Saturday, September 6, 2014

Regional Report – Mongolia: the resource curse

Ng Weng Hoong explains why investor interest in Mongolia is falling.

As its commodities-driven economy began taking off at the start of the decade, Mongolia was warned repeatedly to guard against the “resource curse” associated with the corruption, waste, internal power struggles, runaway inflation and political instability that has befallen many developing economies. Tragically, Mongolian leaders paid little heed as they feasted on – and, indeed, openly fought over – the huge windfall brought in by foreign investors hoping to exploit the country’s vast reserves of coal, copper, gold, uranium and other minerals.

Today, Mongolia’s party mood is clearly over. By 2013, the vast landlocked country, with a population of fewer than 3 million people, sandwiched between Russia and China, developed all the symptoms of the resource curse. Inflation is holding stubbornly above 10% and the currency has lost a third of its value since 2011. Foreign investors are turning their backs on Ulan Bator, while China – the market for more than 90% of Mongolia’s exports – has switched to other suppliers for its coal after two years of troubled bilateral ties. Instead of achieving record export sales of 30 – 40 million t by 2014 as predicted, Mongolia will be lucky to repeat last year’s volume of 18.3 million t. Coal, the country’s main revenue earner, contributed just US$ 1.1 billion in export earnings last year, down from US$ 1.9 billion in 2012.

Yet, Mongolia’s condition is far from fatal. The IMF, World Bank and the Asian Development Bank are supportive of the government’s actions to reverse the country’s slide. Months after the passage of the controversial Strategic Entities Foreign Investment Law, a nationalistic law aimed at preventing foreign control of strategic assets, the government began a series of moves to restore ties with China and try rebuild investor confidence – both of which were damaged when the Mongolian government stepped in to block a Chinese takeover of SouthGobi Resources.

In late 2012, the Mongolian parliament approved SEFIL’s full repeal and the enactment of a new investment law, which received support from both the governing and opposition parties. Meanwhile, over the past 18 months, the government has also initiated high-level and business meetings between senior Mongolian and Chinese officials. Last October, prime minister, Norovyn Altankhuyag, met with Chinese officials in Beijing to reduce friction, culminating in the signing of an agreement to supply 1 billion t of coal to Shenhua over a 20 year period. This was followed, in May 2014, by a meeting between Mongolian President Tsakhia Elbegdorj and his Chinese counterpart, Xi Jinping, at a forum in Shanghai to improve economic and trade ties by focusing on mining, infrastructure building and financial co-operation.

Two months later, the government amended a 2006 law to open up more land for mining and exploration activities, lift a ban on new mining licences and extend exploration periods from 9 to 12 years. The amendment also provides for the creation of a council to oversee future policy changes to cover the interest of foreign investors. The government has set a new target of attracting US$ 1 billion in new investment to explore the country’s coal, oil and shale gas reserves.

The final version of the new law has yet to be published, but investors are not waiting with bated breath. Rather, they are watching the government’s next move to resolve several lawsuits and bitter disputes with foreign companies that have led to the detention of senior executives and the trial of government officials on a number of criminal charges. While accusing some foreign companies of abetting corruption, fraud, evading taxes and breaking contract agreements, the government has also revoked more than 100 mining licences. With little indication as to when and how these disputes will be settled, investors are not expected to quickly return to the land where Ghenghis Khan once ruled and terrified the outside world

Written by Ng Weng Hoong. Edited by Jonathan Rowland.

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