Thursday, April 10, 2014

Mongolia’s investor relations: a job for Genghis Khan?

It was only an April Fool’s day joke – but when an Ulaanbaatar website suggested that Mongolia go on a Genghis Khan-style “investor roadshow” across several continents on horseback to win back international investors, it hinted at the size of the image deficit the north Asian nation faces.

In Mongolia, the 13th century great Khan is thought to have mythic powers “to make the difficult easy and the distant closer by”. So channelling his spirit to serve investor relations seems natural enough – especially when the task at hand is significant.

Foreign direct investment in Mongolia fell 54 per cent year-on-year in 2013 due largely to a reputation for legal capriciousness. But things may be about to look up, with a friendlier, revised investment law in place, GDP growth for 2014 forecast to be rapid and evidence that key economic rebalancing processes are underway.

Support for the beleagured local currency, the tugrik – which has lost over 27 per cent against the US dollar since early 2013 – may be on its way after new data showed a big reduction in the country’s trade deficit. The trade deficit narrowed to US$36m in the first quarter of 2014, down from US$346m in the first quarter of 2013, according to figures from the Customs office.

“In spite of delays in Rio Tinto’s Oyu Tolgoi (OT) mine expansion and the very disappointing performance of the coal sector, the economy is adjusting,” Bold Sandagdorj, chief economist at Mongolbank, the central bank, told beyondbrics.

“Improvements on those two fronts can further improve the overall balance of payments and support economic growth. We are not talking of a 17 per cent growth rate this year, but more realistic projections of around 11 per cent,” Bold added. “On the other hand, without such improvements the situation will be very different.”

Forecasts for Mongolian GDP growth this year vary. The Asian Development Bank (ADB) is forecasting growth at 9.5 per cent, while the International Monetary Fund (IMF) and World Bank are predicting 12.9 per cent and 11.4 per cent respectively.

In spite of the divergence, there was unanimity among the three multilateral organisations over the need for Ulaanbaatar to unwind its monetary stimulus, which is blamed for contributing to the trade deficit and a 40 per cent year-on-year decline in foreign currency reserves in January.

The central bank appears to concur with the ADB, IMF and World Bank advice.

“Mongolbank’s monetary stimulus played a crucial role in maintaining overall economic stability, preventing potential credit crunch and decreasing supply shock impacts on inflation. The bank is now tapering its quantitative easing, and outstanding monetary injection in 2014 will be significantly less than 2013,” Bold said.

However, several issues cast shadows over such signs of incipient improvement. The country’s biggest foreign investment project, the $4.2bn Rio Tinto’s OT mine, is still without an agreement to permit it to expand, pending a final feasibility study and subsequent parliamentary approval.

A quick glance at a 2013 report on Mongolia business by Rio’s subsidiary, Turquoise Hills, suggests that old misgivings about the transience of legal undertakings remains a key bugbear. Among “certain factors which are inherently uncertain”, the Turquoise Hill report lists “the impact of changes in interpretation to or changes in enforcement of, laws, regulations and government practices.”

Mongolia’s reputation for legal capriciousness stems mainly from its response to a 2012 announcement by China’s state-owned Aluminium Corp of China that it was acquiring a coal mine operator, SouthGobi Resources, from a Canadian company. Ulaanbaatar – which is particularly sensitive to signs of economic encroachment from its huge southern neighbour and former colonial overlord -reacted by passing a law requiring government approval for foreign investment in strategic industries.

In a revision that took effect from November last year, it softened this law considerably, following the slump in foreign investment inflows. Now, only state-owned foreign companies acquiring more than one third of a company in a strategic industry must win government approval. Private foreign companies are free from such an approvals process.

Aside from the Rio Tinto delays, the other main factor clouding the outlook for the Mongolian economy this year is China’s dwindling appetite for coal. Coal exports fell 12 per cent in the first two months of 2014, according to Mongolbank figures.

“We expect the pricing environment in the coking coal industry to remain under pressure in the short-term,” Battsengel Gotov, CEO of Mongolia Mining, the country’s largest miner of coking coal, said recently.

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