot on the road to stabilizing its economy by formally beginning talks with the International Monetary Fund last week. Here are a further 10 steps the new government and the IMF should take to put one the world’s most promising economies back on track.

1. Gold: Stop talking, start digging

While estimates have run wild on the trillion dollar-plus potential from Mongolia’s mineral wealth, even the most conservative numbers show huge scope. Now that Rio Tinto’s Oyu Tolgoi project is back on track, the mine projects a fivefold surge in gold output this year. Centerra Gold’s Gatsuurt mine, another with substantial proven resources, is slated to produce in the coming year. Smaller mines have increased total output by as much as 70% this year. This trend will underpin economic growth in the next couple of years – but it’s just the start. Production could surge if Mongolia issues further exploration licenses and removes impediments created by a difficult and rent-seeking bureaucracy.

2. Coal Train to China

Mongolia has around a tenth of the world’s coal reserves but the sector contributes little to the economy. That should soon change: coal prices have jumped more than 170% to over $200 per ton for the first time since 2012. An expected boost in production from the Tavan Tolgoi coal mine, near the Chinese border, should create a windfall in 2017. Even so, it won’t reach anything near its potential without an efficient means of transport. Plans for a railway across the Gobi Desert to link the mine to the nearest Chinese railhead at Baotou, agreed in 2014, have gone nowhere. Now, the rail project is back under discussion with China for construction from the spring of next year. With this in place, BMI Research estimates production could increase by over 9% a year until 2020.

3. Grow up

With winter temperatures plummeting to minus 40 degrees centigrade, farming is tough – though not impossible. In the Canadian prairies, Saskatchewan has a similar climate but exports are expected to exceed $20 billion in the coming years. Privatization and open sales of Mongolia’s agricultural land in the past five years have helped expand farming, particularly in areas close to the capital, Ulaanbaatar. Further gains rely on technology: modern irrigation to enhance grasslands; superior feed and cross breeding to boost cattle productivity. Such investment would pay dividends through food security and an improvement in the balance of payments with China.

4. Import Substitution

While local agriculture could dramatically reduce imports, it’s not the only low-hanging fruit. Mongolians use around 2 million tons of cement a year, 70% of it coming from China. At a price of $100 a ton, substituting this with local sales would cut imports by $140 million and contribute to the push for full employment through self-sufficiency in the construction and materials sectors, along with spinoff benefits from bolstering manufacturing capabilities.

5. Taxing times

The government is busy drawing up tax plans to replenish the public purse. Levies are set to increase on tobacco and alcohol. This is a good start. The key message here: stop drinking and start working. It will help increase employment and reduce expensive social programs. But the government also needs to substantially broaden its fiscal base. While generally keeping income taxes low will encourage corporate expansion, the burden should rise for those earning over 2.5 million tugrik, or $1,100. In a similar vein, high‐powered cars and other luxury goods should come in for excise duties. Savings on social spending should be ploughed into programs that encourage full employment.

6. Stick to the plan

Mongolia is part of the Open Government Partnership. Each year, signatories submit a National Action Plan to adhere to OGP principles. Mongolia’s plan for 2016‐2018 pledged to enhance budget transparency around mining, foreign direct investment and public procurement. All well and good, but Mongolia has some way to go. The OGP reported last year that the country had completed only 24% of its previous commitments, significantly below the global average of 51%. While cuts in high‐ranking officials’ salaries have been accepted by parliament, the focus must now be on smaller government, cutting back wasteful social programs and boosting employment.

7. The triple whammy

Mongolia could boost fiscal revenue, tackle corruption and lure back foreign investors in one fell swoop through privatization. State assets ripe for sale include the Mongolian Stock Exchange, State Bank, the Erdenet copper mine and MIAT airline. The government could even sell its 34% stake in Oyu Tolgoi. Case studies show a positive case: the sale of Khan Bank helped boost employment, training and income, yielding further contribution to the government’s coffers through taxes on profits. Corporate governance practices at Khan Bank have become the template for stifling corruption and bad banking methods.

8. Foreign Investment Promotion

A small country overshadowed by giant neighbors must make a noise to get noticed. While the Foreign Investment & Foreign Trade Agency has had its success cases, it’s mostly been ignored by governments as a potential engine of growth. It should be rejuvenated along the lines of Ireland’s model, with aggressive campaigns for investment, and placed firmly under the Ministry of Finance with access and support from the country’s embassies around the world. Political appointees should be replaced by fluent, persuasive, Western-educated Mongolians with experience in investment promotion, who are tasked with dramatically increasing and diversifying foreign fund flows. It should have a prominent role in ensuring that foreign investor rights are upheld within the government and the judicial system.

9. Long bonds

The Finance Ministry is projecting around a $2 billion-a-year funding gap until 2018. One obvious solution is to swap debt maturing in the next year or two for longer dated bonds. At the same time, the government should slash a legacy of unrealistic expenditure commitments created by the previous government and dramatically increase revenue-generating activities outlined above. Embracing the IMF should help Mongolia to achieve both while leaning on the lender to provide further credit guarantees that will support government bond issuance. Additional debt from China will help the government to term out debt until Rio Tinto’s Oyu Tolgoi project phase II is in full production, substantially increasing its revenue royalties on mineral production as well as income tax on expanded employment among other sources.

10. License to bank

While the history of foreign interference makes Mongolians protective against influence from overseas, appropriately granted licenses to foreign banks could help stimulate competition, reduce fees and challenge the oligopolistic and insular nature of the financial sector in a country in dire need of additional capital and competition. Although the banking system dates to Russian involvement in 1924, the first foreign entrant in modern times wasn’t until ING entered in 2008, and that was only a representative office. Standard Chartered followed in 2011 and the next year, along came Goldman Sachs buying a 4.8% stake in the third‐largest bank, the Trade and Development Bank of Mongolia. Bank of China entered in 2013 but to date it hasn’t been able to operate in the country.

Lee Cashell is the Founder & CEO of Asia Pacific Investment Partners and Mongolia Properties, the country’s biggest real estate firm