Once the darling of foreign investors, Mongolia has struggled to live up to expectations and clouds have now gathered over its horizon as foreign investments are plummeting and authorities seem unable to fix lingering issues such as the multi-billion expansion of flagship mine Oyu Tolgoi.
“The decline in FDI inflows coupled with the contraction in exports in 2012 and 2013 have contributed to a rundown in foreign exchange reserves, a weakening of the currency and an increase in vulnerability to external risks,” credit rating agency Moody's said in a credit opinion on October 23. Moody's reasserted its B2 rating and negative outlook over the country's $1.5bn, 10-year bond issued in November 2012.
Foreign direct investments (FDI) have been decreasing sharply after peaking at $4.6bn and $4.4bn in 2011 and 2012, which were staggering figures for a $10bn economy. Total FDI did not go beyond $640mn in the first eight months of 2014, from $1.6bn during the same period last year, according to figures from the country's central bank.
“This has strained the external liquidity position, as reflected in a sharp fall in gross foreign reserves to $1.4bn in August 2014, from a peak of $4.1bn in December 2012,” Moody's noted. Foreign currency reserves would be even lower were it not for the buffer provided by the 15bn renminbi (approximately $2.4bn) bilateral swap facility with China, which was expanded in August from 10bn renminbi previously. These dynamics took a toll on the Mongolian tugrik too, which has lost 12.5% against the US dollar in the year to date.
Falling FDI inflow can be largely traced back to delays at the planned $4.9bn underground expansion of copper/gold giant mine Oyu Tolgoi, a joint venture between Turquoise Hill Resources, a Toronto-traded firm controlled by British-Australian mining powerhouse Rio Tinto, and the Mongolian government. The expansion has been held up for 18 months now as both parties struggle to strike an agreement over some lingering issues such as project finance, tax and environmental issues. Prime minister Norovyn Altankhuyag repeatedly pledged his commitment to unlock the Oyu Tolgoi negotiations, but a political crisis within the same government has hampered his efforts so far.
“We believe that efforts on all fronts have been evident from the PM’s office,” local investment bank Mongolian Investment Banking said in a note on October 23. “However, the Mongolian political circus is set to take centre stage once again. With seven Ministers facing resignation through the government restructuring, demands for the PM’s resignation were swift. On the 17th of October, 26 members of parliament submitted a proposal officially demanding that Altankhuyag steps down.”
Mongolian institutions' ineffectiveness - “institutional strength is assessed at very low”, Moody's analysis says - is also reflected in poor public finance management, with the thresholds imposed by the 2010 Fiscal Stability Law regularly breached through off-the-balance spending by the Development Bank of Mongolia (DBM).
As the central bank is gradually withdrawing the monetary stimulus that added new momentum to the country's economic growth in 2013, GDP forecasts are being revised downwards. Growth for full 2014, which was largely forecast at a double-digit pace at the beginning of the years, is now estimated at 5.5% by Moody's, 9.1% by the IMF and 6.3% by the World Bank.
However, observers often note that things in Mongolia can change on a dime. A deal on Oyu Tolgoi's expansion alone, which brings to the table investments for almost half the country's overall output, could wipe out doubts overnight and restore optimism in the local business community. With top class mining resources, whose proceedings will have to be divided among 3mn inhabitants only, the country's long-term investment proposition remains solid.
“Mongolia’s honeymoon is over but divorce, not on the horizon,” says Chris de Gruben, a real estate developer in the capital city Ulaanbaatar.
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