Monday, February 24, 2014
The Global Economy in 2014
5 Key Trends
Every year Global Perspectives publishes its annual white paper covering the 5 keys trends we see impacting the global economy in the year ahead.
This year we will look the major global economies and examine the major trends that will influence them over the next twelve months.
1. US becomes the engine of the world economy
In 2014 the US will continue to lead the world in its recovery from the economic crisis of 2008.
The pace of US economic growth is strengthening and this will be reflected in the end of QE as the Federal Reserve turns off the printing press in response to this solid economy recovery.
The US is the only major Western economy that has cleaned up the toxic legacy of 2008 - unlike in Europe where zombie banks still shuffle on and meaningful reforms are mostly non-existent. In America bad debts have been written down, banks have been recapitalised, property markets have re-balanced and companies themselves are now far leaner.
The "Shale Gale" of cheap, nearly limitless energy is substantially re-shaping many parts of the US economy in a way we are still struggling to understand. It will also fundamentally alter the geo-political structure of the world, as the US moves permanently away from its addiction to Middle Eastern energy.
Gas in America is currently one quarter the price in Japan. Next year more US companies will move advanced manufacturing factories back on-shore from Asia, as the cost of energy collapses and years of 20% annual wage growth in China effectively prices these workers out of the market.
Most importantly for the US, as long term shortage in many key commodities such as food and water become apparent later this decade (with the population of the Earth currently increasing by 400,000 per day) much of this future crisis will pass America by. China on the other hand can't feed even 20% of its people. Anticipating a medium term return to the food export bans of 2008, China is buying up whatever farmland it can around the world.
America, has no such problem. It is completely food self-sufficient and always will be once it controls the world’s largest bread basket in the Mid-West and the Mississippi delta.
America, has no such problem. It is completely food self-sufficient and always will be once it controls the world’s largest bread basket in the Mid-West and the Mississippi delta.
Demography is destiny and America's population is young, mobile, entrepreneurial, highly educated and demographically stable. Most of Central and Eastern Europe's population structure is collapsing. Russia's is even worse and China is aging rapidly.
America may have its share of internal problems - a paralysed political system, glaring inequality, too much government debt and unpayable pension promises (as we saw in Detroit in 2013). But once again - as many times over the last century - the USA will be the motor that powers the world economy in 2014.
2. Tapering pains in Emerging Markets
Across the world, as the Federal Reserve tapers its bond purchases, emerging markets will have to cope with a wall of money being hovered out of their economies and moving back into US dollars. This will cause widespread currency volatility across the continent and may lead to a series of local economic crises.
In China the Communist leadership seems determined to wring every last available drop of investment-led growth from its economic model. This will continue into 2014, but the day where Chinese productivity begins to stall is getting closer.
China will continue trying to move its economy away from infrastructure and state directed lending, to one led by consumer demand. To help achieve this difficult transition, it recently announced a number of important changes to its economic model, including modernising its property and business laws. It will be interesting to see if these changes are actually implemented on the ground.
It is difficult to know if China can achieve the transition to a consumer led society and not get stuck in the infamous “middle income” country trap - as has been the destiny for so many other countries in Latin America and Asia. The country’s economic growth may be stabilising but its financial system is still a Pandora's Box of bad debt. What the shadow banking sector contains is known to no-one outside the upper echelons of the Chinese Communist Party (and perhaps not even to them). 2014 could easily be the year of the Chinese Credit Crunch.
The wheels in India have come firmly off the carriage and the panicked imposition of draconian capital and commodity controls last year (mainly around Gold) has not stopped a creeping sense of economic crisis. It has also led to a huge increase in gold smuggling into the country, a trend that will continue next year as the country tries to cope with its balance of payments deficit.
Russia, despite holding the outrageously expensive Sochi winter games, will begin a gradual decline in influence as growing access to cheap "fracked" energy brings to an end to its recent period of renewed economic power. Economic growth has stalled in Brazil and this has been reflected in nationwide protests against its rent-seeking state and needlessly high cost of living. The government there will be hoping the World Cup in Rio de Janeiro next year will lift the national mood.
The fragile economic environment in Asia next year will play out against a background of intermittent hostilities between some of its major players (including Japan, China and South Korea, to say nothing of an increasingly unhinged North Korea). Never in Asia’s history have both Japan and China been as powerful at the same point in time.
It is often remarked how closely the situation in North West Asia resembles that of mainland Europe a century ago, where rising powers armed themselves and ratcheted up the sabre rattling.
With the centenary of WW1’s outbreak next year, this coincidence will be lost on nobody.
3. Europe gets stressed
Europe will begin 2014 with its economy slowly starting to recover from the recession of the last few years - but make no mistake the Euro Zone crisis is percolating away in the background and threatening to erupt at the slightest provocation.
Portugal’s ability to exist the bailout looks shaky and Greece can no more pay back its enormous dent next year than it could last year. A new Greek debt write off will be needed at some stage. This will likely follow some sort of Slovenian banking bailout. It is perilously close to that stage now.
Unemployment will remain scandalously high across the fringes of the continent and the Euro will spend the year overvalued as ever – largely due to China selling’s its US investments and putting the proceeds into Euros.
The threat of deflation will hang over much of Europe for the year ahead and if this starts to threaten the German economic heartland we may see the ECB start to engage in more unconventional monetary activity (basically QE) to boost inflation. Expect stiff resistance to this in Germany.
2014 could also be the year the bond market finally gives up on France, as it becomes clear that the country will not deal with its budget deficit (it hasn’t balanced a budget in nearly 40 years) and the bond market may take fright. Tempers at home are increasingly frayed and next year will see more middle class protests at this section of French society is absolutely taxed to the hilt (to a higher extent than even in Sweden).
