2025.07.25
This study explores different types of debt currency denominations, examines the current state of the domestic FX market, foreign exchange risk and hedging instruments, identifies benchmark interest rates for the Metro project and evaluates Mongolia’s current risk premium.
Two. Debt Currency Denomination Issues
Farebox and other revenues in the Metro Project is going to be denominated in local currency but debt will be sourced from foreign financial institutions. It implies that the project faces certain FX rate risk. Given the Metro project’s large scale and long term duration of life, FX rate risk would be top of the main risk components for the project.
B. Local Currency Rate Against Foreign Exchange in Mongolia
In the broader context, over the past decade, Mongolia’s National currency (MNT) depreciated by more than 80%, averaging 7% annually. Without significant economic shocks, MNT was projected to remain stable, with an average annual depreciation rate of 3% between 2017 and 2021, potentially even remaining fixed in 2023-2025.
However, external shocks such as sharp declines in commodity prices, the COVID-19 pandemic, and global strategic shifts, coupled with internal challenges like budget deficits and stagflation, led to economic stagnation in Mongolia. This stagnation had a detrimental impact on Mongolia’s foreign exchange (FX) rates.
These uncertainties are likely to persist in the future, posing challenges for investors.
C. Managed-floating exchange regime in Mongolia
According to the Provision 22.2 of the Law on Central Banking dated 3rd September 1996, the Bank of Mongolia shall follow the principals that include the foreign exchange risk is realistic and freely floating as well as maintaining stability of the local currency togrog and sustainable development of the national economy when implementing foreign exchange rate policy.
The Bank of Mongolia is not going to go against the trend in FX rate. Per Provision 10.2 of Law on the Currency Regulation dated 12th May 1994, the Bank of Mongolia shall sell the foreign currency from foreign exchange reserve in its ownership in order to ensure the stability of the local currency.
This implicitly implies that the central bank is likely to intervene only in situation where there is a short term fluctuation in the FX market and to smooth the short term shock or large movements in FX rate through local banks. But intervention scope will be dependent on the foreign exchange reserve of the Bank of Mongolia which is equivalent to 5.2 billion USD as of June 2025. FX Reserve reached the record high of 5.5 billion in December 2024.
One notable aspect to consider is Mongolia’s relatively stable FX rate policy. This has been the case since the transition into a market-oriented economy in the 1990s. Given Mongolia’s monetary policy independence and open capital account, it is highly probable that the exchange rate policy will remain consistent in the future.
D. Capital Control
Mongolia does not implement capital control unlike China or Russia. However according to Article 4 of the Law On Conducting Settlements In National Currency (enacted 9 July 2009), the price of goods, work, and services shall be expressed and settlement shall be conducted only in togrog within the territory of Mongolia. It is prohibited to set prices, carry out settlements, and run advertisements in foreign currencies or settlement units without official BOM approval, except for bank and NBFI loans, deposits, and related services. Therefore, all the revenue must be priced in local currency.
E. Domestic FX Market in Mongolia
The primary currencies traded in Mongolia are the US dollar, the euro, the Chinese yuan, and the Japanese yen. The Foreign Exchange (FX) Auction conducted by the Bank of Mongolia primarily utilizes the US dollar, with a smaller volume of transactions in the Chinese yuan. Although official data on the domestic FX market is not readily available, in my experience, the US dollar accounts for approximately 80-90% of the FX market within the banking sector. The remaining 10-15% is comprised of the Chinese yuan, followed by the euro, the Japanese yen, and other minor currencies. In terms of liquidity, the US dollar and the euro are the most liquid forms of currency in Mongolia.
F. Currency Hedging
Theoritically or in developed markets, hedging instruments like currency exchange swap, forward contractand other tools assist in reducing FX rate risk by fixing the future FX rates now with a bearable cost. In Mongolia, the commercial banks are allowed to enter into a derivative contract which is not common in Mongolia because of the high cost due to the high local interest rate[1] in Mongolia.
Due to the project nature, natural hedging was implemented in energy sector projects in Mongolia. A power purchasing agreement was executed in USD denomination between the government and the project company in accordance with the Law on Renewable Energy. These government actions undoubtedly enhanced foreign investments into the Renewable Energy Sector in Mongolia by bolstering investor confidence.
Another notable past example was the case where the Bank of Mongolia entered into contracts of long-term swaps with local commercial banks for long-term funds raised in the international market. While the Bank of Mongolia may enter into such an agreement in the present day, affordability may be a concern due to the associated costs (SOFR + Country Risk Premium).
Considering the substantial scale and the exceptionally long duration of the Metro project, hedging is likely to be unavailable and unaffordable in Mongolia, which presents a potential downside factor for project financing.
