Mongolia's tugrik hits streak of record lows

By bne IntelliNews January 15, 2015

Jacopo Dettoni in Almaty -


The Mongolian tugrik has hit a streak of consecutive new record lows against the US dollar since the beginning of 2015. The exchange rate fell to a historic low of MNT1,938.97 to the dollar on January 14 after touching new record lows in all the eight previous trading sessions of the new year, according to figures from the Bank of Mongolia. The tugrik has already depreciated by 2.67% against the greenback in the year-to-date. This brings the total depreciation over the last two years to 40% against the dollar.

"The sharp fall in [the tugrik's] value reflects many factors, not least a decline in global commodity prices and a collapse of foreign investment inflows into Mongolia amid unstable and unwelcoming regulatory conditions,"  the Economist Intelligence Unit (EIU) said in December. The exchange rate will average MNT1,875 to the dollar in 2015,  the EIU forecasts. 

Foreign direct investment (FDI) in resource-rich Mongolia fell to $582.4mn between January and November 2014, down 71% y/y from the $1.99bn in the same period of 2013, according to figures from the country's central bank, as a new, business friendly investment law passed in October 2013 struggles to gain any traction. FDI hit record levels in 2011 and 2012 when it reached, respectively, $4.71bn and $4.45bn.  Among the consequences of this has been that foreign reserves have plummeted to $1.35bn at the end of November 2014, less then half the $4.12bn reached at the end of 2012.

The country is paying a toll for its legal and political instability. Foreign investors have been repeatedly put off by changes in the legal framework such as the Strategic Entities Foreign Investment Law (SEFIL), passed in May 2012 and eventually repealed by the new October 2013 investment law, which  limited foreign ownership of assets and access to use rights in three key sectors, among them natural resource extraction. The poor decision-making of political authorities has also contributed to spoil business sentiment as the government has struggled to wrap up negotiations over key projects such as a planned $4.9bn underground expansion at Rio Tinto-owned copper and gold mine Oyu Tolgoi.

At the same time, mining firms had to deal with falling  price of copper, gold and coal. Yet, as Oyu Tolgoi's open pit, which came online in July 2013, reached full capacity in 2014, copper exports increased significantly in volumes -  up 138% y/y between January and December, according to figures from the central bank - replacing coal as the country's largest single export voice. This helped total exports grow by 3.15% y/y in the first 11 months of the year.

Despite the tugrik's troublesome beginning of 2015, the business community looks forward to 2015 with some renewed optimism.

“The tugrik will recover in the second half of the year as the whole economy bounces back,” local entrepreneur Lkhagvasuren Odsuren, head of real estate developer Seven Towers, told  bne IntelliNews.

“There are a number of major projects in the pipeline expected to kick off in 2015, such as the development of the coking coal basin Tavan Tolgoi and Ulaanbaatar power plant 5, alongside obviously Oyu Tolgoi's expansion.”

The government has recently awarded a consortium composed of  Shenhua of China,  Sumitomo of Japan, and local group Energy Resource a contract to develop the giant Tavan Tolgoi coking coal deposit, with total investments estimated at $4bn. At the same time, a consortium led by France's GDF Suez has been negotiating details over the construction of a 450MW, $1.2bn coal power plant in Ulaanbaatar and a long awaited agreement may come through in the coming months. With regard to Oyu Tolgoi's $4.9bn expansion, the new government led by  Prime Minister Chimed Saikhanbileg has pledged to get the project back on track. A final agreement is due to come through by mid-2015, risk qualification-forecasting firm Mantis said in a report on January 13.

Such projects are capable of reviving Mongolia's economic miracle as they imply total investment of more than $10bn, or almost the whole 2013 GDP ($11.5bn). However,  the new government, which came into office in November 2014, has yet to show better decision-making than the previous cabinet and the memory of the recent failures weighs on any hope for future recovery. The World Bank forecasts annual GDP growth to further slow down to 6% in 2015, from 6.3% in  2014 and 11.7% in 2012, according to its latest estimates published on January 14. 

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