Special report: Mongolia: Foreign investors ponder potential

By:
David Wigan
Published on:

Mongolia’s rich mineral resources have attracted considerable foreign capital but the government also now hopes to attract investment in its efforts to diversify the economy. The long-running dispute over the Oyu Tolgoi mining project may be dampening interest, however


mine
Oyu Tolgoi mine
Resource-rich Mongolia has been attracting long-term foreign investment on an ever-increasing scale since the 1990 transition. But net inflows exploded following the financial crisis, reaching $4.45 billion in 2012 up from just $372.8 million in 2007, World Bank figures show.


FDI dipped to $2.3 billion in 2013, largely due to the falling price of commodities and completion of phase one of Rio Tinto’s $6 billion Oyu Tolgoi gold and copper mining project in the Gobi desert. The joint venture with the Mongolian government was investing around $180 million a month throughout 2011 and 2012 on everything from a copper concentrator plant and power and water supplies to roads and an airport complete with terminal, as it raced to bring production on line. Work on the deep-mine phase two has been halted by disagreement over financing arrangements which the government says can only be approved by parliament.

State Bank says sweeping legislation restricting foreign investment in sectors of strategic national importance deterred overseas investors and delayed projects. “Our economic analysis reveals that FDI has declined dramatically. By the first quarter of this year, FDI inflows were down by almost 60% year on year,” says State Bank’s director of investment banking, Gombosuren Khandtsooj.

“This was due not only to the completion of Oyu Tolgoi but to stagnation in the mining sector, especially the coal industry. The passage of the Strategic Entities Foreign Investment Law (Sefil) in May 2012 also pushed FDI out. Parliament responded by updating the legislation and approving the new Investment Law.”

Government figures show coal exports slumped by more than 40% to $1.12 billion last year as a slowdown in growth in China, the destination for almost 90% of coal shipments, and disputes with foreign mining investors, took their toll.

Negotiations with international mining firms over rights to develop the West Tsankhi section of the 6 billion ton Tavan Tolgoi coal deposit have been stalled for two years. A $3 billion Hong Kong-Ulaanbaatar-London listing planned for late 2012 of Erdenes Tavan Tolgoi, which is managing development of East Tsankhi, has yet to materialize.

Untapped riches

Even so 2013 FDI, at more than 22% of GDP – the equivalent of around $800 per head of population – remains one of highest proportions of any country. The country sits atop some of the largest untapped deposits of coal, copper, gold and other minerals in the world, worth as much as $2 trillion, that have barely begun to be exploited. Oyu Tolgoi alone is forecast to boost annual gold and copper production from 8 tons and 644,000 tons respectively in 2013 to around 1.2 million tons and 32 tons when its $6.3 billion underground phase two comes fully on stream.

Mongolia is also an oil exporter and has commercially exploitable deposits of a further 80 of the 111 elements on the periodic table, from molybdenum and platinum to tungsten and fluorspar as well as 25 of the 40 heavy elements.

But, unlike in many of its counterparts, Mongolia’s natural bounty is not a source of conflict and division. Mongolia’s robust free-market democracy means its policy of developing its mineral wealth by the most transparent but commercially efficient means, while hotly debated, is in the end consensual. Tapping the resources and expertise of global mining companies has proved beneficial not only to foreign investors, but also in helping fast-track economic and social development.

Mongolia ranks 42nd out of 132 countries for opportunity in Social Progress Imperative’s 2014 Social Progress Index, far ahead of China and most other developing countries in the region. Mongolia scored even more highly for private property rights, freedom of movement, assembly/association and political rights, which are enshrined in law. SPI says Mongolia’s democracy is exemplary, pointing to six free and fair parliamentary and presidential elections since the 1990 transition from one-party state socialism. Mongolia also bested China on meeting basic human needs and the fundamentals of well-being.

Opportunities ahead

Mongolia’s development is still in its early stages and robust economic growth for the foreseeable future means opportunities for overseas investors in almost every area from transport infrastructure and housing to water security and air pollution. Surveys and technical assessments are already under way ahead of the start in 2016 of construction work on a $1.5 billion mass transit railway system serving the capital, Ulaanbaatar. The 16.6km line, of which the central 6.6km will run underground, is scheduled to be completed in 2020. Five transit corridors are also being developed to link landlocked Mongolia to its export markets including a new railway network and a new highway connecting the northern border to the south. There are also plans for both a gas pipeline and an oil pipeline and a longer-term aspiration to form a bridge connecting Europe with APEC nations.

