A political snafu with the world's second-largest economy is no light matter for any country but for troubled Mongolia, it could mean a potential sovereign default.
Ulaanbaatar, facing flat growth and a budget deficit of 20 percent of gross domestic product (GDP) in 2016, is in desperate need of foreign lending to meet debt repayment obligations next year and Beijing may be the only country willing to provide a soft loan, according to political risk consultancy Eurasia.
While President Xi Jinping's administration previously began talks on the matter, negotiations have now adjourned following the Dalai Lama's recent visit to Mongolia. That could leave the nation at high risk when a $580 million bond issued by the state-run Development Bank of Mongolia matures in March.
"The suspension of China talks will increase concerns in the market about a possible default by the spring," Emily Stromquist, senior analyst at Eurasia, said in a note on Tuesday.
Last month's visit of the Tibetan spiritual leader sparked the ire of Beijing and resulted in fresh Chinese tariffs on Mongolian commodity shipments and a temporary closure of a key border crossing. "Since the incident, China has resumed all regular engagements with Mongolia with the exception of negotiations on the soft loan," Stromquist stated.
Since its 1951 annexation, Tibet has been viewed by China as part of the mainland and Beijing believes the Dalai Lama is seeking to divide the Himalayan region. But Tenzin Gyatso, the present Dalai Lama, has repeatedly insisted that he is not pursuing Tibetan independence.
"Mongolia is holding out hope China will restart [loan] negotiations, but in the interim is looking for alternative financing that would resemble the kinds of terms, in particular low interest rates, that were on offer from China," Stromquist explained.
Mongolian Prime Minister Jargaltulga Erdenebat's administration has been reaching out to other countries for help but the outlook appears grim.
"Previous talks with Singapore broke down after Mongolia deemed their lending conditions to be too strict and the interest rates too high. Japan offered financial support, but only through institutions such as the Asian Development Bank or the International Monetary Fund (IMF), assuming Mongolia chooses to comply with the standard rules for engagement," Stromquist noted.
The United Arab Emirates, Russia, and India are among the other countries that Mongolia has contacted but they are likely to offer unfavorable lending terms because unlike China, they do not possess strong interests in aiding Mongolia, she continued.
Ulaanbaatar is in talks with the IMF to enroll in one of the institution's flagship Stand-By programs by February but that's primarily aimed at introducing more fiscal responsibility, not repaying debt.
"If talks [with China] do not restart shortly, or an alternative, acceptable financing arrangement can quickly be secured with another country, Mongolia is looking at a greater default risk," Stromquist said.