New Mongolia govt needs to move fast on budget, Oyu Tolgoi deals

By bne IntelliNews November 6, 2014

Terrence Edwards in Ulaanbaatar -

 

Mongolian Prime Minister Altankhuyag Norov's departure on November 5 signals the end of the so-called “Government of Change” that he formed in 2012 with a grand coalition. But there is little time to mourn its passing, as the Democratic Party will have to regroup and choose a new leader quickly enough to pass a budget for next year and strike a deal so work can restart on the enormous Oyu Tolgoi copper-gold mine.

“This is breaking my heart,” said one investor directly after hearing the announcement that a majority of Mongolia's parliament had voted in favour of Altankhuyag's resignation, “as a Mongolian and an investor.”

Melodramatic dramatic perhaps, but the recent events do paint Mongolia as an unstable country. “Altankhuyag’s removal is likely to be seen as a negative indicator by foreign investors, who are concerned about the stability of the government,” says Neil Ashdown, deputy head of the Asia desk at the London-based consultancy IHS.

He adds, however, that Altankhuyag's dismissal wasn't wholly unexpected, noting that “IHS first highlighted the possibility in August this year – and as such companies and investors familiar with Mongolia are likely to have priced this scenario into their calculations.”

Question of a coalition

Altankhuyag's exit does not require an election. Instead the Democratic Party, which won the 2012 election but did not have enough seats in parliament to form a government on its own, will have to barter an agreement with a minority party so that over 50% - or at least 39 heads - of lawmakers are drawn into the fold.

The Democratic Party already has 35 members in office. It has made up the difference until now with its alliance with the Mongolian People's Revolutionary Party (MPRP), Mongolian National Democratic Party and Civil Will-Green Party.

According to Luvsanvandan Sumati, head of the polling group the Sant Maral Foundation, Mongolia has two options. The first is that it could continue on with the current roster in its grand coalition. However, “it would definitely have to be with a new agreement,” he says.

Or the Democrats could instead partner with the now-opposition Mongolia People's Party (MPP). This latter option would be the reverse arrangement from the 2009-2012 government led by the MPP premier Sukhbaatar Batbold, where the Democratic party was the minority coalition member.

However, Sumati was certain that the next government would be a partnership with one or the other – not both. That's because the MPP and MPRP are at direct odds with one another. Former president and prime minister Nambar Enkhbayar left the MPP and started the MPRP after a disagreement in 2010. Enkhbayar's party bears the name of the MPP when it ran the government as a one-party state during the socialist era, and was formed to directly compete with his former MPP brethren.

Getting back to business

The reason parliament acted so precipitously is likely because two crucial deadlines are looming. The deadline for parliament to pass a budget for next year is November 15 and Mongolia also only has until the end of the year before the next deadline to agree a $4bn financing package that would fund an expansion of the troubled Oyu Tolgoi mine. Developers say the expansion would unlock 80% of the wealth there.

Most important to investors is Oyu Tolgoi, as its sheer size means its fate acts as bellweather for investment in the wider economy. Diversified miner Rio Tinto, which is an indirect 66% shareholder in the project with Mongolia, suspended construction when negotiations fell apart in the second half of 2013. Rio Tinto holds its share through its majority ownership of Toronto-listed Turquoise Hill Resources, while Mongolia owns the remaining 34%.

December 31 is the fourth deadline that Rio and Mongolia have laid down as the two sides try to resolve disagreements before the project financing with the banks will have to be extended for the fourth time. “We fully understand the situation and now is the time for them to decide what they want to do. The ball now is really with the [Mongolian] government,” The Australian reported Rio's copper chief, Jean-Sebastien Jacques, as saying in London in late October.

One item that the prime minister was directly responsible for was signing a memorandum of understanding to show the banks lending to the expansion project that all sides were ready to move forward as partners again. Other loose ends include a resolution to a disagreement of $30mn in taxes that Mongolia says is owed by the Oyu Tolgoi mining unit. Also, Oyu Tolgoi's board still must hand over a feasibility study for the project to the Mongolian Minerals Council, which could give the country's approval.

Even with a fully functioning government, getting all this done before the end of the year would be a big ask.

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