Resource-rich Mongolia an outpost of the wild, wild east

Mongolia’s fairytale economic boom is developing cracks. The failure of the country’s fifth-largest bank and delays to the development of its giant copper mine underscores fears that its growth potential is built on shaky foundations. Yet greater economic realism may ultimately be welcome.

The surprise insolvency of Savings Bank, which controlled about 8 per cent of Mongolia’s banking assets, has rattled the country’s economic cheerleaders. The central bank closed down the lender and transferred its deposits to a state-owned rival after it ran up bad loans worth $109-million (U.S.) – more than twice its capital, according to Fitch Ratings. Some of these loans appear to have been made to Just Group, controlling corporate shareholder in Savings Bank, despite regulations designed to limit such exposures.

Optimism about Mongolia’s resources and its proximity to China helped the country raise $1.5-billion from the bond markets last year – its first such issue. Since then falling commodity prices, China’s slowdown and the emerging market selloff have undermined the bullishness. Five-year bonds now trade at 93 per cent of face value. Yet if the correction prompts Mongolia to take a more prudent long-term view of its undoubted commodity wealth, the recent reality check may ultimately prove healthy.

Full article: Resource-rich Mongolia an outpost of the wild, wild east (The Globe & Mail)

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