Frontiersman: Don’t lose your shirt

Mongolia’s woes offer returns — and major risk — for frontier investors.

In one of the most bizarre moments of the Rio Olympics, Mongolian wrestling coach Tsenrenbataar Tsostbayar stripped down to his underwear in protest against a referee’s decision that cost his man a bronze medal.

Squeamish viewers should be thankful that Tsostbayar was distracted by the wrestling. If he was at home, watching the economy spiral out of control, he might not have stopped at his Y-fronts.

Mongolia’s economy has lost the most precious points of all over the last few years: many percentage points of GDP growth. It was growing at an eye-popping rate of 17.3% five years ago, and maintained growth well above 10% for two years after that. It is unlikely to grow at more than 1% this year or next, according to the Asian Development Bank.

The collapse in commodity prices should get a lot of the blame. Mongolia is reliant on commodities for export revenue. The cool-down of China’s economy — Mongolia’s biggest trading partner by far — has not helped matters either.

But these are problems many other countries are wrestling with. What has really slammed Mongolia to the mat is the government’s on-again, off-again relationship with foreign direct investment. A series of setbacks in the development of Oyu Tolgoi, a copper mine partly-owned by Australia’s Rio Tinto, have raised doubts among foreigners that Mongolia is fully open for business.

The problems in Mongolia may appear to be a Giant Haystacks of economic ineptitude. But to frontier investors, Mongolia presents some attractive opportunities.

The newly elected Mongolian People’s Party is getting serious about improving the economy. And since it won a recent election by a landslide — kicking out the incumbent government — it should have the breathing room to try. Mongolia’s government, led by Jargaltulga Erdenebat, has already reached out to the World Bank for help.

The expansion of the Oyu Tolgoi mine should help fuel economic growth. Mongolia’s $500 million bond earlier this year should help ease fears over its external debt. But perhaps most enticing of all is the sharp weakening of Mongolia’s currency against the dollar; it is down more than 20% since the end of June.

That has helped ensure the stock market has bounced off lows even as the news cycle has remained gloomy. In dollar terms, frontier investors may feel this is a good time to buy stocks that look cheap locally, and look even cheaper in dollar terms. The central bank’s aggressive rate hike on August 18 has perhaps stemmed further depreciation, but it has not led to a reversal.

Investing in Mongolia right now is a dangerous strategy, to be sure. But frontier investors are used to taking calculated risks, and betting on the turn-around of economies  — and companies — that others avoid.

Some fund managers believe Mongolia now offers tantalizing opportunities for the savvy investor. Time will tell whether they are right, but one can only hope that this aggression does not make them lose their shirts.

There’s been quite enough of that already.

 

Frontiersman is a new FinanceAsia column focusing on frontier markets in Asia.

 
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