While the imposition of a new European banking supervisor will be a useful development, unless it clearly identifies a path to remove a bankrupt banking institution from the shoulders of its national government, it is not worth the paper it’s written on. Ireland may have recently successfully exited its bailout but its population is been made to pay for the failure of its banks in full (despite promises of relief last year).
It is important to note that capital controls remain in place in both Iceland and Cyprus – their crises frozen in time and waiting comprehensive solutions (although Iceland is making headway).
Only in the UK is a large European economy making a solid recovery. The UK was the fastest growing economy in the G7 in 2013 and this will continue in 2014, as the country expands its financial, technology and financial services sector (particularly in booming London, the world’s global capital).
The key European development next year will be the bank stress tests carried out by the ECB. Seeing as European banks are sitting on between €1.5 – €2 trillion Euros of bad debts (much of it unaccounted for) this will be a delicate balancing act for the regulator.
The ECB tests need to be seen to be stringent enough to seem credible, while at the same time not so stern that lots of important banks fail them. Indeed there is still no credible solution for providing capital for banks that fail the stress test. Europe’s hard pressed tax payers will not take kindly to opening their pockets once again in 2014.
4. The Commodity cycle turns upward.
Institutional money is starting to flow back into the commodities space marking the end of the Bear commodity cycle. As economies improve the demand for the world’s minerals, metals and commodities will start to increase. Institutions know this and are taking positions at the start of this new trend. Many miners and commodity companies have been absolutely hammered over the last few years. 2014 will be the year this starts to change.
The current price of many food stuffs does not accurately reflect the future demands on this industry. Particularly as the Earth’s planet moves towards 9 billion and continues to increase at a totally unsustainable rate of 3 million people a week.
Similarly grades of many metals continue to decline as the easiest deposits of Copper and Iron Ore have been exhausted. Only in energy has the table turned, with the huge unexpected bounty of shale oil and gas. In other segments like minerals and metals the slow gradual running down of the Earth’s reserves continues.
Indeed the collapse of commodity process over the last few years and the wiping out of many juniors explorers means that in a number of key metals (notably zinc) there is a shortage of new mines coming on stream in the next few years - just as commodity demands will grow.
Expect the price of many commodities to increase in 2014
5. Africa Rising
Africa only seems to make the headlines in the West when there is a famine, drought or natural disaster. But there is another African story taking shape quietly in the background. In 2014 many of the Top 10 fastest growing countries will be in Africa.
Interestingly this is not just a story of commodity extract and production. Non-commodity countries are also growing strongly. Inflation is low and trade with the rest of the world has increased markedly (particular with China).
Although the north of the continent will remain a fragile mess due to the fallout and instability from the Arab Spring, Sub-Saharan Africa is expected to be the fastest growing region in the World in 2014 (at 5.5% - a rate twice as high as the United States).
Infrastructure is starting to improve across the continent as new railways and ports are being built and opened for the first time since independence. South Africa, despites its own economic difficulties, has cemented its role as the continents leading economic power, setting up retail and telecommunications industries all across the continent.
In East Africa, Kenya is an expanding role model for mobile financial payments (number 1 in the world) and there is a growing start up technology industry in the country. In West Africa Lagos is now the largest city in Africa and is its commercial capital, while the Ivory Coast has recovered substantially from its civil war and is re-establishing itself as an important trading centre.
Despite the ongoing risks (terrorism from Somalia, Muslim/Christian conflict in Nigeria and particularly the nasty civil war in the Central African Republic - which has the potential to drag in other Africa states like in Congo in the 90’s), overall the continent is calmer, better governed and more prosperous than any time since independence.
A small African middle class is starting to appear across the continent and this process will continue to escalate in 2014.
Tuesday, February 18, 2014
Mongolia sitting on a gold mine
This is a very interesting article. Mongolia could teach us many lessons. It seems to be embracing Freedom and Democracy as we, the US, are running from it, and it is rejecting Socialism, Tyranny, and Authoritarianism, just as the US is embracing it. How could it be that the US is becoming a more backward country in this regard than MONGOLIA?ULAN BATOR, Mongolia — It is late June, but a biting north wind has swept in from the Siberian steppe, driving temperatures down by 40 degrees and bringing an icy drizzle that chills the skin.
Bundled in an inadequate cloth coat, Khavdal Khurman stoops behind a makeshift mine piling with a small sack, sifting through the detritus for a few lumps of coal to heat his tent against the unseasonal chill. Around him lies a coal-blackened Mad Max landscape of abandoned mining equipment and derelict buildings, the windows long since stripped of glass.
Life has been tough for Mr. Khavdal, who worked for 11 years in the coal mine a few miles outside of the capital until it was closed because of safety concerns in 1990 — the same year Mongolia rejected socialism in favor of democracy and a market economy.
Aged somewhere “over 40,” he receives a small pension from the government because of a mining-related ailment, but “it is not enough to survive. I run out of tea and salt,” he says. Yet like almost all Mongolians, he still has faith in the country’s new commitment to democracy.
“Eventually life will get better,” he says.
U.S. officials, who would like to hold up Mongolia as a role model for other countries poised on the cusp between democracy and authoritarianism, sincerely hope he is right.
During a visit to Washington in early June, Foreign Minister Sukhbaatar Batbold received access far beyond what might be expected for a country with a population of just 2.7 million and a gross national product roughly equal to Buffalo, N.Y., including meetings with Secretary of State Hillary Rodham Clinton, Commerce Secretary Gary Locke and senior members of Congress.
“The United States has no greater foreign policy goal than to expand the number of democratic countries in the world,” said Ambassador Mark Minton, who lauded Mongolia as a country that, almost entirely through its own efforts, has done just that.
“That is useful in and of itself,” he said. But it also “gives hope to other countries that … are geographically isolated and under pressure that they can in fact develop democratic institutions for the benefit of their own people.”
