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Capital Markets

Mongolia banks on mining project

With fresh signs of political and legislative progress, there is a renewed sense of optimism around the country after more than a year of political posturing that cast a pall over the nation and put the brakes on foreign direct investment that sent asset prices tumbling.

On April 19, the Mongolian parliament passed amendments to the government’s controversial strategic sectors foreign investment law, which was introduced a year ago to block strategic assets falling into foreign hands.

The amendments’ passage is an important step because the law, in its original form, was seen as a backlash against foreign ownership of Mongolian companies that accomplished nothing but to scare off foreign investors.

Mongolia is not unique in having such a law, but it needs large amounts of foreign investment to spur its growth and development.

Foreign direct investment fell 17% year on year to $3.9 billion in 2012 as a direct result of the law in its original form, while economic growth slowed to 12.3% from 17.5% in 2011.

Furthermore, companies listed on the Mongolian Stock Exchange plunged 19% year on year in 2012, while the Silk Road Mongolia Index, which tracks the share price performance of internationally listed Mongolia-focused companies, shrank 49% year on year as a result of sell-offs by investors.

Alisher Ali, founder and chairman of Silk Road Finance, a frontier markets investment group, says slowing FDI inflows must be a pressing concern for those in government.

"Weaker FDI inflows could delay the development of the resources sector as well as others," he says.

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