Mongolia Brief August 14, 2014 Part II
President
of the Central Bank's resignation called for
August 14
(news.mn) Several MPs of the State Great Khural submitted a petition to Speaker
Z.Enkhbold for Central Bank's President N.Zoljargal's resignation, on Thursday.
The
parliamentarians blame the Central Bank for the Mongolian tugrik's slip against
foreign currency. The petition for N.Zoljargal's resignation claimed that the
Central Bank failed to take urgent measures against the rising exchange rate
and blamed the Central Bank's weak policy during critical economic conditions.
The
parliamentarians also claimed the exchange rate increase is politically
motivated and an intentional boost.
Xi
Jinping is to pay a two-day visit to Mongolia
August 14
(news.mn) Chinese President Xi Jinping is to pay a two-day visit to Mongolia in
August. But the date of the visit is not confirmed yet. According
to an official source, the visit will be scheduled next week.
Chinese
President Xi Jinping's visit to Mongolia comes 11 years after former Chinese
President Hu Jintao's visit to Mongolia.
FX
Futures and Options Available Through the MSE
August 14
(Mongolian Economy) The Mongolian Stock Exchange recently began to draft
regulation for FX features and options trading under the Securities market law.
With this change, enterprises and investors will have the ability to account
for investment risk in a proper manner. The MSE and Financial Regulatory
Commission will put this new system in operation beginning October 1, 2014. FX
futures and options are financial instruments that enable companies or sole
proprietors to speculate changes in the currency exchange-rate or remove the exchange-rate
risk.
In addition,
the MSE is also beginning to spread daily trading and price information to the
public via mobile application. Customers will have access to price information
of trading on a daily basis, allowing for more interaction and for customers to
better provide signals on price fluctuation. Through the application, customers
will be able to establish their own portfolio. The application will be uploaded
to the AppStore starting October 1, 2014.
Robert
Schoellhammer from the ADB on Mongolia’s current economic situation “A crisis
is quite obvious and we’re not in one”
By B.
Enkhtsetseg
August 14
(Mongolian Economy) German national
Robert Schoellhammer was appointed Country Director of the Asian Development
Bank (ADB) for Mongolia in 2011. He joined ADB in 2000 as a Project Economist
in the East and Central Asia Department (ECRD). He managed ADB’s operations in
the education and social security sectors in Mongolia, and the Kyrgyz
Republic.
Prior to joining ADB, Mr. Schoellhammer
worked at the African Development Bank and as a European Commission adviser to
the Ukrainian Cabinet of Ministers and Ministry of Defense. From 1992 to 1994,
Mr. Schoellhammer worked as a lecturer in English and Economics at the
Institute for Administration and Management Development in Mongolia,
during which time he worked on the establishment of Mongolia’s first MBA
program, and conducted a major survey of rural poverty in 1992, in conjunction
with the Government of Mongolia’s Poverty Alleviation Program.
Mr. Schoellhammer holds a Bachelor’s degree
in Development Economics from the University of East Anglia, United
Kingdom and a Master’s degree in Agriculture from the University of Aberdeen,
UK.
Q: What is your opinion on the dollar hike?
Do you think it will continue or will it go down? What is the main cause of the
depreciation of the tugrug?
A: We have seen
this in a lot of other Asian countries. It started last year when we saw drops
in many Asian currencies. If we look at Asia Pacific as a whole, it’s become
much more problematic keeping money in emerging economies.
There are many
reasons for that. It started with a discussion of tapering in the US. Interest
rates were super low and stock prices were falling. Emerging markets then
became attractive. You can put things at a higher rate. Mongolia benefited from
that and other Asian countries benefited from that. If you look at the last
year, you will have seen the old economies coming back. The US is growing back.
The Japanese stock market has increased. The Euro economy increased. The UK
economy is exceeding IMF predictions. All of a sudden, emerging markets have a
lot more competition for capital. That’s one of the factors that has affected Mongolia.
It has become a much more competitive situation on the whole.
If we look
specifically at Mongolia, a lot of it is related to foreign direct investment.
It depends so much on the faith of one or two projects. What we’ve seen
recently is that the foreign direct investment has reduced and with that, a
country doesn’t have the influx of foreign exchange to finance its imports. But
from ADB’s point of view, this is something that I think really underscores the
urgent need for diversifying the economy because when I came to Mongolia three
years ago, the talk was all about mining.
