Terrence Edwards in Ulaanbaatar -
In May the Mongolian government continued its efforts to make amends with investors and restore the lustre to its once prosperous economy. This latest legislative push will see the country roll out a new coordinated effort to settle disputes in its mining a sector and tip the balance of investment returns once more in favour of investors.
Mongolian Prime Minister Norov Altankhuyag received approval from parliament on May 7 for his 100-day economic stimulus initiative. The premier is putting his energy behind promoting private business and foreign investment to help remove some of the bitter taste left in investors' mouths from the grief that the country's politicians have caused over recent years.
"These [initiatives] are all aimed to increase foreign direct investment to Mongolia because right now one of the key problems is the inflow of foreign capital into Mongolia, and that can only be revived once there are specific projects in place," says Bayanjargal Byambsaikhan, chairman of the Business Council of Mongolia and now an advisor to the prime minister for the 100-day initiative.
Poor policy decisions that restricted investment and fuelled disputes with large investors have forced the government to watch the local currency, the tugrik, depreciate for about a year. At the end of April, the tugrik sank below 1,800 to the dollar, meaning the currency has weakened 26% from a year ago and is now the worst performer in Asia over the past 12 months, according to Bloomberg. The weak currency has made essential imports such as petrol fuel and food staples more expensive than many in the country can bear.
Government revenues aren't anything to boast about either. Although the volume of coal exported in the first three months of the year was up 8.4% from the year before, lower prices resulted in a fall of 1.4% in revenue earned. And while revenue from copper exports grew 67%, thanks in no small part to the launch of commercial operations at Rio Tinto's Oyu Tolgoi mine, disagreements over costs between the diversified Anglo-Australian miner and the Mongolian government have held back a key expansion project that would unlock a majority of the wealth at the mine.
That's bad news all round for investment in Mongolia. The mine – which literally means "turquoise hill" due to the outcrops of oxidised copper that Mongolians have supposedly known about for centuries – is one of world's largest undeveloped copper deposits and at peak production will constitute about a third of the country's economy, so its progress is taken as a bellwether by investors for how the country is performing.
Open for business
"Mongolia is open for business" is the message that the government is eager to spread. Mongolia's prime minister on April 30 called upon foreign diplomats and leading figures in business to gather for a meeting to announce his plan. Altankhuyag and his aides explained how the government would concentrate on supporting business through tax cuts and loans, as well as help to increase production from mines and promote foreign investment.
Efforts by the Mongolian government to recapture foreign investment began in earnest last year. In November, the parliament passed a new Investment Law that threw out unpopular restrictions on foreign investment by private foreign firms. It also approved legislation that revamped Mongolia's securities market and set the foundation for institutional investors to enter the market.
The economy minister went into greater detail on Altankhuyag's plan the next day at the Mongolian Investment Summit in London. A slideshow presented at the summit on May 1 showed government plans to invest in downstream production for the country's vast coal reserves, such as coal washing and handling. Concession agreements between the government and private investors would be a key mechanism to see such projects become a reality, according to the presentation.
Altankhuyag is dedicating a fair bit of his plan to the mining sector – which is what originally put Mongolia on investors' radars in the first place. Canada's Centerra Gold has been waiting for the go-ahead from the Mongolian government since 2010 for its Gatsuurt mine after a law aimed at protecting the country's forests and water resources put its license in limbo.
There were also between 106 and 109 licenses cancelled by the government after a judge voided every license approved by an official convicted of corruption. Kincora Copper, another Mongolia-focused miner based in Canada, reported a C$7m write-off because the court decision meant it could no longer explore at its North Fox and Tourmaline Hills properties. "In the previous government, some of the licenses were approved in an unlawful way," said Altankhuyag. "We are committed to solving the issues. On how, we have a working group to develop the criteria."
Traversing the Turquoise Hill
While most would agree the government has ticked off many of the items on its list of issues that need to be dealt with, it is unlikely to eliminate some of the biggest drags on the economy, which the International Monetary Fund (IMF) now sees decelerating more sharply to growth of 11.7% in 2014 and 5.8% in 2015. Previously it saw growth of 12.9% in 2014 and 7.6% in 2015.
Not everything is in the government's control. One issue out of its hands is demand from China for coal and copper – Mongolia's two largest exports. However, it does have influence over the biggest factor for the economy, the relaunch of the development of the Oyu Tolgoi mine.
Statements by Rio Tinto CEO Sam Walsh and the government indicate that the company is in no rush to begin work on the underground mine shaft, even though the government is indicating that work could begin as soon as September.
According to Dale Choi, head of Independent Mongolian Metals & Mining Research, it's unlikely that Rio Tinto will move forward until it can be sure that Mongolia won't try to alter the original terms laid out in a 2009 investment agreement for the project, as it has many times attempted in the past. "Only RT [Rio Tinto] and GOM [government of Mongolia] know exactly what's going on but our understanding is that RT wants essentially sanctity of the multi-billion dollar investment agreement, not the never-ending political debate with attempts to renegotiate it," Choi said in an email note to subscribers. "Although this point is well understood by some GoM officials... at the moment there is a lack of prominent national political consensus on sanctity of the Oyu Tolgoi Investment Agreement which would be enabling for RT to proceed with underground development at OT."
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