For that to happen, however, Mongolia must demonstrate that free markets can improve the lot of its people, and in that respect it has hit a bump in the road. After several years of rapid economic growth, the country has been hard hit by the global recession, which knocked the bottom out from under prices for its main exports — copper, other minerals and to a lesser extent the cashmere that goes into the fine suits of New York and London stockbrokers.
Coupled with that have been several years of droughts and harsh winter storms that have decimated the herds of Mongolia’s traditional nomadic herders. As a result, close to half the population is now clustered in Ulan Bator, the majority living in vast tent and shanty communities that sprawl across the hillsides overlooking an increasingly shabby city center.
At the city’s core, a few soaring glass-and-steel towers, initiated amid high hopes and soaring commodities prices of a few years ago, stand vacant on streets with gaping potholes surrounding a modernist new parliament building with an imposing statue of Genghis Khan.
Hopes for a turnaround are focused almost entirely on some enormous mineral deposits in the southern Gobi Desert that, in the words of Mr. Minton, have the potential, if properly developed, to turn Mongolia into “a prosperous middle-class country” within 20 years.
More than five years of bickering over how to develop the first of those deposits, a mine site called Oyu Tolgoi with copper and gold reserves estimated in excess of $200 billion, appears to be coming to a conclusion and could be settled within days or weeks.
Mongolians say the deal that is being negotiated with a Canadian company that holds licenses on the property will serve as a model for negotiations to develop nearby Tavan Tolgoi, billed as the world’s largest undeveloped deposit of coking coal with estimated reserves of more than 6 million metric tons.
“With the minerals that we know about, on a per capita basis [Mongolia] is one of the 10 most wealthy nations,” President Elbegdorj Tsakhia told al Jazeera in perhaps his only interview with a foreign news organization since he took office on June 18. “Yet the average living standard is 150th in the world.”
Mongolia’s potential wealth has not escaped the notice of its only immediate neighbors — Russia and China.
Moscow, after nearly two decades of virtually ignoring its former Cold War client, is suddenly showing great interest in Mongolia, demonstrated by a personal visit to Ulan Bator by Prime Minister Vladimir Putin in June and plans for a follow-up visit by President Dmitry Medvedev later this year.
After years in which there was no military cooperation between the countries, Mongolia has also received visits from Russian Defense Minister Anatoly Serdyukov and armed forces Chief of Staff Nikolai Makarov. The two countries recently held their first joint military exercises since the end of the Cold War.
Russia’s interest extends beyond gold and copper, though it has suggested the proceeds from the Oyu Tolgoi and Tavan Tolgoi mines might be shipped to market through its Pacific coast ports. While in Ulan Bator, Mr. Putin said he expected within “several weeks” to announce a deal for the “joint extraction and processing” of some of Mongolia’s estimated 60,000 metric tons of uranium ore.
China has been less active diplomatically, but it can afford to be. With its major industrial and population centers much closer to Mongolia than Russia’s, it already accounts for more than 50 percent of the country’s trade and investment and provides the bulk of its produce and consumer goods. When it closed the main border crossing for two days to protest a visit to Mongolia by the Dalai Lama in August 2006, food shortages in Ulan Bator quickly drove home the message.
Chinese business interests are among the 10 current bidders to develop the Tavan Tolgoi deposits, but Beijing does not seem particularly worried about the outcome. Economic and geographic considerations suggest that whoever develops the mines, most of the coal and copper will travel south to feed the voracious appetite of China’s growing industrial sector.
Public sympathies are much more with Moscow, thanks largely to the Russian troops who helped Mongolia to free itself from Chinese rule and achieve its independence in 1921. Most of the infrastructure that Mongolians now depend on — roads, railways, power plants, schools, hospitals — was built by the Soviet Union.
Nineteen years after the rejection of socialism, a statue still stands in front of the national university to Choibalsan — sometimes called the Mongolian Stalin — who as interior minister in 1937 oversaw a purge in which some 30,000 people were executed, including 17,000 Buddhist monks.
At a shabby, paint-peeled and seldom-visited museum honoring the victims of that period, an exhibit case holds about two dozen skulls, each with a bullet hole in the forehead, taken from the mass grave of about 600 monks that was accidentally discovered in 2003.
Yet, “We still like the Russian people,” said Shinee Dampimparev, the only staffer at the museum one recent afternoon. “It was not the Russian people who killed Mongolians, it was one person — Stalin. The Russians … are more welcoming, more warm-hearted than Chinese.”
While public opinion is decisively with Russia, government officials are more pragmatic and work hard to treat the two countries with equal respect. That extends to military cooperation; a few dozen Mongolian soldiers visited Beijing for their first joint exercise with Chinese troops over the July 4 weekend.
Prime Minister Sanjaa Bayar was quoted in the English-language Ulan Bator Post in April saying economic and trade cooperation with China is going through its best period in history “and will continue to progress in the future.”
The United States is also in the game, along with Japan, South Korea, Australia and a few others. While democracy is America’s “overarching” interest in Mongolia, Mr. Minton said, “there are other interests, economic interests.”
U.S.-based Peabody Energy Corp., the world’s largest coal-mining company, “has a very strong interest in helping Mongolia develop its coal deposits in the Gobi Desert.”
U.S. influence is expected to be boosted by the election of Mr. Elbegdorj, who holds degrees from the University of Colorado and Harvard’s John F. Kennedy School of Government. Balancing that is the Russian-educated prime minister, Mr. Bayar, who maintains close ties to Kremlin leaders.
Like Russia and China, the United States is backing its diplomatic overtures with economic aid, notably a grant of $285 million from the Millennium Challenge Account, most of which was earmarked for a badly needed upgrading of Mongolia’s aging rail system.