What we now see
is that you really can’t build an economy on one sector. It’s risky especially
in extractive industries. You’re very vulnerable to commodity prices going up
or down. The market is all international. There are a lot of different factors
there. The conclusion is really the need for diversification. If you look at
the tugrug, to some extent, there is some correction. The tugrug became very
strong because of mining. To some extent, the correction can be a benefit to
Mongolia to make it more competitive for exports. With the depreciation,
imports become more expensive and that will make domestic products more
competitive. The question is: Can Mongolia’s export industry take advantage of
Mongolia’s low tugrug value? But there is a blockage. Mongolia has 17 livestock
per person. We see fantastic potential to redevelop its agriculture sector. But
regulations and skills need to be settled out.
Q: You say, current depreciation can have
good impacts on local producers who export especially in agriculture and the
tourism sector. But for a country with very little local production, would
depreciation transpire to crisis?
A: You know
very well the concept of Dutch Disease. With all of this capital coming in, it
really changed the value of the local currency to the detriment of
non-extractive industries. I think what we are seeing here is a correction.
Even now, Mongolia imports a lot of milk. If you have foreign currency, you’re
going to use foreign currency. If you go to a Mongolian supermarket, it’s full
of imported products. Clearly in a cold climate like this one, you can’t
produce everything, but when you see things such as imported milk and imported
dairy, you’ve really got to wonder. The main damaging thing is uncertainty. If
you’re going to invest and your revenue is in tugrug, you want to know what the
amount is. The key thing is certainty. Currencies do fluctuate. It’s when they
fluctuate too much is what makes it hard to keep certainty.
Q: Some say the current depreciation of the
Mongolian currency is the true color of the tugrug. If it’s the true color of
Mongolian currency, do you think it’s at the right level where Mongolia
currency should stay?
A: Whoever
you’ll ask, you’ll get a different answer. If you’re a tourist about to go
abroad, you want a strong currency. No one wants to show up with a weak
currency. If you’re an exporter, you want to be competitive. However, you
always want to find the perfect balance. Mongolia’s importing, but it’s also
exporting. We don’t have these wild swings in foreign investment. Foreign
direct investment is very important, but it’s also important to realize that
Mongolia is very different in terms of FDI because it’s very lumpy.
Foreign direct
investment is related to few mining projects. We do hope those projects will
succeed, but at the same time, those few lumpy projects cannot be a proxy for
the whole economy. What has happened too much is that there has been too much
focus from the international investment community and the national investment
community in landing these huge projects. Mega-projects are very difficult. I
would not build an investment strategy for a country on occasionally landing a
large project. A theory that I have heard a lot is that Mongolia is struggling
because it’s a land-locked country.
ADB doesn’t
think so. Most of the richest countries such as Switzerland and Lichtenstein
are land-locked countries. It’s an advantage in some respects. The key thing is
how Mongolia can become a part of great economic opportunity. Can it do it
through mining alone? Well mining is only one element. We hear about laws. Laws
are only one part. You need those real companies producing real things. That is
ultimately my conclusion about currency. There is some real great potential
here. Mongolia can come up with great quality to export. Food is a great
export. It’s in demand. If you look at China, there is a big shortage of land
and meat. Mongolia has huge potential for beef exports and lamb and mutton
exports.
The
tugrug-dollar rate is getting lessened. It’s a reminder to diversify the
economy. Make sure that the economy is not vulnerable to the outcomes of one or
two big projects. Get it in from different economic sectors. Build up the
exports.
Q: Currently, the latest information from
Mongol Bank is that FDI decreased by 70% for the first half of 2014. If we look
at the situation, some people call it a crisis. Do you think it is a crisis? On
the other side, can some people can people call it a mental crisis?
A: I’ve worked
on some financial crises before. A crisis is something that you don’t have to
ask. If it’s a crisis, you’ll know immediately. A crisis is when you go the
bank and you don’t get money. A crisis is quite obvious and we’re not in one.
We have a lot of indicators to be worried about. You have to look at the real
economy and differentiate between economic difficulties and economic
crises.
Right now, I
would say it is very difficult. I don’t think there is any doubt about
that. For many sectors, it certainly is very difficult. When I worked here 20
years ago, I would say that’s a crisis. The GDP was about USD 300. Budget was
about USD 150 million per year. The level of integration that Mongolia had with
the rest of the world was minimal. There were even shortages with coal. That
was a more worrying time than now. If you fast forward 20 years, Mongolia has
some great companies and good economic ties and prospects. The level of
integration at hand is much better. The key thing is to keep up that
momentum.
Q: I think that there is a lesson to be
learned. What would you say is the biggest moral of this situation?