G. Interest rate
1. LIBOR (London Interbank Offered Rate)
Libor rate was the key benchmark interest rate for the project finane. It was announced as London Interbank Offered rate for the short term loans denominated in USD, EUR, BRP, and JPY.
In Mongolia’s cases, LIBOR is used for the Oyutolgoi Copper Mine Project. Mongolia's 34% stake in the project is financed by a loan from Rio Tinto, with interest calculated at LIBOR plus 6.5%.
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2. SOFR (Secured Overnight Financing Rate)
Due to the speculation on the interbank benchmark interest rate validation, LIBOR is completely phased out. Currently, Secured Overnight Financing Rate (SOFR) is widely used between the global banks in the world.SOFR is announced by US Federal Reserve and is an interest rate calculated based on the real overnight transcations amounted of daily average 2.7 trillion US dollar backed by US Treasury Bills[2] between the global banks. The current rate is 4.28 as of 23 July 2025.
3. EURIBOR (Euro Interbank Offered Rate)
EURIBOR is a reference rate daily published by the European Money Markets Institute. Euro is the second most traded currency in the world around 30 percent of the total trading volume. EURIBOR is 2.4 percentage points lower than SOFR.
Table 1. EURIBOR as of 7/23/2025
1.887 % | |
1.912 % | |
1.939 % | |
2.034 % | |
2.038 % |
4. Fundamental Rates which affect SOFR and EURIBOR as well as other interest rates
· European Central Bank 2.15 % Benchmark EUR interest rate
Main refinancing operations
· United States Fed Funds Rate 4.31 % Benchmark USD interest rate
H. Mongolia’s risk premium (roughtly 3%)
Figure 4. External loan currency denomination |
As per the statistics provided by the Ministry of Finance, the weighted average cost of foreign debt securities stands at 6.2% as of the first quarter of 2025. Similarly, the weighted average cost of external loans is 2.1%. The average maturity of foreign debt securities is 4.0 years, while that of external loans is 9 years. Outstanding external debt amounts to 31.4 trillion MNT, which equals to 8.7 billion USD as of the first quarter of 2025. The variable interest rate as a percentage of total debt is 27.9%, while the fixed interest rate is 70.8%. Notably, 54.5% of external loans are denominated in USD, while 13.9% are denominated in JPY, and 6.3% aredenominated in EUR.
Mongolia’s risk premium is influenced by macroeconomic stability, political and legal risks, external vulnerabilities, financial sector health, environmental and social factors, global market conditions, and relations with institutions like the IMF, in addition to its credit rating and internal/external dynamics.
Table 2. Debt maturity and yield
I. Fixed or Floating Interest Rate
From a lender’s perspective, the SOFR floating rate agreement is advantageous. However, from the Municipality of Ulaanbaatar’s standpoint, a fixed exchange rate is preferable due to its ability to stabilize debt service payments and ensure timely obligations.
Interest rate risk is possible movement in the interest rate specified in the financing agreement. Fixed interest rates do not carry interest rate risk for the borrower, as payments remain constant.
Three. Conclusion
The Ulaanbaatar Metro Project faces significant foreign exchange (FX) rate risk due to revenues being in MNT while financing is in foreign currencies. Mongolia’s history of currency depreciation, reliance on a managed-floating FX regime, and limited availability of affordable hedging instruments heighten this risk. Although Mongolia has no formal capital controls, all domestic transactions must be conducted in MNT, reinforcing exposure to currency mismatch. The domestic FX market is dominated by USD, and liquidity in other currencies is limited.
From a financing standpoint, interest rate risk is a concern primarily for floating-rate loans (e.g., SOFR-based), which may benefit lenders but create uncertainty for borrowers. A fixed interest rate is preferred by the Municipality to stabilize debt service payments. With LIBOR phased out, SOFR and EURIBOR are the key benchmarks, influenced by the Fed Funds Rate and ECB rates. Mongolia’s risk premium, estimated at ~3%, is driven by macroeconomic, political, and external conditions.
Overall, while multiple freely convertible currencies are acceptable for project finance, careful attention must be paid to benchmark rates and currency fluctuations, which will significantly affect the project's cost and repayment capacity.
Four. Summary
· FX risk is high due to MNT-denominated revenues and foreign currency debt.
· MNT has depreciated over 80% in the past decade; long-term volatility remains a concern.
· Hedging options are limited and expensive in Mongolia, making risk mitigation difficult.
· SOFR is now the global benchmark rate (4.28%), replacing LIBOR; EURIBOR is lower (~2.0%).
· Fixed interest rates are preferred by the Municipality to stabilize debt service costs.
· Mongolia’s risk premium is ~3%, reflecting macroeconomic and political risks.
· Most of Mongolia’s external debt is USD-denominated and fixed-rate.
Research Conducted by
Chuluunbaatar Shinebaatar (Professional in Contracts)
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