Tuesday, November 4, 2014

Mongolia’s main economic and political challenges

Mongolia’s main economic and political challenges

Embedded image permalinkMongolia’s main economic and political challenges are all linked to ensuring steady growth through the boom and bust cycles likely to visit this resource-dependent economy. Double-digit economic growth over the past few years—2011’s sizzling 17.3 % GDP growth, for instance— has been based on the investment in, and the production and export of, minerals. Mongolia is a major producer of several minerals including coal, copper, gold, zinc, and fluorspar. With extensive reserves, it has the potential to increase production considerably. For U.S. investors and firms, mining and mining-related services represent one of the most important and potentially most reliable sectors for long-term investment in Mongolia. Other promising sectors, based on Mongolia’s economic development needs, include infrastructure, transportation, energy, construction, healthcare, and environmental products and services. However, Mongolia has suffered ongoing setbacks to its economic advancement. Indeed, growth has steadily slowed from 2011’s 17.3 % to 2013’s 11.7 %.

Both the International Monetary Fund (IMF) and World Bank estimate 2014 GDP to decline to 9.5%; and 2015, depending on Mongolian policy decisions, may range from a high of 12% to as low as 2%.

The IMF cites loose fiscal and monetary policies as likely causes for negative economic adjustment. (For IMF:;
For WB: As with GDP, Foreign Direct Investment (FDI) has steadily declined, constraining development of the mining and infrastructure sectors.

In 2012, FDI invested in Mongolia (mostly in the mining sector) reached USD $3.9 billion, which amounted to approximately 40% of that year’s GDP. In 2013, FDI had contracted by nearly 45%. In the first five months of 2014, Mongolia’s central bank reported that FDI through May was US $402.3 million compared to US $1.11 billion a year ago—a 64% year-on-year decline. Two factors have and will continue to affect Mongolia’s economic condition.

First, more than 90 percent of Mongolia’s exports consistently go to China; and so, any slowing of China’s growth affects Mongolia. Second, economic policies designed to protect Mongolia’s sovereign interests and to respond to the expectations of the Mongolian public have discouraged FDI – despite statements from Mongolia’s senior politicians that the government is committed to improving the business environment, reigniting foreign direct investment flows, and fostering Mongolian growth. Recent policy decisions have been influenced by the political realities of a coalition government representing multiple platforms, which has complicated reaching consensus on politically sensitive issues. There are a range of views represented within parliament on what constitutes an appropriate legal and regulatory framework for mining and other activities. Statutes and regulations are thus often crafted in a manner which incorporates multiple approaches and political imperatives. Investors have told us that this approach to legislation and regulation can give the impression that laws are hastily passed and that regulations are slowly created and partially implemented.

Some investors are concerned that criticism from some political quarters of current investment agreements and statutory obligations undertaken by past governments portends that commitments may not be fully respected. Investors and companies may likely encounter bumpy short-run trends as Mongolia continues to come to terms with its mining endowments and how to bring them to the outside world, while satisfying domestic expectations that the mining sector should benefit the public. Investors may perceive, and have to accept that, the current political process creates an unclear policy environment that may increase investment risk, while Mongolian politicians see the process as yielding the necessary level of political comity. However, in the medium to long term, those willing to manage these issues and relationships with local partners with open eyes may find attractive opportunities in the aforementioned industries and sectors. Chapter 1: Openness to, and Restrictions upon, Foreign Investment 1.1. Attitude toward FDI The Government of Mongolia (GOM) has consistently said that it supports foreign direct investment (FDI) in all sectors.

Throughout 2013 and well into 2014, the President of Mongolia, Ts. Elbegdorj, and other senior officials have publicly stated in a variety of international and domestic venues that the GOM will keep key foreign investment commitments and pass investor-friendly legislation, because they recognize the value of FDI for Mongolia. On May 8, Parliament passed a resolution on “measures to spur economic activities” identifying steps to improve foreign currency flows, lower risk, and improve the business and investment environment; and on July 1, passed long-awaited amendments to the Minerals and Petroleum Laws respectively.

However, some investors assert that Mongolia’s support for FDI remains more aspiration than reality. Specifically, they report that, reform of a key investment law and resource laws notwithstanding, resolving disputes with Rio Tinto expeditiously according to the terms of the Investment and Share Holders Agreements and then moving to complete development of the Oyu Tolgoi (OT) project will explicitly demonstrate the GOM’s commitment to the transparent rule of law, sanctity of contracts, and free market principles. Settling the outstanding issues with respect to OT will do much to convince hesitant investors that the GOM is able and willing to translate positive intentions into a welcoming and productive environment for investment.