Three years ago, Mongolia was broke and facing a possible debt default. It suffered a big drop in the volume and value of copper and coal exports to China during 2020-2021 and the dispute with the controlling shareholders of the Oyu Tolgoi copper mine also delayed development of that project. The budget was severely strained and the government had little money to spend on infrastructure expansion and upgrades or in helping such industries as agriculture and addressing the severe environment problems affecting Ulaanbaatar.

The situation today is still far from perfect, but it has significantly improved from 2021. The reopening of the Chinese borders from late 2022 and the dispute between Beijing and Canberra allowed for a significant rise in Chinese purchases of Mongolian coal. This happened at the same time as demand for copper rose strongly as the production of electric vehicles also grew steeply. Rio Tinto resolved issues concerning its mining operations which allowed it to commit to a major expansion of the Oyu Tolgoi copper and gold mine.

The budget has reported a surplus since 2H22 and both the trade and current accounts have seen strong surpluses in 2023 and in 2024. This allowed the government to meet its debt obligations and to start building financial reserves. Total external debt is still very high, at over $37bn or 150% of GDP. But sovereign debt, which was at almost 70% of GDP in 2021, is now down to 40%. The government is planning the components for a multi-layered sovereign wealth fund and foreign exchange reserves are growing. Reflecting these improvements, all three international rating agencies upgraded their assessment of sovereign risk and with positive or stable outlooks.

But does the coalition government provide political stability? 

The ruling Mongolian People’s Party (MPP) took advantage of the improved financial resources and persuaded the DPM and HUN parties to form a grand coalition, which brought political stability to the country and allows for greater coordination to advance industrial and social reforms, although there are many critics about the “heavy-handed” control of dissenting media and other critics.

The economic and industrial development plan adopted by the MPP-led coalition is the Mega Projects strategy. This aims to build 14 large-scale infrastructure projects which can help modernise the economy and create a platform for future growth. The projects include new, cleaner, energy generation, greater transport networks, better water management, a new city to alleviate the pressures in the capital, etc. There are many who are critical of the major development plans, especially given the long history of delays, corruption and environmental damage from projects in the past. But with a coalition government, several of the projects are advancing more quickly than predicted.

But, this relatively positive picture remains very dependent on the expansion in the mining sector, on export receipts and, critically, China. At present, 90% of exports currently go to China so demand for coal and copper in that market is key to Mongolia’s future development and government options; especially as the government has committed to a balanced budget and conservative debt management. The money for the Mega Projects will have to come from mining sector taxes and export receipts.

Mongolia is not directly impacted by the proposed new US import tariffs. But because China is its major trading partner, it is very much exposed - albeit indirectly. If Washington and Beijing fail to agree on an acceptable (to both) deal, then industrial output in China will decline and that will reduce demand for coal and copper and/or negatively impact the price China is willing to pay, especially as Russia will be willing to sell such materials at a discount in order to regain export markets post-conflict.

The government is also targeting a bigger tax-take from the mining sector. It will have to be careful with its proposed plan to change the taxation structure in the mining sector. Officials are pushing for a greater state tax take in the industry so as to cover the cost of the projects and to fund the three-part Sovereign Wealth Fund. Changing the tax and royalty rules for profitable industries and projects after the foreign investors have completed major investment spending, is not uncommon in the Eurasia region (e.g. in Kazakhstan with the oil projects). However, it is a delicate and dangerous balance, especially as Mongolia needs to attract a lot more foreign investment into the planned new projects and for mining sector expansion.

Public suspicion is far from eased too. The other issue for investors and the government is whether the public protests seen last winter will be repeated and grow in the summer or come next winter. The last large-scale protests were in 2022, when the so-called “coal mafia” details were revealed. 

This involved very senior elected and government officials getting kickbacks for selling coal to Chinese buyers at discounted prices. People remain angry about state corruption and are far from convinced that the issues are being dealt with. Surveys show that the majority think the Mega Projects provide another excuse for wide scale corruption. People are also fierce defenders of the country’s natural beauty, wildlife and nomadic culture, all of which, they fear, could be overwhelmed by rapid infrastructure development.

Environmental problems are also still to be addressed. People are also angry at the failure to address the often-extreme environmental issues in Ulaanbaatar, including clogged traffic, poor services and dangerously unhealthy air quality; the latter having been made worse with the rapid and uncontrolled growth of “ger” suburbs - created as rural inhabitants were forced to the city after the extreme “dzud” (a severe winter phenomenon) conditions of the past two winters. 

One of the remedial responses of the government has been to increase pension and public sector wages by close to 20% in nominal terms. But the ability to do this or to keep it growing, is also critically dependent on China’s economy and the tax-versus-investment balance in the mining sector. 

Inflation is another major concern in terms of socio-political stability. The headline rate is expected to exceed the Bank of Mongolia’s target rate (set at 8%) throughout this year and then stabilise within the target range beginning in 2Q26. Increasing government spending and higher energy prices are amongst the principal drivers, pushing headline inflation to 9.6% year-on-year in February, albeit lower at 8.5% in April. It is expected that rising domestic prices for flour, meat, and meat products will drive up food inflation in the coming quarters. As domestic demand grows and the Mongolian tugrik is expected to decline a little further, prices for both imported and locally produced goods will rise.

For investors and foreign companies, the major opportunities in Mongolia continue to be related to the mining sector as all operators have significant plans for output and export growth. That will also depend on China demand and pricing. 

The government, via its “Third Neighbor” strategy is trying to diversify its customer and investor partner base with a growing engagement with India. Exports of coking coal are increasing via Vladivostok port too. India is also funding the construction of the country’s first oil refinery near Ulaanbaatar.

The next major opportunity will be for construction equipment, engineering and related services linked to the Mega Projects. The timing and scale of such opportunities is directly linked to China’s economy and appetite for imported materials.