That deal, approved in 2007 after several years in which Mongolia struggled to meet the good governance requirements of the Millennium Challenge program, was stymied this year when Russia — a 50 percent partner in the Mongolian rail system — declared that it, not the United States, would take care of the upgrade. Washington is now considering a request from Mongolia for permission to divert the $188 million that would have gone to the rail system to another purpose.
Mongolians, long accustomed to being what one described as “the meat between two large buns,” have become expert at balancing their two large neighbors against one another. As insurance, they have developed what they call the “Third Neighbor” policy aimed at establishing close ties with virtually anyone else.
“The United States, the European Union, Japan, Korea, [Southeast Asia], these are all Third Neighbors,” said Mr. Batbold during an interview at his offices in Ulan Bator. “As a small country sandwiched between Russia and China, we need to be proactive rather than just sitting here. We like to talk to all other countries and balance their interests.”
Even if Mongolia manages to navigate the diplomatic maze, it faces other challenges in exploiting its mineral bonanza. Among the most demanding are a penchant for corruption and a long-running argument over how to distribute the spoils.
In the early part of this decade, when commodity prices were low and Mongolia was desperate to attract foreign investment, “the government offered too many incentives, too many tax holidays,” explained Oyun Sanjaasurn, an independent member of parliament and sister to a deceased hero of the protests that brought down socialism in Mongolia.
As a result, foreign companies were able to mine out some gold reserves with little or nothing accruing to the Mongolians. Then, when commodity prices shot up, “there was a natural reaction,” she said. “Now we are turning the pendulum to very left policies in parliament.”
In what Ms. Oyun described as a wave of populism, the two main parties both promised during a close-fought parliamentary election last year to pay every Mongolian a sum in the neighborhood of $1,000 once the Oyu Tolgoi deal is signed.
“We had a federal budget of $2.5 billion last year; this proposal would roughly equal the whole budget; there would be no money left for anything else. This will be almost impossible to deliver,” she said.
Difficult or not, the country’s youthful and sophisticated mining minister, Dashdorj Zorigt, said in an interview that the government has an obligation to keep its campaign promises. “That is the whole thrust of the democratic system. Trust between the government and the people is based on it.”
In the tent camps overlooking the capital, people are already planning how they will spend their share of the handout.
“We need the money so badly,” said Narantuya Duln, a 50-year-old widow who lives with 12 children, grandchildren, in-laws and two dogs in three tents, or “gers,” in a bare-earth compound with a stunning view of the more prosperous city center. Surrounding it is an utterly unplanned hodgepodge of gers — called “yurts” in Russian — and simple frame or brick homes, separated by steep, rutted dirt roadways on which children wrestle large canisters of water from public pumps.
Mrs. Narantuya said she worked for Mr. Elbegdorj in the presidential campaign, helping him to carry her neighborhood by a two-to-one margin, and that she has faith that he will keep his promises. “I hope he will really do something for this district,” she said.
But asked whether the windfall from the Oyu Tolgoi might better be spent to upgrade the country’s infrastructure or do something to spur long-term economic growth, she was adamant. “He should hand out the money. There are so many poor people around — lots of families who cannot even buy bread. So we need the money. Then we can build a house here.”
On another hillside half a mile away, Magnai Migid, 40, moved to block the drizzle and icy wind from a 5-year-old neighbor whose face bears the scars of a fire that destroyed her tent home and killed her parents. Mrs. Magnai longs to live in an apartment in the city below, she said, “but that takes money, and to have money you need a good job. It is very hard to get a good job, especially at my age.”
Like Mrs. Narantuya, she said she is looking for the new president “to fulfill his promises.” If he does not do that, “he will not be elected again.”
There is more skepticism about the proposed handout among better educated Mongolians, people like Sandagdorj Bayanbaatar who was able, because of the nation’s transformation in 1990, to go to Japan for schooling and now runs a Mongolian-Japanese joint venture computer services company in Ulan Bator.
The payout “will be like a small rain in the Gobi Desert,” said the 37-year-old entrepreneur. “It will soon be gone. We need to invest the money in a big infrastructure project.”
The Oyu Tolgoi proposal approved by parliament calls for an upfront payment to the country of about $125 million, which would be essentially a loan against future revenues. But that is just 5 percent of what it would take to fulfill the campaign promise, and it will have to be repaid from future profits at 9.9 percent interest.
Ms. Oyun said the parliament is now beginning to talk about alternatives to a cash payment, perhaps vouchers to purchase education and health care or even a general distribution of shares from what is expected to be a 34 percent government stake in the mine.
Another recurring theme, heard both in city offices and in the tent camps, or Ger District, as it is known, is a fervent hope that the new president will bring a greater level of honesty to government.
“There is corruption in every country, but in Mongolia it is everywhere, from the lowest levels all the way up to the [Cabinet] ministers,” said Garigtsatsralt Chuluunkhuu, the 26-year-old head of the marketing research department at the Transportation and Development Bank of Mongolia.
“To start a business, you need hundreds of licenses; at every ministry you need to get a lot of licenses,” opening the door to bribes, said Miss Garigtsatsralt, who added that her bank has seen many of its small business customers go bankrupt since the start of the global downturn.
The pattern extends also onto the hillsides, where a herder moving in from the countryside must pay bribes to get a license for a plot of land on which to pitch his ger — the more desirable the lot, the higher the payment.
Ms. Oyun readily acknowledged the problem. “Corruption is a problem and it has been all during the transition as in other post-communist countries. Mongolia is not an exception,” she said. But she noted that Mr. Elbegdorj had earned something of a reputation for fighting corruption during a previous stint as prime minister and had made it a central issue in his campaign.
Mr. Minton, the U.S. ambassador, also was hopeful that progress is being made. “Surveys are taken regularly. The trend lines are a small but steady decrease in citizen concerns about corruption. This is becoming a more open society,” he said.
