In November 2016, Mongolia reeled as Fitch issued a further downgrade to B-. Anaemic growth, economic mismanagement and impending repayments, loomed large. Prior to the package led by the International Monetary Fund (IMF), Mongolian politicians looked on in vain hope of a solution. But sometimes fortune favours the brave. Battered by a winter of discontent, partners trusted in Mongolia, and now the markets seem minded to agree.

After a year which saw the explosive re-emergence of coal, copper prices stabilizing, industrial output increase 40%, and the local stock market hit record highs, the government has again returned to the international capital markets. Initially marketing US$650m, strong demand sent the total sum to US$800m. According to Finance Asia, orders amounted to an incredible US$5.5bn. In a climate of low yields globally, savvy bond investors are betting on Mongolia where the likelihood of default is remote.   

Guidance on the Caa1/B-/B- issuer was put at 6.125%, however, by close it was fixed at par to a yield of 5.625%. This rate compares favourably with recent performance. In March, the government raised US$600m on its seven year ‘Khuraldai’ bond at 8.75%. The change since March 2016 is still more astounding. Then, Mongolia debt traded at 10.875%, reflecting its perceived ‘junk’ status. Today, investors would fall over themselves to buy at that level.

The contrast in just over eighteen months, reflects broader emerging market trends. Investors are beginning to re-appraise risk, and scrutinise the real likelihood of delinquency. In September, Tajikistan, raised US$500m from its inaugural offering at a fixed rate of 7.25%. Meanwhile, in August, the Iraqi government raised US$1bn for five year money at a rate of 6.75% - an issuance six times oversubscribed. Mongolia is cashing in on this improved liquidity to enable it to create robust foundations for the future.  

On the one hand, this latest tranche of debt, should be seen as a vote of confidence in the IMF-backed Mongolian recovery. But there is a more fundamental point: Mongolia is refinancing unsustainable debt, and doing so on favourable terms. With the government announcing plans to buy back US$500m of yuan and dollar denominated bonds due in 2018, it will stave off maturities until 2022, giving it ample time to reform and grow.  

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