UPDATE 1-IMF delays Mongolia bailout due to banking requirements for foreign firms
* IMF bailout delayed by clause aimed at boosting forex reserves
* Ruling Mongolian People's Party to support ditching clause
* Final deal likely to take two-three weeks - analyst (Adds detail, background)
ULAANBAATAR, May 2 The International Monetary Fund (IMF) has postponed a $5.5 billion bailout for Mongolia because of a measure included in the country's 2017 budget that forces foreign firms to bank with domestic institutions, the IMF's country representative said.
Mongolia's economy has slid into a crisis caused by heavy foreign debt, a collapse in its currency and a slowdown in growth in its biggest trading partner, China. The IMF board had been expected to approve a rescue package at a meeting on April 28.
"The Board discussion was postponed," said Neil Saker, the IMF's Mongolia country representative, in emailed comments, adding that they needed to examine the details of a new measure covering foreign exchange transactions by investors.
The IMF announced in February a $440 million Extended Fund Facility that Mongolia can draw on for three years, in addition to $3 billion from Japan and South Korea and a three-year extension to a 15 billion yuan ($2.18 billion) swap agreement with the People's Bank of China.
In the 2017 budget approved in the early hours of the morning on April 14, legislators introduced tax changes that would allow it to meet conditions set by the IMF.
But it also included a clause seeking to "improve" investment agreements with foreign partners, forcing firms such as miner Oyu Tolgoi LLC, jointly owned by Mongolia and Rio Tinto , to do all their banking with Mongolian institutions in a bid to bolster foreign currency reserves.
"We need a bit more time to understand the nature and the specifics of the measure, and whether the macroeconomic framework of the program remains valid," said Saker.
Mongolia's Ministry of Finance and Ministry of Foreign Affairs did not immediately respond for comment.
According to a report in local news portal News.mn on Tuesday, the ruling Mongolian People's Party (MPP) will support the removal of the controversial clause. A spokesman for the party declined to comment, but any move would require the consent of parliament.
"The parliament must now approve the agreement without that clause and have the programme discussed again by the IMF executive board," said Dale Choi, analyst with the Altan Bumba Financial Group based in Ulaanbaatar. "It could take another two to three weeks."
The MPP has been anxious to show it is ready to reach deals with foreign firms following a catastrophic collapse of inward investment, caused in part by disputes with overseas partners like Rio Tinto.
The previous government became embroiled in a dispute with Rio Tinto over rising development costs and allegations of unpaid tax at Oyu Tolgoi, delaying the expansion of one of the world's biggest copper mines for two years.
Mongolian bonds have not so far been affected by the delay, traders said. Bonds due 2024 were trading steadily at 111/111.75 cents on the dollar. This $600 million bond was issued at 101.243 in March in an exchange offer.
($1 = 6.8937 yuan) (Reporting by Terrence Edwards; Additional reporting by Umesh Desai in HONG KONG; Editing by Simon Cameron-Moore and Sam Holmes)