A great deal is riding on the shoulders of Mr. Elbegdorj, but perhaps nothing is more important than the faith of people like Mrs. Narantuya, who despite the hardships in her life believes Mongolia will never turn back from its commitment to democracy.
Asked what democracy means to her, she said it “means being honest. No corruption. Everybody has their workplace and everybody lives in comfort. I hope one day we will reach that.”
Sunday, February 16, 2014
Why do Politicians Have Such a Bad Reputation?
Sometimes, it seems there is a difference between public service and politics, although the two concepts are supposed to be interchangeable. Citizens may support their hardworking elected representatives, but passionately disdain power-hungry dirty politicians. Why do so many politicians have a bad reputation when their job descriptions seem so noble and self-sacrificing? The answer can be a little complicated.
One reason certain politicians have a bad reputation is the election process itself. A life of public service and law making is not an occupation for social introverts, so many candidates for local offices are already notorious overachievers with more than enough self-confidence. Candidates for political office are often very ambitious by nature, and with ambition can come a level of moral and ethical flexibility. Some bad reputations develop because the politician has already had to compromise any number of personal beliefs in order to gain votes or popularity.
There is also the adage that power corrupts, and absolute power corrupts absolutely. Some politicians have a bad reputation because the power of the office has corrupted them in some way. Professional lawmakers, judges and others in position of power over citizens are constantly approached by lobbyists, special interest groups and influential private citizens who all want them to provide favors. Many politicians do have enough integrity to resist corruption, but unfortunately some are not as strong. A politician under significant pressure can make some questionable decisions, which in turn could lead to accusations of wrongdoing or deriving personal benefit from an office.
Historically, there have been numerous examples of dirty politics practiced by equally dirty politicians. Unfortunately for the majority of honest office holders, these incidents often dominate the public media. Consequently, a number of effective politicians have a bad reputation only by association. If one politician is capable of dirty tricks or dereliction of duty, then they may all be equally capable of some wrongdoing. This general perception of politicians becomes even more pronounced during election campaigns, where candidates have the leverage to expose each other's political and personal shortcomings.Professional lawmaking and public service does require a certain amount of personal and professional sacrifice, since many private sector jobs are more lucrative and less demanding than politics. Sometimes, a politician gets a a bad reputation because he or she is driven people with good intentions, but also has poor managerial skills or a controversial public persona. Some very effective politicians look bad on paper, but are in reality well respected in the political arena.
Wednesday, February 12, 2014
What can Mongolia learn from Norway?
As Mongolia develops its mining industry to foster economic and social development, two challenges are key to the country’s long-term prospects: how can Mongolia’s economy move beyond its focus on resources, and how can its resource wealth be used for sustainable development?
One possible answer to these questions, which came up repeatedly during discussions at the World Economic Forum’s Strategic Dialogue on the Future of Mongolia, is to set up a sovereign wealth fund (SWF).
Modeled in part on the success of Norway in turning its oil wealth into a sustainable source of government financing through its Government Pension Fund Global (GPFG), such funds have become widely used by Gulf states as well as throughout Asia, where some SWFs have a strong focus on strategic investments for geopolitical or industrial development goals.
In the Mongolian context, suggestions for the creation of a SWF focus on the need to balance fluctuations in revenue streams to the state stemming from resource activities, to seek a fiscally sustainable benefit from exhaustible resources, and to fund diversification strategies.
However, using a SWF for diversification investment is at odds with frequent calls at the Strategic Dialogue for a withdrawal of the Mongolian government as an active participant in economic activities, to a role that is focused on enabling and regulating business. If investors and financial markets do not want the Mongolian state to continue its involvement and ownership in the resource sector, why does investment in green technologies, for example, seem desirable? What makes the proponents of a liberalization of mining activities believe that the Mongolian state would be particularly good at “picking winners” in efforts to diversify the economy?
Given the Mongolian government’s track record in running state-owned companies, the use of a SWF for diversification investments would raise many concerns about profitability and the likelihood of patronage and corruption in such investments.
To the extent that a SWF can balance fluctuations in revenue streams that are caused by commodity prices, Mongolia already has a Fiscal Stability Fund for this purpose. While this fund is limited in its investment opportunities due to the requirement of constant liquidity, once fully funded, it does allow the government to budget for mining revenues that are based on 10-year running averages of prices rather than on annual oscillations.
One of the express purposes of a SWF is to seek geographic diversification away from the dependence on the domestic economy, which is dominated by resources. Many such funds, including the Norwegian GPFG, are expressly prohibited from investing domestically to avoid distortions in exchange rates, but also out of concern over an investment strategy that increases rather than limits exposure to country risk. Tasking a Mongolian SWF with investment in diversification prevents such a fund’s efforts to reduce exposure to the Mongolian economy and is thus counterproductive.
That is not to say that investment for diversification should not be pursued, but it is unclear whether a SWF is the appropriate vehicle for such efforts. While investments for sectoral diversification should be pursued, a broadly defined SWF is not the appropriate vehicle for such efforts.
Proposals for a Mongolian SWF aimed narrowly at financial stabilization also neglect opportunities for a wider impact that could be built into such a fund. If a SWF could be a model of transparency in investment, this could be a catalyst for deepened transparency in other sectors. Investment choices made by the SWF could be the basis for a concerted effort not only to document these choices, but also to make this documentation available and accessible to the general public.
The activities of such a fund could also be used to structure capacity building in the financial sector. For example, the running of a fund could be contracted primarily to foreign financial professionals initially, but with a clear plan for the education of Mongolian financial managers within such a fund and a gradual shift of management to Mongolian participation keeping in mind the overall aim at maximizing financial benefits.
A SWF is important for Mongolian policy-makers to consider once they overcome current blockages of revenue streams. However, such thinking needs to be targeted very specifically at specific goals. A SWF could do some very important things for Mongolia in the future, but it cannot be expected to be a fix-all.
