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Key messages

• Mongolia relies heavily on state-owned enterprises (SOEs) to manage several key mining assets. Baganuur, Shivee Ovoo, Erdenet, Mongolrostsvetmet and Erdenes Tavan Tolgoi are the most important majority state-owned companies operating large-scale mines.
• From 2019 to 2021, debt held by mining SOEs increased 4.3 times. The total liabilities of these companies reached USD 2.3 billion, representing 15 percent of GDP. The new debt was largely issued to cover social spending and an economically questionable railway project. It is unclear how the government intends to service this debt, particularly since profitability at most mining SOEs has been weak and most face liquidity challenges.
• Mining SOEs’ poor financial health is due to the combination of quasi-fiscal activity financing, poor project selection and management, and inadequate legislation and control mechanisms for new debt issuance.
• Legal reforms to new debt issuance and stronger Ministry of Finance oversight of SOEs are needed, in addition to stricter implementation of existing legal requirements such as collecting and disclosing complete data on SOE debt. Mongolia’s government should also review mining SOE quasi-fiscal expenditures, such as price controls on coal, and other reasons for low profitability of mines.

Mongolia’s 10 most important upstream mining state-owned enterprises (SOEs) reported total liabilities of 6.45 trillion Mongolian tugrug (MNT) (around USD 2.3 billion) at the end of 2021, of which 26 percent could be classified as “debt.” The liabilities of these 10 companies alone represented 15 percent of GDP, while liabilities officially declared as “debt” represented four percent of GDP. In comparison, around the world, SOE debt from all sectors is equivalent to roughly seven percent of GDP on average. While SOE debt can be a useful source of financing for economic development projects, Mongolia’s mining SOE debt issuances represent a significant risk to economic stability and fiscal sustainability.

Mining SOE debt is 4.3 times larger than in 2019, while liabilities are 4.8 times greater. The biggest increases came from bond issuances from Erdenes Tavan Tolgoi to pay for the Gashuun Sukhait railway project, and Erdenes Mongol to pay for the government’s policy to cover pension-backed loans and other subsidies to the elderly. In other words, the government has collateralized future revenues of mining SOEs to pay for projects that may not actually contribute to SOEs’ improved performance.

In addition, mining SOE profitability is well below international standards and is highly dependent on volatile coal and copper prices. Three out of Mongolia’s five state-owned operating mines make little or no profit. Borrowing to finance long-term state-owned projects of unclear feasibility risks throwing good money after bad.Given these high costs and the global energy transition, it is unclear whether mining SOEs will be able to pay back their debt. More likely, the government will need to cover mining SOEs’ losses in the future using taxpayers’ money, shifting state resources away from programs that would benefit the majority, such as investments in education, healthcare and modernizing infrastructure.