Mongolia's economic boom could face policy risks -investors
ULAN BATOR, Sept 8 (Reuters) - Mongolia's booming economy could be derailed by a slowdown in Chinese demand for its extensive mineral reserves but disruptive government policies present a greater risk, especially as 2012 polls near, investors and experts said on Wednesday.
The landlocked nation is expected to maintain double-digit growth for at least the next decade as foreign capital floods in, not only to develop some of the world's most promising deposits of coal, copper and gold, but also to provide infrastructure, services and training.
"This place can do really well unless the government screws it up," said Edward Rochette, former vice-president of Canada's Ivanhoe Mines , now serving as chairman of the East Asia Minerals Corporation. "The biggest risk in my opinion is government interference.
"The second risk is if the Chinese quit buying -- if they quit buying the whole thing collapses."
Mongolia's democratic government has been under pressure to use the dividends from its mining sector to enrich its population, half of which still lives under the poverty line. But investors and parliamentarians alike have been worried that populism could prevail over prudence.
Many still recoil at the memory of Mongolia's decision to impose a windfall tax on mining profits in 2007, as politicians sought to use soaring copper prices to raise the cash needed to meet promises made to voters in 2004.
The law was revoked in 2009, paving the way for a landmark investment agreement granting 66 percent of the massive Oyu Tolgoi copper-gold deposit to Ivanhoe, whose biggest shareholder is global miner Rio Tinto , with a stake of 46.5 percent.
But Mongolia's political parties have still been quick to offer cash payments to citizens, putting them under pressure to squeeze as much out of their mines as possible. At the 2008 parliamentary elections, the Mongolian Democratic Party's offer of 1 million tugriks (around $1,200) for every citizen was quickly trumped by the Mongolian People's Revolutionary Party, which offered an even higher 1.5 million tugriks. The MPRP won.
"It is easier for politicians to promise cash than to come up with very clever policies to create jobs," said Sanjaasuren Oyun, former foreign minister and now a member of parliament for the centrist Civic Will and Green Party.
The 2008 promise will require $4 billion in total spending, the same as the budget for this year. The cash-strapped government has already squeezed "prepayments" from the Oyu Tolgoi and Tavan Tolgoi projects in order to fulfil its election promises but so far they have not been enough.
Last month, Mongolia signed a deal with the Aluminium Corp of China Ltd to supply $250 million worth of coal from Tavan Tolgoi, partly to raise the money required to meet its 2008 pledges.
"There are so many needs and it is so tempting for the government to go on a spending spree as soon as the money comes in," Oyun said.
Investors are also concerned by a new law that forbids mining in forests or river basins. Dozens of projects are in a state of legal limbo, with the government unable to raise the millions of dollars required to compensate them.
Many expect the law to be revoked. Like the windfall tax, it was submitted by backbenchers and passed despite opposition from the government.
"It is not unusual that some of this legislation is passed despite government not supporting it," Oyun said. "I remember the deputy prime minister and the ministry of finance were fiercely opposing the legislation, saying that it would deter foreign investment, but it was passed."
The state accounts for about 35 percent of the Mongolian economy, up from around 15 percent in 2003, and investors said the government's growing role has made the economy more vulnerable to misguided populist policies.
"There is a tendency to make knee-jerk policy decisions in response to complaints from environmental groups or nationalists, as has happened with the environmental law," said a representative with a foreign mining firm.
Oyun said Mongolian policies have fluctuated very consistently in line with global commodity prices.
"Ten years ago mining legislation was very liberal and the mining sector was business as usual. Please provide jobs, pay taxes, thank you very much."
"Only when prices started going up did things start to change and we swung from having very liberal policies to more left-wing policies. This was a natural reaction."
The landlocked nation is expected to maintain double-digit growth for at least the next decade as foreign capital floods in, not only to develop some of the world's most promising deposits of coal, copper and gold, but also to provide infrastructure, services and training.
"This place can do really well unless the government screws it up," said Edward Rochette, former vice-president of Canada's Ivanhoe Mines , now serving as chairman of the East Asia Minerals Corporation. "The biggest risk in my opinion is government interference.
"The second risk is if the Chinese quit buying -- if they quit buying the whole thing collapses."
Mongolia's democratic government has been under pressure to use the dividends from its mining sector to enrich its population, half of which still lives under the poverty line. But investors and parliamentarians alike have been worried that populism could prevail over prudence.
Many still recoil at the memory of Mongolia's decision to impose a windfall tax on mining profits in 2007, as politicians sought to use soaring copper prices to raise the cash needed to meet promises made to voters in 2004.
The law was revoked in 2009, paving the way for a landmark investment agreement granting 66 percent of the massive Oyu Tolgoi copper-gold deposit to Ivanhoe, whose biggest shareholder is global miner Rio Tinto , with a stake of 46.5 percent.
But Mongolia's political parties have still been quick to offer cash payments to citizens, putting them under pressure to squeeze as much out of their mines as possible. At the 2008 parliamentary elections, the Mongolian Democratic Party's offer of 1 million tugriks (around $1,200) for every citizen was quickly trumped by the Mongolian People's Revolutionary Party, which offered an even higher 1.5 million tugriks. The MPRP won.
"It is easier for politicians to promise cash than to come up with very clever policies to create jobs," said Sanjaasuren Oyun, former foreign minister and now a member of parliament for the centrist Civic Will and Green Party.
The 2008 promise will require $4 billion in total spending, the same as the budget for this year. The cash-strapped government has already squeezed "prepayments" from the Oyu Tolgoi and Tavan Tolgoi projects in order to fulfil its election promises but so far they have not been enough.
Last month, Mongolia signed a deal with the Aluminium Corp of China Ltd to supply $250 million worth of coal from Tavan Tolgoi, partly to raise the money required to meet its 2008 pledges.
"There are so many needs and it is so tempting for the government to go on a spending spree as soon as the money comes in," Oyun said.
Investors are also concerned by a new law that forbids mining in forests or river basins. Dozens of projects are in a state of legal limbo, with the government unable to raise the millions of dollars required to compensate them.
Many expect the law to be revoked. Like the windfall tax, it was submitted by backbenchers and passed despite opposition from the government.
"It is not unusual that some of this legislation is passed despite government not supporting it," Oyun said. "I remember the deputy prime minister and the ministry of finance were fiercely opposing the legislation, saying that it would deter foreign investment, but it was passed."
The state accounts for about 35 percent of the Mongolian economy, up from around 15 percent in 2003, and investors said the government's growing role has made the economy more vulnerable to misguided populist policies.
"There is a tendency to make knee-jerk policy decisions in response to complaints from environmental groups or nationalists, as has happened with the environmental law," said a representative with a foreign mining firm.
Oyun said Mongolian policies have fluctuated very consistently in line with global commodity prices.
"Ten years ago mining legislation was very liberal and the mining sector was business as usual. Please provide jobs, pay taxes, thank you very much."
"Only when prices started going up did things start to change and we swung from having very liberal policies to more left-wing policies. This was a natural reaction."
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