Mongolia’s Future Framework
Mongolia’s economic potential is significant, with vast deposits of copper and coking coal situated close to its main market in China. However, this potential is vulnerable as the country is increasingly reliant on two main commodities being exported to one country, making Mongolia susceptible to external shocks such as changes in commodity prices and demand in China.
Charting a course for the country from mineral wealth to long-term sustainable and diversified growth is a key task facing Mongolia’s leaders. Throughout 2013, the World Economic Forum engaged over 250 stakeholders and experts in a dialogue to explore three key strategic decisions on this path:
1. How should the development of the mining industry and its potential revenues be managed to maximize their benefit to the country?
2. What forms of economic diversification should be pursued and how?
3. What trade and investment relationships will be needed to achieve both?
Responding to these questions however, is not straightforward. Developments of mineral deposits and other diversified products and services require long lead times. This means the decisions must take into account not only present contexts but future ones, which are likely to be very different.
Future contexts will be shaped by highly uncertain forces in commodity demand and pricing, regional collaboration, mining investments, and social and environmental norms. These uncertainties will influence whether Mongolia finds it easy or difficult to produce and sell its main minerals (copper and coking coal) over the next few decades.
Similarly, uncertain forces influencing the ability of the country to access the necessary capital, knowledge and skills and compete in markets in which it has a competitive advantage will influence whether Mongolia is able to diversify its economy to produce and sell significant products and services beyond its main minerals.
The possible outcomes of these uncertainties are explored in three scenarios, helping Mongolia to learn and prepare for whichever future arises.
Regional Renaissance: North-East Asia becomes more politically integrated, with strong economic growth. This gives Mongolia the opportunity to sell its main minerals and achieve economic diversification, and the challenge of managing export revenues in a way that prevents economic overheating and social unrest.
China Greening: A revolution in environmental attitudes sees China lead the way in the “circular economy” and pioneering new products and services. This reduces demand for Mongolia’s main minerals, but opens up new opportunities to diversify into greenproducts and services.
Resource Tensions: Geopolitical tensions ravage the region; natural resources are used for political leverage, making trade difficult. Mongolia struggles to access finance and markets for its minerals and to pursue diversification opportunities, but this scenario presents opportunities to carve out a role as a neutral and respected neighbour.
These scenarios suggest policy responses relevant to all three strategic decisions, such as developing a good investment and business climate, with public buy-in, for both minerals and other sectors; designing a form of sovereign wealth fund that can operate as an investment fund or development fund as needed; and actively engaging with neighbours in the region to forge strong political and economic relationships.
The individual scenarios suggest interesting choices for Mongolia to consider, for example facilitating cross-border infrastructure for regional economic cooperation in Regional Renaissance; joining regional supply chains for green and sustainable industries in China Greening; and locking in long-term contracts to hedge against regional instability in Resource Tensions.
Charting a course for the country, from developing mineral wealth to long-term sustainable and diversified growth, is a key task facing Mongolia’s leaders. On this course, they need to explore and make three strategic decisions related to managing the mining industry and the wealth that it is expected to create, approaching the challenge of diversifying the economy, and building long-term trade and investment relations. The best inroads to these decisions are not straightforward and must take into account uncertain future contexts. Possible future contexts are explored in three scenarios intended to help Mongolia’s leaders to prepare and make the most of whichever future arises.
I usually do not like to comment on another's piece of work, but for this one time I like to say about this point "While the lack of research capacity to support decision-making has been lamented in the past, it has become glaringly obvious in the current discussions of governance structures, construction budgets and the integration of Mongolia into global financial flows. A radical investment into such analysis capacity and into governance structures directly involving the Mongolian people may be one of the few solutions here."
I have worked in Mongolia previously and well aware of the many agencies that are assisting Mongolia in terms of research and more research. Personally, I like research but this maybe excessive especially when these research are often done remotely and without complementing those on the ground. A good example that I read recently was a paper about the future of the meat industry and was written by someone who came to Mongolia for 3 days to give a seminar and his main suggestion was to follow-up with Australian style cattle farming not fully grasping that Mongolians have no idea of land ownership as versus land rights and ancestry law to provide for freedom of animal movement. Mongolian cattle are free to roam the entire country from North to South following the seasons and therefore its beef are tough because those cattle are feed with real grass not synthetic food. I digressed, the current debacle that Mongolia is facing are two folds. While external economic factors do play an important role (and I leave this for the experts to do more research to fix their own governance issues), the main culprit here is the Mongolian politicians themselves. They had overpromised by bribing for votes leaving nothing at all for the next government to work with from day one. No research is needed to reach this conclusion as this is common knowledge. When the new government came it, they replaced most of the current heads with their own people (usually from the same province). There is a learning curve which means all the businesses have to relearn who are their new principals and vice-versa, hence nothing get done for the next 12 months to allow them to settle in. Understandably the Mongolians are reserve when dealing with foreigners especially Chinese. No marks for guessing why even though for some unknown reason, Mongols consider Manchus and Hans to be the same. The current government needs to consider how to extract more $$ to get mileage for their own promises to their people during the election (its a face thing too). Again no guesses from whom. If RT does not want to play because of some IA then it is RT's prerogative but they still need to negotiate with the current government. Will foreigners abandon Mongolia because of less friendly investment laws ? My response is no as Mongolia will need to consider the consequences as well, they need to improve their own infrastructure (roads/power) and to provide for a growing younger generation who are quickly adapting themselves with the western ("english") world instead of old russian (even though most would prefer Korean TV soaps). There will be compromise (deals) and JVs are already in the pipeline to tap into rich resources which China and the rest of the world are hungry for (read Japan and Korea and as far as Indonesia). Mongolia's attitude in terms of governance, budget and global financial integration are similar in many respects to other developing countries (Malaysia is the most prominent. Malaysia even trained Mongolians Anti-Corruption Officers which is an irony). They have the appearance but lack the will and compulsion to act on them. Again no amount of research can solve these issues. The only cure is time and lessons to be learned (better to have tried and failed then not at all). Just like any foreigner, I find Mongolians are eager to learn about the outside world to meet their internal challenges (example over half a million still live in Gers ("tents") at the outskirt of UB without much sanitation), they have short term views because they are at each other throats trying to lineup their pockets (particular when in a coalition). When they are not fighting, they are pretty savvy businessmen (not the Abe Lincoln type). Politically, Mongolians are ferocious inline with their history (take no prisoner other than to fight for them like a trained warhorse). They had their first political assassination at the dawn of their democratic reforms so there is no love between the many political factions other than a common desire to rule Mongolia like many of their counterparts in developing countries (I must admit at least the Mongolians are better educated though - in order to be a Member of Parliament they have to gain at least a recognised University degree). They are meat eaters and frowned on those who prefer vegetarian, liken them to animals. Need I say more on how to deal with them ? Research is great but seldom do they meet practice. Give them time, they are still planning to return to China (symbolically the famous Gengkhis Khan statue (affectionately known as grand-daddy to all mongols) looks to China for a good reason). BTW in case you need to ask, Mongolians' view of the world remain the same during their grand-daddy's time (stretching from China to the steps of Europe). When you are negotiating with them, give them respect, not more research. As the Chinese used to say giving respect is free and will return even more.