A: The main
thing is that there is risk with any sector. Let’s say a country will go into
agriculture or mining. I don’t know any sector that doesn’t carry any risk. It
goes with the saying; don’t put all eggs in one basket. Mongolia and many of
its foreign partners have been focused on mining. A lot of foreign investors
come in and put holes in the ground and export resources. This is not a
sustainable model for development. If you put too much in one sector, you don’t
pay attention to other sectors. If one sector fails, you need something else to
fall back on. I think the main lesson is the need for diversification. Look at
smaller land-locked countries. They’re all diversified. When one sector goes
into turbulence, you have another one to fall back on.
Another lesson
here is that Mongolia has had very fast growth which also brings high
inflation. Inflation is bad. The higher the inflation, the more it kills the
economy. Above all, for business you need certainty and predictability. I think
what’s most important from ADB’s perspective is jobs. What really makes the
biggest difference is jobs for people. In any country, you need to make sure
that young people have good and sustainable jobs. Mining only provides 4%
maximum of jobs. What about the remaining 96%? Focus on jobs. Diversify. Any
one sector has substantial risks. If something goes wrong, there is going to be
an extraordinary impact. In a few weeks time, I think the Chinese president is
visiting. ADB is looking at this. Mongolia has coal. China has gas. It could be
a very reliable business. I think that it’s good other sectors are being looked
at.
Q: Is increasing interest rates going to
limit national production?
A: I think when
you put rates up, it will limit production, but again I think this is an
experience not just for Mongolia, but for many other Asian countries. They
focus on growth and creating higher GDPs, but that also created inflation.
What’s the point of having growth if most of that growth is inflation?
Inflation is really a killer. What’s highly important is don’t have an interest
rate below inflation otherwise you’ll have a gradual erosion. Have an interest
rate above inflation. All these things are linked. Investment is related to
confidence. Confidence is related to many things including the legislative
framework. Why invest if you don’t know what your revenue stream is going to
be? I think it’s a good idea to increase the rates. That’s the nature of
economics. Things work in different ways.
Q: Some say the current situation will cool
off by the middle of next year. When do you think this situation will be better
off?
A: It really
depends on the decisions made by the private sector and government. It doesn’t
all happen automatically. It is a result of collective decisions. With all the
gloom around the investment framework, we were happy about the Concession
Agreement made in June. Oyu Tolgoi will be important. Will coal and gas
projects proceed? How fast will they proceed? This will all depend on
decisions. It is something which I can’t really predict, but it is a situation
that can be partially controlled. It’s a much more competitive environment now
for emerging economies. If you are an investor, you have more choices. The
expectation in many countries is that interest rates will rise. The key thing
for emerging economies is to become more competitive. Work on the
infrastructure. Work on the economy. Work on the legal environment. Diversify.
The role of the government can be helped my international markets. There are so
many interrelated things. Competitiveness will come from a good labor force. On
the whole, the labor force is not that well-prepared. There is a lot that can
be done – labor force, infrastructure and certainty in the legal policy
environment. The opportunities are there and if the right decisions are made,
there is no need for concern.
Agreement
to Develop TT Power Plant by Government of Mongolia and Oyu Tolgoi LLC to Be
Signed Today
August 14
(infomongolia.com) The Government of Mongolia and Oyu Tolgoi Company will ink
an Agreement of Cooperation in Energy Sector in Southern Region at the
Government House at 04:00 pm on August 14, 2014.
The decision to
establish this Agreement was agreed at the Cabinet meeting held on July 03,
2014, where the Government of Mongolia will be represented by Prime Minister
N.Altankhuyag, Minister of Energy M.Sonompil and Chairman of Energy Regulation
Committee S.Otgonbayar and the Oyu Tolgoi LLC by Chief Executive Officer of
Iron Ore at Rio Tinto Ltd., Andrew Harding and other officials.
According to
document, the cooperation between Government and Oyu Tolgoi LLC will be
regulated by this Agreement to develop the "Tavan Tolgoi Power Plant"
mega project in Southern Gobi Region of Mongolia, where Oyu Tolgoi (OT) Company
is considered the main user of this power plant and OT’s participation is
great.
Moreover, due
to the Investment Agreement established in 2009, the Clause 7.3 cites the
Investor shall, within 4 (four) years of Commencement of Production, secure its
total power requirements for the OT Project and according to the Agreement,
Government of Mongolia to provide 50 million USD in the form of mezzanine
financing to the Project, and the final Government financing will not exceed
amount equaling 1/3 of equity amount of the Project.
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