Mongolians exchange ideas with London

By bne IntelliNews October 18, 2010

Oli Belfitt-Nash in UlaanBaatar -

Snuggled at the feet of the Great Khural government office, an old soviet cinema is home to Mongolia's Stock Exchange and opens its doors for an hour a day to host the slow trickle of brokers making their way to work. The candy-pink paint job is a deceptively lively mask for the dearth of activity inside, where a huge hall echoes any time a trade is made.

The Mongolian bourse needs help. Out of 367 companies listed since the 1990s (as part of a voucher privatisation programme), over half have been suspended and of those left, less than 20 are liquid enough to be traded on a daily basis.

With the vast majority of shares in the pockets of very few investors, manipulation and insider trading have become commonplace. Mongolia's stock market had the distinction of being the best performer in the world over the last decade, up 1,600%, and is on course to be the same again this year, with the leading index rising over 100% in just two months this summer. But with an average daily turnover of just $100,000 for the whole exchange, these gains could just as easily be one of the local oligarchs playing games.

A big fix

The bourse badly needs reform, as Mongolia is expecting a wave of cash to hit the economy in the coming years after Canada's Ivanhoe Mines brings the massive Oyu Tolgoi copper/gold mine on stream in 2013, which should increase the size of the economy by half on its own. The government is well aware of the problems and has finally turned its mind to fixing them. Earlier this year, it announced the exchange would be privatised and put the job out for tender. From an original 12 applications, four candidates were short listed and a proud Prime Minister Sükhbaataryn Batbold recently said the London Stock Exchange (LSE) was the "front-runner."

The LSE has no doubt helped its bid by hosting a conference in UlaanBaatar at the end of September to discuss the future of the local bourse. With a reputation as strong as London's and expected growth as overwhelming as Mongolia's, it wasn't difficult to impress.

Emerging markets represent 12% of the LSE, $635bn worth of stocks, and the exchange is keen to expand into the fast growing economies of the east. With the largest pool of liquidity in the world and over 200 years of expertise, the LSE has a lot to offer. "Mongolia has huge opportunities with regards to development of the natural resources, and that growth will support the economy," says Tracey Pierce, director of equity primary markets, in an interview with bne. "If they're to monetize those opportunities, they're going to need efficient capital markets, and London truly is the centre for global finance for natural resources companies."

However, the opportunities for both parties won't come without bumps in the road. In October, a representative of Mongolia's State Property Committee suddenly announced that the tender had been cancelled. With that decision almost instantly overturned, it would appear infighting has broken out over a strategic decision that will set the course for the development of the country's capital markets for decades to come.

Fears of foreign ownership and flip-flopping on tenders have become something of a norm in Mongolia. Both the deals to develop Oyu Tolgoi mine and the giant Tavan Tolgoi coal deposit by foreign investors have followed a similar winding path - the Oyu Tolgoi deal took six years to sign and Tavan Tolgoi is back on the table after a first attempt to auction it was cancelled earlier this year, frustrating international investors. The executive director of the Mongolian Stock Exchange (MSE), Rentsen Sodkhuu, had to fend off accusations that he was selling out in a recent interview with the local media. "Mongolians can do the work," he said. "We will not permanently hand over the MSE to any foreign bidder."

As head of the Agricultural Association and four years as an MP before helping to draft the new securities law, Sodkhuu is a fiery public speaker and has inflamed the media with Mongol patriotism before. "If we took back our Oyu Tolgoi," he said in 2008, "we could have raised several billion dollars like Ivanhoe [Mines]." Amidst recent arguments over accusations of corruption, he is now fighting to restore his reputation with one hand while beckoning London with the other.

Mongolia recognizes the real need for diversification and a developed domestic capital market to channel the wall of cash that Oyu Tolgoi will bring. Dwarfed by their two neighbours of Russia and China, however, they are being very cautious to balance foreign influence during this pivotal period. They would rather be in charge of their own development process themselves if they could manage it.

Beefing up the bourse

The government's Financial Regulatory Committee (FRC) has drafted a new securities law, which is due to go to a vote in November. With over 100 new articles, the law aims to introduce international standards by drawing on the experience of other leading exchanges around the world. Strict investor and company rules as well as harsher penalties for crimes wield the stick, and new much-anticipated depositary receipt rules and fund structures offer the carrot.

Despite this step forward, there were still complaints from the panel at the LSE's conference. "What's the point of over regulating a market that barely has a heartbeat?" asked Lee Cashell, founder of Asia Pacific Investment Partners. Finding "complete paralysis" from the FRC, he insists that more IPOs and tradable floats are required to drive this market forward.

Happily, this is about to change. Tavan Tolgoi will be listed on the MSE and shares distributed to citizens, according to the government's latest announcements. In fact, all "strategically significant" companies must sell at least 10% to the public via the MSE, it says, despite the deep-seated problems with the exchange - though critics argue that demands for local listing can't be met until the MSE has had its makeover, and this could take years.

The LSE is plugging London dual listings to Mongolian companies before relying on the MSE and offering up London's Alternative Investment Market (AIM) is no doubt where the interest in Mongolia stems. "We're definitely here to win [the management tender]," says Pierce with confidence. "We are here for the long term and would like to use London's expertise to support the future development of the Mongolian capital markets."

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