Foreign investors turning positive on Mongolia

Foreign investors turning positive on Mongolia
No easy ride: foreign investors in Mongolia are used to the unexpected

After two years of relative misery, foreign investors are beginning to feel more optimistic about Mongolia as attention swings back to the business of extracting the country's ample natural resources and away from its extravagant domestic politics.

With Tsakhiagiin Elbegdorj re-elected as president this summer and a new parliament chosen a year earlier, there are now no more national elections due until 2016, setting the scene for a recovery in foreign investment, speakers at the Mongolian Investment Summit in Hong Kong said on Tuesday.

“We’re optimistic on all Mongolian assets,” said James Passin, co-founder of Firebird Management, which has invested more than $100 million in Mongolia. “The country has spent $1.5 billion to $2 billion on elections during the latest cycle, which is like the US spending trillions of dollars. Obviously that has a big effect on the domestic economy, so next year we expect to see a rebuilding of liquidity, which should create the conditions for [a] sustainable inflation of Mongolian asset prices.”

Mongolia’s total economic output was just $10 billion in 2012 and has averaged less than $5 billion in the past decade, according to the World Bank, making Mongolian democracy perhaps the most expensive in the world relative to the size of its economy.

The government has not always offered investors value for money. Foreign investment has fallen by close to 50% so far in 2013, while the currency and the stock market have both lost 20%.

Some of the weakness has been as a result of global economic conditions — including lower commodity prices and the slowdown in neighbouring China — but the main drag has been domestic, the biggest of which is undoubtedly Rio Tinto’s Oyu Tolgoi copper-and-gold project.

The mine shipped its first ore in July but the all-important second phase, which will take the work underground where the bulk of metal lies, has stalled amid a dispute with the government, which owns 34% of the project. Talks between Rio Tinto and the government have dragged on for more than a year with no end in sight.

Rio Tinto’s new Mongolia head, who also spoke at the conference on Tuesday, had no news on a possible resolution and was reduced to briefing investors on the company’s safety record in Mongolia, which he said was excellent.

An investigation into corrupt practises among government mining officials has also led to a moratorium on new exploration licences over the last 18 months and placed a question mark over the licences of existing foreign investors.

All of this has sapped confidence among investors, most of whom are otherwise desperate to take advantage of Mongolia’s 10%-plus economic growth.

But the overwhelming message from the assembled speakers at the conference was one of optimism. The government has made some changes to its foreign investment rules and a new securities law takes effect in January, both of which could help to restore confidence and attract much-needed capital.

Oyu Tolgoi alone is estimated to have a final price tag of more than $14 billion while the infrastructure needed to transport Mongolia’s natural resources to China will cost even more, which is why it is so important for the government to strike a deal with foreign investors.

Nobody expects an easy ride. Randolph Koppa, president of Trade and Development Bank of Mongolia, variously compared Mongolia to a pack of wild horses racing across the steppe, a double-humped Bactrian camel and even a starfish missing a leg: “Mongolia has strong upward growth but it will not be without its lumps and bumps.”

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