The Biggest Tests for Mongolia Lie Ahead

For many countries, the global financial crisis and its aftermath is the stiffest test they are likely to face for years. For Mongolia, however, the recession, banking crisis and International Monetary Fund package that set the tone for 2008-2009 are likely to pale in comparison with the challenge of managing the next decade. As the country finally unlocks its stockpiles of copper, gold and coal, it will have to cope with unprecedented economic pressures.

Mongolia's enormous Oyu Tolgoi copper and gold complex is expected to start production in late 2012. As a result, the IMF forecasts 2013 gross-domestic-product growth of 28%, the fastest in the world, up from forecast increases of 7%-8% in 2011 and 2012. Foreign direct investment both in the mining industry and in infrastructure is expected to be many multiples of GDP of just $5 billion.


Coping with those flows will be a challenge. The appreciation in the Mongolian togrog against the U.S. dollar is raising fears of Dutch disease, whereby the country becomes ever more dependent on natural resources as money floods in, making other sectors less competitive. The infrastructure needs are colossal: In a country the size of Western Europe, there are fewer paved roads than in Luxembourg, according to Renaissance Capital.

For investors, getting exposure is a challenge. The Mongolian stock market has a market capitalization of about $1 billion, and trades only one hour a day. But the bond market may offer an entry route in 2011. Mongolia plans to tap the bond market, likely for $500 million. Given the enthusiasm for emerging markets and Mongolia's unique opportunities, that could be one of the hottest deals of the year.

Write to Richard Barley at richard.barley@dowjones.com