A surge in government spending and falling revenue pushed Mongolia's budget into a MNT1.97tn (€774.6mn) deficit in the first seven months of 2016, state-run Montsame news agency reported on August 22. The deficit is well above its year-ago level of just MNT637.9bn.

While Mongolia’s government relies heavily on external borrowing for domestic financing needs, it comes at the cost of high interest payments and exchange rate risk exposure, the World Bank said in a recent report.

Budget expenditure jumped 32.6% y/y to MNT5.01tn in January-July, while revenues fell by 3.3% y/y to MNT3.04tn.

Earlier this month, the newly-elected government roiled markets announcing the country is in a state of deep “economic crisis” and moved quickly to announce a number of austerity measures seeking to support the slowing economy and fight the soaring budget deficit. Yet, upcoming debt repayments will continue to put pressure on the government which might need to borrow more to pay back the debt.

The government debt burden is expected to reach 78% of GDP in 2016, above the target of 55%. The projected budget deficit is seen at $2.6bn, or 21% of the GDP. 

Mongolia sold $1.5bn in sovereign debt in 2012, know as Chinggis Bonds, mainly to finance road projects. The government is due to repay $500mn in 2018 and the remaining in 2022. The Development Bank of Mongolia faces a $580mn repayment in 2017. 

The country’s central bank raised its policy interest rate by 450 basis points (bps) to 15% on August 18 in order to stem the fall in the country’s national currency. The currency depreciated by over 8% against the greenback since the start of August and is now worth half of what it was in the fall of 2008.