Country Profile: In Genghis’ Mongolian foot steppes

CHANCES are that – if you were a Mongolian citizen sitting down earlier this month to a calming glass of airag after a long day at the copper mine – your evening’s relaxation may have been disturbed by a text message from the prime minister. Assailed by economic woes Chimediin Saikhanbileg sent a message to the population’s mobile phones posing a stark question: did they want austerity or prosperity?

Bloomberg reports, not too surprisingly, that most people replied that they wanted prosperity. But there was a catch from Saikhanbileg. If the people of Mongolia – a country that harbours delicate sensitivities about the involvement of outsiders – wanted the good times back, then they would have to come to terms with foreign involvement and lots of direct foreign investment.

Saikhanbileg laid out the choices not just for his people, but to send a clear message of intent to overseas exporters and nervous multinationals that Mongolia is open for business and sees its future trading with the outside world.

Munkhdul Badral, an economist who runs market intelligence provider CoverMongolia in the capital Ulan Bator, tells Financial Director: “It’s going to be another tough couple of years economically. The macro numbers are not looking good. Foreign direct investment (FDI) has been falling since 2011 and Mongolia is very import-orientated – FDI was plugging a hole. My personal feeling, after two economic crises, is that Mongolia needs to go through a crisis to put itself on the right track.”

Sustainable growth

Mongolia’s current malaise comes after a period of significant growth driven by the expansion of mining for coal, copper and gold, itself carried on a wave of inward investment. The World Bank says the economy peaked in 2011 with annual GDP growth of 18% (a huge lift on the previous year’s 6%). Since then, it has been falling. Growth in 2014 is estimated to be 6.3%, and then remaining broadly at the same level through to 2017.

Perhaps more alarming, though, is what has happened to FDI. In 2013 (the latest reliable figures), investment stood at 47% of 2011 figures. If you take 2008 as a starting point, FDI is only 25% of what it was. In December last year, the World Bank concluded in a report: “Economic policy needs to focus on addressing growing external vulnerabilities with tighter macro-economic policies and reviving foreign investment into the economy.”

As Munkhdul Badral points out, Mongolia’s balance of trade has also rarely been in positive territory, while collapsing inward investment means a depreciating currency, making it harder for the economy to afford overseas goods and services. Which in turn puts stress on foreign currency reserves.

And that is a pity because Mongolia was once touted as the coming economy, benefiting not only from trade with the West, but also from its vastly more important proximity to neighbours like China and Russia, both of which had insatiable demand for the country’s minerals and accounted for most of the country’s exports. Even the Economist Intelligence Unit was wowed, placing Mongolia in second place in November 2013 among countries whose markets were expected to continue booming. Presciently, the Washington Post said at the time: “The country is working really hard to figure out how to make its growth sustainable.”

UK Trade and Investment, however, bubbles with optimism for Mongolia, saying on its website that it will be the fastest-growing economy in the world over the next two decades. Even the then-foreign secretary William Hague was convinced. In 2013, he included Mongolia on a tour of Asia aimed at generating trade with the UK.

UKTI notes that there are opportunities for exports to service the mining industry but, as the country manages a rapidly growing urban population, construction also emerged as a huge trade prospect along with high-end consumer goods. Indeed, Sukhbaatar Square, where Ulan Bator’s monument to Lenin once stood, is now home to a Louis Vuitton store just a stone’s throw from a Burberry outlet.
But as foreign investment waned, the two sectors to be hit the hardest were construction and consumer spending. Agriculture and transport remain positive, but from 2013-14 construction contracted 11% while wholesale and retail goods have seen two successive years of negative growth: -6.5% and then a painful -6.8%. By February, this year the economy was so strained the country was said to be considering help from the IMF.

Strategic entities

Outside observers explain the country’s current travails by pointing to two events in 2012. First was new legislation reflecting the country’s anxiety over foreign interference, and the second was a dispute that saw three foreign mining executives blocked from leaving the country for almost three years.

The legislative change was the now notorious SEFIL (Strategic Entities Foreign Investment Law) measure aimed at blocking foreign state-owned enterprises from gaining control of key assets.

The law came in reaction to efforts by China’s national aluminium group, CHALCO, to gain control of South Gobi Sands, a major coal miner in Mongolia. Unfortunately, the law was poorly drafted and multinationals soon realised that it affected not just Chinese government companies but all investors. Law firm Linklaters says in a report: “Subsequent to SEFIL’s introduction investor confidence and foreign investment in Mongolia plummeted.”

