Mongolia sets stall out for foreign investors

Prime minister Saikhanbileg Chimed said the country’s drive to supplement mining with other sectors offered investment potential.

Mongolia is at the crossroads of Asia and offer’s plenty of investment opportunities for foreigners.

That was the sales pitch offered by the country's prime minister, Saikhanbileg Chimed, at a media luncheon held on Thursday as part of Credit Suisse’s 19th Annual Asian Investment Conference.

The geographically vast, demographically tiny north Asian country has had a rough time over the past two years. The vast majority of its gross domestic product is related to mining, principally for coal, copper and gold, but the commodity cycle’s plummet has crushed Mongolian export revenues and left the government with worryingly large deficits.

To secure its own financial future, the country’s government is attempting to introduce reforms to open up the economy to more investment. Chimed described Mongolia (somewhat optimistically) as being an ideal Asian crossroads for transportation, telecommunication, and energy.

“We have 300 days of sun every year. If you consider our potential for solar and wind power we could become the energy hub for the whole of the Asian continent,” he said to the audience of investors, journalists, and Credit Suisse employees.

Chimed went on to describe agribusiness (the country has 56 million heads of livestock compared with its populace of just 3.5 million), healthcare, tourism, and manufacturing as areas of untapped investment opportunities, in addition to its traditionally dominant mining sector.

Troubled times

The prime minister’s fairly naked pitch is a sign of Mongolia’s growing need to drum up foreign capital and help diversify its economy.

The country’s myopic focus on mining – it became known as ‘Minegolia’ in some circles – and selling these commodities to China was hugely beneficial to begin with. The company registered 17% GDP growth in 2011 and minerals account for 94% of exports.

But betting its entire economy on digging up minerals left Mongolia in a lot of trouble once its huge southern neighbour lost its appetite for them. The price of copper surged from $5,000 per tonne to around $10,000 in 2011 but has since fallen back to $4,776.

“Mining is 80% of the economy; we want to decrease this a great deal,” Chimed said.

The boom-bust cycle has left the country with GDP growth of 2.3%, a fiscal deficit of 7.9%, and an inflation rate of 6.6% in 2015. Its economic prospects in the short term are also bleak, for all of Chimed’s optimism. The Asian Development Bank thinks the nation’s economy will grow by just 0.1% this year and by 0.5% in 2017.

Meanwhile, the government is struggling to contain a disenchanted populace that feel they missed out entirely on the good times and are now suffering in the bad. Thousands of locals protested in Ulaanbaatar on March 30 over the unequal distribution of wealth as a result of mining revenues.

Despite all this, investors remain relatively supportive of Mongolia. The country priced a $500 million 10.875% five-year bond deal on the same day as the protests, to good investor interest. The eye-watering coupon rate is a reflection of Mongolia’s difficult economic situation and its B2/B/B credit rating scores. However, investor interest was piqued by the prospect of the current Democratic Party government becoming more investment friendly.

Their hopes largely rest on the Democratic Party winning the general election on June 29 against the anti-foreign direct investment Mongolian People’s Party. The latter has already made Chimed’s life difficult in passing pro-FDI legislation, although it reduced its obstructionism when the country pulled in just $230 million in 2015 versus $5 billion in 2011.

Mongolia’s financial constraints were also eased after it received a $250 million loan from Credit Suisse on March 14.

It’s worth putting these amounts in the context of the Mongolian economy; the combined bond and loan values are equivalent to 6.1% of Mongolia’s total GDP of $12.3 billion.

Rays of hope

Despite the country’s very real difficulties, Chimed offered a hopeful view for the future.

With the opposition party having temporarily suspended outright opposition to FDI, Chimed is rapidly working to make mining and infrastructure agreements. He noted that Anglo-Australian mining company Rio Tinto signed a $4.4 billion agreement in December for the second phase of its Oyu Tolgoi mining project in the south of the country. Construction on this will begin in May (the ADB estimates the project will generate $2.2 billion in local capital expenditure by 2022).

Chimed also said that the country’s stock exchange is liaising with the London Stock Exchange to promote liquidity. And the government hopes to organise its various public companies under an umbrella investment company similar to Singapore's Temasek, to be privately managed. “We have asked the ADB and others to help us make it,” he said.

In addition, Chimed said the government wants to make a sovereign wealth fund with the revenues it accrues from mining. Such a decision is not doubt in part designed to rebut political and popular complaints that only business and political elites and foreign mining companies seem to benefit from the country’s mineral wealth. However, it would still be a sensible move for a small country to secure some long-term benefits if implemented effectively.

Chimed lastly noted that he felt infrastructure investments offered the best capital investment opportunities for foreign investors, adding that the government has been building roads and facilitated three big railroad projects as it aims to get the transportation links in place to truly make it an Asian crossroads.

“In Hong Kong right now it’s hard to find infrastructure projects, whereas in Mongolia it’s like white paper, there’s a lot of potential,” Chimed said. “From Beijing [to Ulaanbaatar] we spent one and a half hours [of flying time], and Hong Kong is four hours [from Ulaanbaatar], and from Siberia it’s a couple of hours. So this geographical location [is central] and investing in infrastructure right now is the most important sector.” 

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