Terrence Edwards in Ulaanbaatar -
Bankers in Mongolia have already seen what was once the world’s fastest growing economy go from boom to bust because of too much hope vested in the country's valuable mineral resources. Investment into other segments of the economy is needed, they say, to avoid repeating the mistake.
The collapse of a two-year mining boom in 2012 rocked the Mongolian economy, bringing it close to economic disaster. The experience has made it clear how important it is for the country to diversify away from the export of natural resources such as copper and coal. But with weak appetite from investors, the country is counting on the help of international partners.
Investors attending the IIB-MBA Mongolia Business Conference Mongolia in in Ulaanbaatar on June 5 spoke frankly about their shared troubles during a two-year rough patch.
With foreign investment accounting for between 42% and 45% of GDP in the boom years, a 16-times drop in FDI has been a serious drag on growth. The economy expanded 7.8% last year, but that only really means an additional $1bn to nominal GDP and pales in comparison to the peak growth rate of 17.5% posted in 2011.
Mongolia has experienced a fall from grace with investors because of disputes over mining projects. A softer market for commodities like coal and slowing economic growth in China have also turned investors off commodity plays like Mongolia. “Dependence on the commodities market is very dangerous,” chief economist at the Bank of Mongolia, Sandagdorj Bold, told delegates at the conference, recalling the impact that declining coal prices has had on the economy.
After facing stiff fiscal challenges in 2013 and 2014, Bold argued that the Bank of Mongolia's use of a tight fiscal policy and flexible exchange rate had managed to manoeuvre the economy into a “soft landing.” He said the country can now look forward to a “modest and moderate outlook for 2016”.
Norihiko Kato, chief executive of Khan Bank, one of Mongolia's three largest, was less sanguine. “I think the situation is still a bit fragile,” he said, noting that salaries across all sectors were growing at a slower rate, if at all, while the level of non-performing loans at banks had failed to improve.
Echoing that sentiment, Golomt Bank’s CEO, Lamjav Oyun-Erdene, said: “Jobs have decreased and that burden is having an impact on the quality of loans.”
Desperately seeking diversity
The government’s fiscal situation is set to improve thanks to an expected $6bn in investment from Rio Tinto for the expansion of the Oyu Tolgoi copper-gold mine. But while that gives a fillip to the beleagured economy, panellists were in agreement that more diversification in the economy is needed.
Co-hosting the event was the International Investment Bank (IIB), a development bank established during the Soviet era for the Comecon countries. After a lull in activity from 1991 to 2012 following the collapse of the Soviet Union, the bank has been re-energized under the leadership of its chairman, Nikolay Kosov.
Kosov on the day of the conference signed an agreement with Mongolia's finance ministry to maintain micro lending to small businesses, using local commercial banks as intermediaries. It's a popular tool that's been utilised by other groups in Mongolia, with some success. Such financing provides options for start-ups and entrepreneurs while local banks remain too illiquid or are unwilling to bear the risk to lend, bringing hopes of building a more sustainable economy. “Mongolia currently represents 20% of our portfolio – that's €15bn,” Denis Ivanov, IIB's deputy chairman, told bne IntelliNews on the sidelines of the conference.
The European Bank for Reconstruction and Development (EBRD), another development bank helping former communist states transition toward market economies, since 2006 has invested $1.1bn into businesses in Mongolia. That includes $30mn of its own intermediary micro lending since 2013. The Asian Infrastructure Investment Bank, China's attempt to wield soft power in the region, is also expected to enter the market later this year.
The EBRD and the Asian Development Bank named agriculture, non-mining industrial production and renewable energy as attractive targets for lending and assistance.
Roads to China
The attention given to Mongolia is predicated on IIB's strategy to tap into Asian markets, specifically China. “It was last year that IIB began pursuing equal engagement with Asia,” said Kosov. “We, IIB, try to pioneer a closer relationship with the region as a whole, and with China in particular.”
It was Mongolia's close proximity to China that first caught the eye of investors, paired with a competitive tax regime and cheaper labour costs than competitors such as Australia. In addition to being Mongolia's top trade partner, China is also one of its largest investors and the main consumer of its minerals.
Undeterred by slowing growth in China, IIB sees the world's second largest economy as a strategic destination for expansion. The bank signed a second agreement with China's Dragon Global Credit Rating agency, which sets the stage for a possible bond offering there.
But Mongolia still faces logistical hurdles in trading with its southern neighbour. The country will need assistance from international partners to finance construction of crucial railway lines to cut down on transport costs for its minerals.
Bankers, still feeling burned by the commodities slump, hope that some day Mongolia's economy will mature enough so it will have more than just its natural resources to offer.
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