Negotiations between the Mongolian government and Rio Tinto Group over financing for the Oyu Tolgoi copper mine have dried up foreign capital and caused the tugrik to hit a new low, a fund manager said.
“Because of this impasse, international capital is staying away on the sidelines until this important issue is solved,” Michael Preiss, co-founder of Mongolia Asset Management, said in an e-mail. “Everyone is waiting for OT resolution to act as a catalyst to come into the market to ensure that we have indeed seen the bottom and that the currency downtrend has reversed.”
The tugrik fell 0.3 percent to 1,790 to the dollar yesterday and has weakened 26 percent from a year ago, according to data compiled by Bloomberg. The currency is now the worst performing in Asia over the past 12 months.
Mongolia’s economic growth has slipped to 11.7 percent from a record 17.5 percent in 2011 as Rio Tinto has slowed construction at Oyu Tolgoi. Underground tunneling at the mine was suspended in August after the government and Rio failed to agree on how to finance the $5.1 billion expansion.
The fall in currency coincides with weak foreign investment, which fell 28 percent in the first two months of this year after declining 54 percent last year. Foreign reserves stand at $2.4 billion as of January, down 40 percent from last year.
A weakener tugrik increases the costs of most imports, including construction materials, electronics, clothing and food, and has helped push inflation to 12.4 percent.
A central bank price stabilization program has managed to level prices for products including meat, flour and gasoline. The authority injected 677 billion tugrik ($380.3 million) last year, according to Bank of Mongolia Chief Economist Bold Sandagdorj.
The central bank will inject less this year, Bold said, declining to give an amount.
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