The World Bank and IMF designated Mongolia a middle-income country in 2011 and living standards have risen dramatically in recent years thanks to per capita GDP growth that is far outpacing that of regional rivals Indonesia and Vietnam. Real income per capita more than tripled between 2005 and 2012 and is forecast to reach $7,500 in just four years’ time.

Increasing wealth has brought with it more disposable income for more people and shopping malls have sprung up across the capital to meet demand for everything from fashion and cosmetics to watches and consumer electronics. Brand awareness is strong. AT Kearney’s 2013 Global Retail Development Index ranks Mongolia seventh, up from ninth in 2012, just below the UAE and Turkey. The firm groups Mongolia among what it calls ‘little gems’ – markets that general retailers should strongly consider as the starting point for regional strategies. For luxury retailers, small population, unique countries like Mongolia are newfound hubs.

According to Asia Pacific Investment Partners (APIP) more than 40 global luxury brands have established presences in Ulaanbaatar in the past three-and-a-half years, from Louis Vuitton and Burberry to Tag Heuer and Bang & Olufsen.

APIP says that with consumer and retail spending set to boom over the coming decade dozens of new brands are planning to enter the market, including more mid-range brands, which tend to do well in Mongolia. High Street brands often perform poorly in Asia relative to luxury brands.

Diversification efforts

The recent volatility in investment flows has, however, prompted the government to launch efforts to further diversify the economy to reduce reliance on resources which account for almost a quarter of GDP. Agriculture makes up about 16%, retail 15%, and transport, real estate and education 8%, 6% and 4% respectively. Financial services comprise around 5-6% of GDP. The public sector accounts for the remainder. The competitiveness of the non-mining sector, particularly manufacturing and tourism, is being boosted by the weaker togrog, which depreciated by 15% last year.

“The positive impact of that move was that it helped absorb external risks and promote exports, while reducing imports,” says Sandagdorj Bold, adviser to the governor of the central bank. “Last year we had a balance of payments deficit but in the first part of 2014 exports rose by 18% and imports fell by 12%. Over the past two months the currency markets have recognized the progress we have made and the togrog has stabilized.”

The government has implemented a number of key reforms and initiatives aimed at removing uncertainty that it is hoped will kick-start renewed FDI flows. New legislation came into force in November replacing the Sefil law of 2012 and the 1993 Foreign Investment Law. The new Investment Law frees up foreign investors from having to secure government permission to invest in the mining, banking and telecommunications industries. The waiver does not apply to foreign state-owned companies, which are still required to seek approval.

The legislation also introduced tax stabilization certificates guaranteeing uniform tax treatment for between five and 22 years covering corporate tax, VAT, mining royalties and import duties.

In April, prime minister Norov Altankhuyag unveiled a ‘100-day action plan’ to promote foreign investment through major construction projects, reissuing mining exploration licences, tax incentives for foreign banks and cutting red tape. Projects include a road linking Mongolia to Russia and China, power plants and two economic free zones. An additional $1 billion worth of concessions in sectors from mining to tourism will be offered. 

The country is also pinning hopes on its stock exchange and asset management, passing a new securities markets law that came into force in January and an investment fund law in the second half of 2013.

The government has also launched a ‘From Big Government to Smart Government’ drive, paving the way for sweeping reforms including separating business from the state, making officials more accountable and simplified procedures for issuing licences and approvals.

John Grogan, chairman of the Mongolian-British Chamber of Commerce, is not convinced the government’s efforts will achieve much until the deadlock over Oyu Tolgoi is resolved. “The failure to progress in settling the issues over Oyu Tolgoi affects others thinking of investing in Mongolia. It’s definitely having a chilling effect. There’s a lot less interest than there was a year or 18 months ago. I’m not sure that we’ll see any appreciable pick-up in FDI while this dispute remains unresolved.

“Mining and the distribution of mining profits is a very sensitive issue where Mongolia quite rightly wants to strike the right balance and follow Norway’s example of mineral wealth development, rather than Nigeria’s.

“It’s determined to get a good deal but now is the time to strike that deal. One option I know is being discussed is convening a grand coalition in the Khural to approve the deal so that all parties are signed up to it. That was the way the original Oyu Tolgoi agreement was signed.”