Debt-indulging Money Market

Just until recently, when the new century began, Mongolia was unable to acquire any loans from international capital markets. It was a time when we did not hold any currency in our hands, but had natural wealth buried underground. Foreign countries used to send us food and provided funds to fix our plants and buy coal so that the capital would not freeze during the winter. Even the budget deficit was made up with foreign aid.

However, we have been extracting the natural wealth that lies underground, using foreign capital and other resources, and selling it to China, our neighbor to the south. As a result, our economy has grown exponentially, while GDP per capita today is ten times higher than it was 1990.

As the public budget got bigger, the same thing happened to its deficit. These days the budget deficit is well over ten percent of GDP. Although a law was passed two years ago to keep this deficit at two percent of GDP, the cap was changed to six percent last year. The expansion of the economy allowed the government to raise foreign loans by issuing bonds. Any long term government securities are always low-risk investments that yield regularly. Having low risk means smaller interest rates. The interest rates of bonds issued by local companies, both big and small, are always higher than those of government securities.

Besides being guaranteed, government securities are exempt from taxes and have a great fluidity, making securities available to be easily sold at any time. For this reason, government securities are heavily weighted in the market portfolio.

LEVEL OF RISK OUR GOVERNMENT BEARS

The interest rates of our government securities are too high. Six month securities have an annual interest rate of 16.4 percent, which is bigger than the 13 percent policy rate of our central bank. It is interesting that government securities have interest rates which are also higher than the savings account rates of smaller banks (State Bank 14.2 percent, Capital Bank 14 percent).

Does our government bear such high risk? The main reason is that the budget deficit continues to grow while the government's spending is still higher than its revenue. As of the first quarter of 2015, the budget revenue was 1,228.5 billion MNT, which was 88.4 billion MNT short of its target. It appears that the gap will increase to 488.3 billion MNT by the end of the year.

Transactions related to Mongolia's public budget and debt paymets are made through the State Fund at Mongol...