Mongolia Seeks Balanced Growth to Avoid `Dutch Disease' From Mining Boom

Mongolia needs to look beyond the coal and copper mines that are driving its economic boom to find a more balanced model of growth, Prime Minister Sukhbaatar Batbold said.

Investment in mining projects and speculation on the wealth they will create in the world’s most sparsely populated nation have made Mongolia’s tugrik the best-performing currency since the beginning of last year. That’s putting exports such as cashmere at a disadvantage, and adding costs to newer industries such as tourism, food production and metal processing.

“It is important to have a good mining industry,” Batbold said in an interview at a forum in Mongolia’s capital Ulan Bator. “But it is a tool of moving many other things forward. What we want to focus on is creating jobs in many other industries.”

Mongolia needs to avoid developing “Dutch disease,” where the financial benefits of a resource boom lead to a hollowing out of other sectors, according to the World Bank. Sandwiched by Russia’s far east to the north and 1.3 billion-strong, resource- hungry China to the south, the government is looking for ways to lessen its vulnerability to competition from its giant neighbor and reduce its reliance as a customer.

Photographer: Nelson Ching/Bloomberg

Sukhbaatar Batbold, prime minister of Mongolia. Close

Sukhbaatar Batbold, prime minister of Mongolia.

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Photographer: Nelson Ching/Bloomberg

Sukhbaatar Batbold, prime minister of Mongolia.

“Mongolia can’t compete with China on wages, but it can certainly find areas in the Chinese economy where it could have an edge,” such as in cashmere, meat, and services, said Rogier van den Brink, lead economist for Mongolia at the World Bank. “Diversifying from resources would be a solution similar to what the Dutch found to combat the resource disease.”

Mineral Projects

The discovery of gas in the Netherlands drove up inflation and damaged manufacturing. In Mongolia, Vale SA (VALE5), the world’s largest iron ore supplier, and Xstrata Plc (XTA), the No. 1 thermal coal exporter, are leading six groups bidding for a 1 billion metric ton concession at the Tavan Tolgoi coal project.

Rio Tinto, the world’s No. 2 mining company, is developing the Oyu Tolgoi copper and gold deposit, which it expects will account for 30 percent of Mongolia’s gross domestic product when completed.

The country also holds oil, potash, iron ore, uranium and the rare earth minerals used in Toyota Motor Corp. hybrid cars and Raytheon Co.’s Tomahawk cruise missiles.

Plans this year to begin mining part of Tavan Tolgoi and preparatory work for the 2012 start-up of Oyu Tolgoi may cause the economy to expand 33 percent in dollar terms, according to Eurasia Capital, an Ulan Bator-based bank. That compares with a 10 percent growth in local currency terms, Eurasia said in a Jan. 11 report.

The tugrik gained 16 percent against the U.S. dollar since Jan. 1, 2010, beating 172 other currencies tracked by Bloomberg. China’s yuan advanced 4.1 percent over the same period.

Cashmere Competition

China, Mongolia’s biggest rival in cashmere and top trading partner, is “stealing jobs” with a more stringent currency policy, Naidansuren Zoljargal, a deputy governor at the nation’s central bank, told the forum.

While the dollar value of greasy cashmere exports rose to about $105 million from $92 million in the first 11 months of 2011, it dropped to 3.6 percent of all exported goods in December in dollar terms, from 4.8 percent a year earlier, according to the World Bank.

Mongolia, which the government estimates has the capacity to produce 30 percent of the world’s cashmere, this year set up a marketing agency to help farmers and herders market their products abroad. This should help producers compete on quality and brand, not price, agency chief Stephen Kreppel told the forum on March 4.

Cashmere Goats

Thirty-four percent of Mongolia’s 1.1 million labor force work in agriculture, primarily tending livestock that includes the goats that yield cashmere fibers. Services employ 61 percent, with industry accounting for 5 percent, according to the CIA World Handbook.

In contrast, industry provides 30 percent of gross domestic product and agriculture 21 percent. As well as raw materials and unprocessed animal products, Mongolia also sells apparel and leather goods and the government aims to support to textiles, infrastructure, tourism and food production, Batbold said.

“We’d like to focus now on value-added products,” he said. Tackling poverty is one reason development in Mongolia has become more urgent, with the mining industry a way to “give better impetus to the economy,” Batbold said.

More than a third of Mongolians live below the poverty line, and per head income in the nation of 2.7 million is $2,111, the International Monetary Fund said in 2010. In December, Russia wrote off about 98 percent of Mongolia’s $172 million debt.

China accounts for 80 percent of Mongolia’s imports and buys about 85 percent of its exports, according to Mongolia’s central bank data. While Mongolian trade turnover surged 54 percent to $6.2 billion last year, imports exceeded exports by $379 million, Eurasia Capital said, citing official data.

Currency Swap

To help mitigate the effects of the rising tugrik, Mongolia’s central bank is in talks with China on a currency swap that would amount to “a few billion” yuan, Zoljargal said in a March 4 interview. The accord allowing trade to bypass the dollar should be ready before July, and a similar deal with Russia is likely to follow, he said.

“This will help us to smooth all those pressures to the local economy,” Zoljargal said.

The Bank of Mongolia last year introduced dollar-tugrik forward contracts to help hedge against jumps in the exchange rate and is supporting plans to set up a market for tugrik- denominated government bonds as soon as this year, Zoljargal said.

The measures will help make any appreciation in the tugrik “smooth” and predictable, Zoljargal said. “We don’t want to fight the trend,” he said. “Our target is more on the inflation, which we’re trying to keep at single digit.”

The IMF in a Feb. 17 report forecast the figure to reach 20 percent by the year’s end due to increased state spending.

To contact the reporter on this story: Yuriy Humber in Ulan Bator, via the Tokyo newsroom at yhumber@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net

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