Mongolia: The Next Investment Destination?
Amidst the ups and downs of the business cycle, one constant parameter remains: investors are looking for the next sector of high growth and safe returns. In the 1980s the Asian Tigers appeared and roared until the crash of 1997.
They are now thankfully enjoying a comeback. Recently the large and ever growing BRICs (Brazil, Russia, India and China) have been all the rage. One financial advice book in Japan went so far as to come out with the concept of the VBRICs, attempting to piggyback the smaller Vietnamese economy onto this trend. Still, the question remains: “What’s next?”
MONGOLIA’S recent minerals and construction boom has led many investors to examine a previously overlooked destination for capital. While considered by some observers to be off the investment track, this thinking is considered due to an information lag. With a bit of background briefing and an update on the current situation, most would find their interest aroused.
After nearly seventy years of Soviet domination, Mongolia became fully independent in 1990. The transition from command economy to market economy met with the usual difficulties and the economy showed negative growth for the next four years. Unfortunately the remainder of the decade was a period of consolidation with economic growth around 3.0% for the late 1990s. Things have taken off since then. At 13.3% for 2004 and 9.0% for the most recent year of 2007, the growth rate has rivalled that of China. (source: ADB)
Why the steady high growth?
Mongolia is the 18th largest country in the world, a bit smaller in size than Iran, a bit larger than Alaska. Besides a strong (yet undeveloped) agricultural sector, Mongolia happens to be sitting on some of the largest deposits of mineral resources in the world. Just as these materials were finally being extracted in significant quantities, the world-wide boom in commodity prices gave Mongolia a much appreciated double economic boost.
Foreign investment climbed along with this growth. But there is no need for the investors to limit their sights to mineral extraction and infrastructure. The construction industry has heretofore been unable to meet the needs of a rising middle-class, not to mention the expatriate and tourist market.
Economy growing, but how is the investment climate?
There are plenty of countries around the world with growing economies and extensive mineral resources. But they may not be the ideal place to get involved waist-deep in an extensive long-term project. Fortunately Mongolia compares very well in this regard. A recent World Bank report called “Doing Business 2008”, comparing regulations in 178 countries, sets out to rank countries by the ease of doing business. On four key indicators Mongolia scored well. For Registering Property the country was rated better than Japan, Taiwan and Korea. Protecting Investors showed the country ranked in the top twenty nations of the world, much higher than Taiwan and Korea, and not far behind Japan. While in the category of Regulations on Tax Payment Mongolia received a relatively low score, which still ranked ahead of Taiwan, Japan and Korea. Enforcement of Contracts saw Mongolia placed behind Korea and Japan (ahead of Taiwan) but still at a very respectable 27th rank out of 178 economies. (source:World Bank)
Unlike many members of ASEAN, Mongolia practices few capital controls. No restrictions exist on payments and transfers. Foreign exchange accounts may be opened by both residents and non-residents.
While the uninformed may have an image of a distant isolated country far from the norms of the world, the truth is that Mongolia has quickly become a full member of the international community.
It has joined over 40 international organizations such as FAO, IAEA, ICAO, ILO, OSCE (partner), UNESCO, WHO and WTO. Mongolia has demonstrated its strong commitment to the international community with the dispatch of peacekeeping troops to Sierra Leone, Afghanistan, Kosovo and other countries.
The leaders of major economies have taken the time to pay a visit to this nation of less than three million people, including Japanese Prime Minister Koizumi, Russian Prime Minister Putin and President Bush of the United States.
Mongolia keeps a low profile and very seldom pops up in international news stories. The most likely explanation for this is that as an island of stability in a troubled world, very little newsworthy events occur. The fact that Mongolia is off the radar of most people should be taken as a very positive sign!
Is it all good news in Mongolia? Certainly not. Every country has special characteristics that the investor must consider while looking for the right fit. While the Mongolian economy may yet be too small for some larger institutional investors, it represents a high-growth portfolio diversification opportunity. Indeed the question is not whether to invest in Mongolia, but rather, how, which, who, where and when. It is just a matter of time.
Infrastructure, Construction and Mongolia
The Soviet era from 1924 to 1990 saw Mongolia’s infrastructure relatively well maintained, with rural electrification and a national road network. During the 1990s infrastructure was relatively ignored and currently much is in poor condition. This factor combined with rapid population and economic growth means a severe shortfall. As revenue from commodities continues to rise, Mongolia continues to implement more infrastructure projects. This is a virtuous circle as the further extraction of mineral resources often requires more of three things: roads, water and electricity. As typical in many countries, infrastructure spending will bring more wealth production, leading to yet more infrastructure being required and built. Estimates regarding infrastructure spending to the year 2020 range from US$4.7 to US$8.0 billion dollars. If the past is anything to go by, these will likely turn out to be conservative estimates.
In early 2008 Mongolia reached agreement for a US$37.6 million loan for the commencement of construction of a north-south highway to be located in the western part of the country. The total budget of this project linking Russia and China is expected to be around US$200 million. It is reported that the Chinese government will provide US$45 million, with the Asian Development Bank (ADB) kicking in US$70 million, and US$85 million left for the Mongolian government to look after. This highway will be part of the Silk Road project in Central Asia linking eight countries with a total budget of US$18 billion.
Amongst the government’s extensive shopping list for 2008 were twelve highway projects up for bid. Some were transport infrastructure in the capital city while others ranged across the country with a length of up to 774 kilometers. Further offerings in many fields are due in 2009.
It is evident that the government keenly realises the role that the private sector has to play in the development of infrastructure. PPP (Private Public Partnership) projects have so far gained little traction but are now being regarded as a vital part of the country’s development future. At the bi-annual meeting between the government and international partners on 28-29 January 2008 in Ulaan Baator, the capital of Mongolia, the draft of the Private Sector Development Strategy was discussed. A sustained effort to identify and implement PPPs in cooperation with the government was agreed upon by external partners and the private sector.
Meanwhile the construction boom continues in Ulaan Baator. The most striking symbol is the 42,000 square meter Blue Sky Tower, built by M&G, a Mongolian-Korean company, scheduled for completion by October 2008. At 26 stories, the 110 meter high structure will be multi-use on the first three floors, with the 4-10 stories office space and the next 10 for hotel use. The upper floors are for residential and restaurants.
Just around the corner from the Blue Sky Tower the same company is constructing the Monnis Tower, an office block of 14,500 square meters on behalf of the Monnis Group. Some observers feel that these and other projects will result in a temporary over-supply of office space. Construction cranes continue to dot the landscape of the capital city, but most are part of the apartment complexes’ construction rush.
While Mongolia does face the challenge of inflation and the risk of an overheated economy, the business mood is buoyant. In spite of the economic shocks experienced world-wide in the first half of the year 2008, it is expected that Mongolia’s unique combination of extensive mineral resources and free markets operating under a stable democratic government assure a continuation of growth and a stable business environment.