Jon Springer, a writer on central Asian economic affairs, tells FD that he attended an investor conference not long after SEFIL’s introduction. “It was a horse and pony show with no one to sell to,” he says.

SEFIL was not the only legislation to give foreign companies the jitters. A so-called Draft Minerals Law, also published in 2012, caused an outcry after it appeared to threaten mine operators’ “tenure” and floated new rules for local procurement and royalty payments. The law was withdrawn and the SEFIL arrangements reformed at the end of 2013. But the damage had been done.

Close on the heels of SEFIL came the ‘South Gobi three’, a US citizen and two Filipino employees who were detained and charged with tax evasion. The three were blocked from leaving for their home nations and were finally convicted in January this year, only for the trio to be pardoned a month later in an apparent U-turn by the government.

According to Springer, the Mongolian government has “created a climate, not only of uncertainty, but of bitter distrust for foreigners”.

If all of this wasn’t destructive enough, the government began a long-running dispute over terms with Rio Tinto, operators of Mongolia’s giant copper mine, Oyu Tolgoi, a project accounting for roughly 30% of the state’s GDP. The disagreement, over an allegation that taxes amounting to $130m (£87m) were unpaid, was reportedly resolved in April, but the endless bickering was enough to delay a $5bn second-phase expansion of the mine, an investment desperately needed for a beleaguered economy.

Further snags came over Tavan Tolgoi, the country’s largest coking coal mine. With $4bn needed to exploit what is estimated to be more than 1.8 billion tonnes of coal, discussions pulling together a venture involving China’s Shenhua Energy, Japan’s Sumitomo Corporation and the local Mongolian Mining Corporation dragged on interminably. This cast further doubts over Mongolia’s attitude toward foreign investment.

Great Khural

However, the Mongolia political landscape moves as quickly as a desert dust storm. December of last year saw a grand coalition come together in the country’s parliament, the State Great Khural, to topple then-prime minister Norovyn Altankhuyag, of the People’s Revolutionary Party – replacing him with Saikhanbileg, of the Democratic Party. Change in leadership was marked by a change in approach. The new arrangement was described as a “dream team” by Alexander Molyneaux, the former head of South Gobi. “I think you could really fix Mongolia in 2015,” he told the Financial Times.

But for some, the future depends on the “grand standing” promises that could be made by Mongolia’s politicians as they campaign for next June’s election. Before the 2012 poll, the government privatised a mining company which turned into a cash hand-out for voters. “The uncertainty is what politicians will do and promise in the election campaign,” says Jon Springer.

According to Munkhdul Badral, the economic metrics seem grim at present, but there are reasons to be optimistic, though he adds that effects of the economy’s hard landing are only just beginning, with companies making large cuts to head counts.

“I feel we are either at the bottom, or at the start of the bottom, and it will depend on whether we can attract foreign capital in the shortest term possible. The macro numbers are all down to foreign investment,” he says.

“At the moment, it is difficult. But having said that, it wouldn’t be unwise to begin studying the market, because if we manage to get all these major projects going, things should start getting noticeably better. Perhaps not for ordinary people, but for business activity. Things change direction very quickly.” ?

Mongolia – key facts:

Population: 2.8 million. Some 40% of Mongolians live in the capital Ulan Bator. The land-locked nation – six times the size of the UK – is the most sparsely populated independent country in the world.
World Bank ‘Ease of Doing Business’ index ranking: 76
Key UK exports: UK exports to Mongolia hit £20.7m in 2013, up from £11m in 2012. The biggest-value UK exports are mining machinery followed by vehicles and their mechanical spare parts. UK education, consultancy and financial services are also significant.
Economic overview: Mongolia’s growth is driven by its mining boom. Mongolia is estimated to hold more than $1trn in mineral deposits, yet only a quarter of its land mass has been geologically surveyed. Major exports include copper, gold, molybdenum, coal and fluorspar concentrates. Abutting resource-hungry China provides a convenient market for Mongolia’s vast mineral wealth. However, its crumbling infrastructure is a major concern, but it does provide ripe opportunities for UK companies in mining exploration, extraction and production, the supply of mining equipment and technologies, engineering consultancy services and training services.
Mongolia’s economy is highly dependent on China. More than 90% of Mongolia’s imports and exports are traded directly with China, so what affects China also has an impact on Mongolia.
Source: UK Trade & Investment