Mongolia’s economy is at a crossroadsA sudden sense of economic crisis is spoiling the mood over Mongolia’s three years of world-beating economic growth. This crisis stems from the huge decline in foreign investment and ongoing uncertainty surrounding the partnership with Rio Tinto in the Oyu Tolgoi mine project. In the coming week, two events will seek to address this crisis.
Mongolia is on an economic fault line. Growth rates of 10+% for the past three years, at a time when the world is still struggling to climb out of the post-Lehman hole, have not only brought rising incomes to many Mongolians and spawned a construction boom in the capital Ulaanbaatar but also have focused the world’s attention on Mongolia in a new way.
This growth has been built almost entirely on mining exploration, coal production and construction associated with the Oyu Tolgoi project. Now, however, growth seems threatened by three challenges: nervous foreign investors; a drop in Chinese demand for coal; and uncertainty surrounding Oyu Tolgoi. Foreign investment – apart from Rio Tinto’s engagement in Oyu Tolgoi – has fallen precipitously since the passage of a foreign investment law in May 2012. The relative slowdown of the Chinese economy, meanwhile, has led to a steep decline in purchases of Mongolian coal.
On top of this, Mongolian politicians and the public have been grappling with the implications of being a part-owner in the Oyu Tolgoi project and the governance and financial challenges that this ownership implies. Oyu Tolgoi represents the economic future, but also the thorny challenge of trying to balance the population’s expectations of immediate and equitable benefits, the need for foreign expertise and financing, and environmental stewardship. The challenges have found their expression in public disputes with Rio Tinto over the Oyu Tolgoi construction budget just as the project is poised for production. These disputes have led to a financing crunch that has forced the company to suspend underground construction and to let 1,700 workers go.
Over the next week, two events in Ulaanbaatar will address the crisis brought about by the Oyu Tolgoi job losses and the tanking of Mongolia’s currency, the tugrik, by roughly 20% since the triumphant oversubscription of a Chinggis Bond last November. The first is a workshop, led by the World Economic Forum’s Strategic Foresight team, with Mongolian decision-makers and stakeholders, which will examine future scenarios and possible policies. The likely focus will be on Mongolia’s mining and related industries, and the country’s main customer, China.
The second event is parliament convening for an extraordinary session to discuss the revision of the foreign investment law, as well as proposed changes to the mining law. Hints about the provisions of the foreign investment law suggest that it will retain controls over state-owned investments but clarify these to create less hindrances for the sale of assets by non-state-owned foreign investors. Specifics of these revisions will show whether they will actually be significant enough to lead to a return of investment, especially if discussions of the mining law remain at a relatively early stage.
Neither of these initiatives addresses the ongoing challenges surrounding Oyu Tolgoi, which is governed by an Investment Agreement.
While the lack of research capacity to support decision-making has been lamented in the past, it has become glaringly obvious in the current discussions of governance structures, construction budgets and the integration of Mongolia into global financial flows. A radical investment into such analysis capacity and into governance structures directly involving the Mongolian people may be one of the few solutions here.
Alternatively, a sale of the state’s share in Oyu Tolgoi would not only allow the company access to financing, but also shift the government’s responsibility to that of regulation and of decision-making about revenue streams that now seem threatened.
To continue on its path of rapid economic growth and development, Mongolian leaders will have to take decisive action on mining regulation and Oyu Tolgoi. In this, they will need the backing of the Mongolian people who continue to enjoy a vibrant democracy. Consideration of long-term scenarios and solutions for a lack of policy analysis capacity and governance challenges will play a crucial role in selecting courses of action.
Tuesday, February 11, 2014
ХӨРӨНГӨ ОРУУЛАЛТ ГЭЖ ЮУ ВЭ?
Хөрөнгө оруулалтын цаана мөнгө гэсэн ойлголт байнга дагадаг бөгөөд мөнгөнөөс мөнгө олох арга гэж хөрөнгө оруулалтыг нэрлэж болох юм. Мөнгө хэрэглэснийхээ төлөө хүү төлөх сонирхол хүмүүсийн дунд их байдаг. Үүнийг мөнгө эзэмшигч өөрт байгаа мөнгөөрөө эрсдэл хүлээн мөнгө худалдаж авч байгаа үйлдэл гэж хэлж болно. Бэлэн мөнгөөр хадгаламж нээх, хувьцаа, бонд худалдаж авах, дундын сангуудад зээлэх гэх мэт олон аргаар хөрөнгө оруулалт хийж болдог.
