Oliver Belfitt-Nash in Ulaanbaatar -

With an almost threefold increase in GDP growth last year and inflation now in double digits, Mongolia's economic problems appear to be of the overheating kind, rather than the recessionary sort. The government is now talking about spending curbs, but it still has promises to keep ahead of elections due in June.

While GDP growth was officially put at 17.3% for 2011, up from 6.4% in 2010, "some have been counting the trucks leaving the mines and say the real figure may be twice that," says Peter Morrow, an adviser to Khan Bank, the largest commercial bank in Mongolia.

What's driving that growth are massive production and exports of natural resources. Mongolia's coal exports to China grew 26% in 2011 and the sale price per tonne rose 155% to $106 - but that's still well under the global price of $219 per tonne, so there's some way yet to grow. While coal has been a driver of growth, the retail sector was the fastest growing part of the economy last year, up 42.5% from 2010. Together with government spending rising 56% in 2011, which is expected by the World Bank to increase another 32% this year, there are growing worries that inflation could rise further from the 11.1% hit in December.

During a visit to Japan in mid-March, Prime Minister Sukhbaatar Batbold spoke to the media about the need for "a tight monetary policy" as well as taking "control over the expenditures, especially on the budget side."

However, people like President Tsakhiagiin Elbegdorj expect little from the government in the way of enlightened policy ahead of this summer's elections. "We hear dangerous promises, but rarely present any solutions," Elbegdorj said in his closing speech to the Mongolian Economic Forum in March, in what was perhaps an early taste of the tone to be expected from the campaigns. "Businesses owned by politicians thrive while the poor stay poor, and this needs to change. Only international bodies bring up corruption, but we Mongolians must deal with this problem. The government is a danger and a risk to the well-being of the Mongolian people."

Prime Minister Batbold accepts the government has work to do, telling the same Mongolian Economic Forum: "We have economic strategies, but no solid plan... Market development is not yet in place and we need clear, scientific-based methods for the future."

Bottlenecks

The up to $3bn IPO of Erdenes Tavan Tolgoi, the state-owned coal company that controls the world's largest deposit of coking coal, is symptomatic of the bottlenecks and government indecision in major projects and reforms.

Foreign investors and local voters alike have been waiting for progress on this entity to list in Mongolia, London and Hong Kong, but the deal seems to have hit a speed bump at every stage of the road. Half the deposit was to have been sold to a consortium of China's Shenhua Group, Peabody Energy and a Russian-Mongolian mining group, but the share split and details of the deal has been a problem from the outset. The population was promised 10% of the mine last year, but now that figure could increase to 20% as elections approach, and Hong Kong could drop off the listing locations because the company might not meet the requirements. The company says it's still "very keen" to list by June, though many don't expect a deal to happen before the autumn.

Part of the hold-up comes from the lack of a legal framework for a listing of that size on the local Mongolian Stock Exchange. A new Securities Law has been in the works for over a year now as the London Stock Exchange (LSE) runs its experienced eye over the document. "The new law will force accountability for companies in line with international standards," says Saruul Ganbaatar, chief strategy officer for the MSE. "It will define Depository Receipts for Mongolia." The law is also expected to enforce a 30% free float of any company wanting to remain listed on the MSE, which would drastically increase liquidity and encourage more companies to follow after Tavan Tolgoi.

The long-awaited law was due to be considered in the autumn session, but now has been delayed until spring. Tavan Tolgoi aside, the $1.6bn-sized MSE is in need of serious reform if it is to be considered a viable option for raising capital, as most investors stay clear of the outdated and opaque system of today. "The new Millenium IT LSE system will come to Mongolia within a month or so," Tony Weeresinghe, the LSE's global development director, said at the beginning of March. "We will install the same system that runs in London, so the foundation will be here when the MSE develops further."

And the MSE is sure to grow fast if current figures are anything to go by. "Less than 10% of Mongolian companies are listed," says Bold Baatar, chairman of the MSE. "Property is up to $1,500 per square metre downtown and the capital markets must catch up with the growth. Almost all of the MSE's market capitalization is concentrated in the top five companies, and as more like Tavan Tolgoi and Oyu Tolgoi [copper-gold project] come to market, I believe we have a potential for a $45bn exchange."