Хөрөнгө оруулалтын тухай хамгийн зөв ойлголт бол өөрт хуримтлагдсан мөнгийг цаг хугацаа өнгөрөх тусам улам үнэд хүргэх гэсэн үзэл юм. Та мөнгөө бэлнээр нь хадгалах тусам мөнгө таны хяналтанд ордог бол мөнгөөрөө хөрөнгө оруулалт хийх тусам эргээд хэд дахин өсдөг гэсэн үг. Тиймээс мөнгийг та сүүлд хуримтлуулахаас илүү эртнээс хуримтлуулах нь илүү ашигтай. Мөнгөний үнэ цэнийг цаг хугацаа тодорхойлдог учраас ирээдүйд олох мөнгөнөөс илүү өнөөдөр таны олсон мөнгө хамгаас үнэтэй гэдгийг сайн санаж явах хэрэгтэй. Мөнгийг ирээдүйд хүлээн зөвшөөрөгдөх хэмжээнд хүртэл хуримтлуулах нь мөнгөний үнэ цэнийг улам өсгөдөг.
Нөгөө талаар, өөрт хуримтлагдсан бэлэн мөнгийг хөрөнгө оруулалтын хэлбэрээр ашиглахгүй бол одоогийн үнэ цэнээ ирээдүйд алддаг. Учир нь мөнгөний ханш цаг хугацаа өнгөрөх тусам өсдөг ч нөлөө нь багасдаг. Үүний гол шалтгаан нь инфляци. Мөнгийг хөрөнгө оруулалт хийлгүйгээр зүгээр хадгаламжинд хийсэн тохиолдолд удаан хадгалах тусам инфляцийн нөлөөгөөр ханш нь хүүгийн хамт улам багассаар байдаг. Тиймээс хөрөнгө оруулалт нь мөнгө өсгөөд зогсохгүй ирээдүйн эрсдэлээс мөнгөө хамгаалах гол хэрэгсэл болдог.
Хоорондоо холбоотой олон янзын хөрөнгө оруулалтын аргууд байдаг. Үүний хамгийн түгээмэл нь тодорхой хугацаанд тогтмол хүү авдаг хөрөнгө оруулалтын арга байдаг. Нэг үгээр бол хадгаламжийн хүү юм. Үндсэн мөнгөн дээр хүү нэмэгдэх нь жам ёсных ч түүнээс илүү их хүү авах боломж бас бий. Та чадах чинээгээрээ их мөнгө хуримтлуулж чадвал түүний хүүгээс олох ашиг өндөр байдаг. Их мөнгө их хүү дагуулдаг бол их хүү их мөнгийг шаарддаг. Энэ аргыг банкин дахь данс, хувьцааны ноогдол ашиг гэх мэт бага эрсдэлтэй хөрөнгө оруулалтуудаас авах хүүгийн нийлэмжийг бүрдүүлэхэд ашиглах нь зүйтэй. Гэхдээ таны хөрөнгө оруулалтын хэмжээ аль болох их байх ёстой. Учир нь дундаж болон бага хэмжээний мөнгөнөөс зөвхөн өдөр тутмын хэрэглээнд зарцуулагдах хэмжээний хүү авдаг.
Хөрөнгө оруулалт, азын сугалаа хоёрын хооронд маш их ялгаа бий гэдгийг мартаж болохгүй. Их мөнгөний хүү болон хөрөнгө оруулалтаас олох ашиг нь азын сугалаа сугалахтай ижил биш ч эрсдэлээ тооцоогүй хөрөнгө оруулалт аюулгүй, урт хугацааны хөрөнгө оруулалтаас ч илүү их алдагдал хүлээх магадлалыг ихэсгэдэг. Их хэмжээний мөнгөөр ганц хувьцаа худалдаж авах нь харин азын сугалаа сугалахтай ижил зүйл юм. Үүнээс ашиг бараг гардаггүй бөгөөд бага алдагдал хүлээвэл таны аз. Аюулгүй, олон төрлийн хөрөнгө оруулалт нь ашгаа удаан өгдөг ч мөнгөө алдах эрсдэлээс хамгаалдаг.
Monday, February 10, 2014
Laws of Mongolia in English
The rule of law in Mongolia is a key factor in evaluating trade and investment opportunities. This section contains the country's laws most relevant to business. For each law, click on the pdf link for the English version. We should mention that the laws may not be up to date and amendments may occur that are not reflected in the body of the laws. If necessary, interested parties should check for themselves or with a law firm.
- Accounting Law
- Anti-Corruption Law
- Banking Law
- Law on Conducting Settlement in National Currency
- Economic Entity Income Tax LawAmendments
- Environmental Impact Assessment Law
- Environmental Protection Law
- Civil Code
- Concession Law
- Company Law (revised) by Hogan Lovells LLC
- Company Law
- Customs Law
- Energy Law
- Explanation of Foreign Investment Law
- Law on Regulation of foreign investment in economic entities operating in sectors of strategic importance (mongolian)
- Foreign Investment Law (unofficial translation)
- General Taxation LawAmendments
- Hazardous and Toxic Chemicals Law
- Land Law
- Licensing Law
- Minerals Law
- On Combating Money Laundering and Terrorism Financing
- Petroleum Law
- Securities Law (MNG)
- Securities Law (ENG) ("Unoffcial translation" draft of 10/22/2011)
- Securities Markets Law (revised and unofficial translation)
- Securities Markets Law (revised and unofficial translation)
- REVISED SECURITIES MARKET LAW OF MONGOLIA by Mongolian Stock Exchange, Aug 2013
- Social Insurance Law
- Tourism Law
- VAT LawAmendments
- Water Law