Mongolia’s Epic Meltdown Won’t Be Reversed by a Commodity RevivalMichael Kohn
Government needs to upgrade laws, woo back skeptical investors
Oyu Tolgoi mine restart hasn’t yet delivered an economic jolt
The commodity super-cycle that peaked in 2011 powered Mongolia to world-beating growth. Then came the bust and China’s recent economic slowdown that’s pushed the land of Genghis Khan into an unprecedented economic crisis this summer.
Yet even though the commodity market finally has a pulse again after a five-year collapse, a modest revival in prices isn’t going to be enough to rescue Mongolia’s mineral-rich, $12 billion economy.
What worked for Mongolia in 2011 isn’t working now. The nation, once dubbed Minegolia for sitting on what the International Monetary Fund has estimated is $1 trillion to $3 trillion in mineral wealth, has seen its attractiveness as an investment destination wane as global miners rein in spending.
On top of that, disputes with foreign investors such as Rio Tinto Group over the development of the Oyu Tolgoi copper and gold deposits continue to weigh on its reputation. And the seemingly unique advantage of sitting on the doorstep of the world’s biggest buyer of commodities, China, is now looking more like a liability given the marked slowdown in the world’s second-biggest economy.
While there’s no quick fix to Mongolia’s recent travails -- it has burned through much of its foreign currency reserves and the government has a crushing debt burden -- the country can mend things by improving the laws, regulations and bureaucracy that prevent it from being globally competitive, according to an industry analyst and former chief of Oyu Tolgoi LLC.
“The government doesn’t have money to throw around or to subsidize its industries, so the only thing it can do is to make sure its policies and its administration are absolutely fine-tuned to the world’s best practice,’’ Cameron McRae, executive chairman of Tarva Investment & Advisory, said by phone.
Mongolia earlier this month declared an economic crisis after leaders in Ulaanbaatar took to national TV to outline the country’s deteriorating debt position, cash reserves and budget deficit. Prime Minister Erdenebat Jargaltulga has since announced an austerity program, which includes government pay cuts and spending halts on projects.
To woo back investors, Erdenebat signaled he would establish a council to promote foreign investment. The details of how the council will operate have not been announced.
Mongolia faces a balance of payments crisis, thanks to overspending by the previous government just as foreign investment inflows dried up, leading to a 2 trillion tugrik ($885 million) budget deficit through the first seven months. Gross domestic product grew 1.4 percent in the first half of the year, a far cry from the double-digit growth Mongolia experienced earlier this decade.
While commodities are showing signs of recovery from the multi-year lows reached at the start of the year, they’re a fraction of the highs of five years ago. Copper has rebounded about 7 percent in London to $4,633 a metric ton, but is half what it was at its peak in 2011.
The restart of the second phase of the giant Oyu Tolgoi project, signed in Dubai in May 2015, was expected to ease the cash crunch. However, the net effect of the copper and gold mine has yet to be felt across the country.
“The government was saying that everything is OK, and everything will improve in a matter of months once the Dubai agreement will come into force, but now it’s become clear that it’s not so easy and it’s not going to improve drastically in just a few months,’’ Khashchuluun Chuluundorj, an economist for the National University of Mongolia, said by phone.
The FDI drought extends beyond Mongolia, said Sam Spring, chief executive of Kincora Copper Ltd., which does business in the country. “The global commodity sector largely remains capital constrained and it will take time for potential improving sentiment to flow through the sector and into the more earlier stage projects,’’ Spring said.
That doesn’t mean Mongolia’s project pipeline is empty. Construction of the second phase of the Oyu Tolgoi mine, where 80 percent of the project’s wealth lies, is expected to deliver about $1 billion in FDI each year over the next five years. The currently producing open-pit mine at Oyu Tolgoi has helped push the nation’s copper exports to almost 1 million metric tons this year.
Beyond that project, though, the rest of the sector is struggling, said McRae. “All are finding it very hard in terms of survival at the moment. A lot of their strategies are going to be focused on cost containment, capital spend only on things that give a very short-term return.’’
One possible area of investment is Tavan Tolgoi, where the previous government cobbled together an investment deal with a consortium, including China’s Shenhua Energy Co. While the agreement stalled in Parliament, the Erdenebat government is looking to get a deal back on track.
Merely sitting on China’s doorstep, with large reserves of copper, gold, coal and iron ore, might not be enough of a competitive advantage. The country should identify where it needs to improve its investment climate by measuring itself against other countries, consultant McRae said.
“If I was in charge of a ministry I would ask who are my competitors for capital, what do their laws look like, how does their bureaucracy interact with business and how easy is it to win finance,” he said.
McRae called it an “appropriate’’ step for Mongolia to consider a stabilization program with its lenders. The IMF, in Mongolia for talks with leaders last week, is prepared to send a larger delegation to Ulaanbaatar to address the country’s financial needs, according to a statement published on a Mongolian government website.
Improving the country’s business reputation may take longer. The so-called Hotel Mongolia incidents, which saw several foreign business people trapped in the country against their will while authorities investigated their companies, appears to be a thing of the past.
However, Anglo American Plc. and Peabody Energy Corp. have closed offices in Ulaanbaatar amid global cost cutting measures. The government still owes a $30 million back payment to Samsung C&T over the construction of a railway from Tavan Tolgoi to the border with China.
A two-year long dispute with Rio Tinto Group that stalled progress at Oyu Tolgoi was resolved, opening the door to $4.4 billion in project financing. The government also ended a long-standing conflict with Canada’s Khan Resources Inc. by paying the miner $70 million as compensation for lost mining licenses.
Restoring Mongolia’s reputation with foreign investors may turn out to be as challenging as sorting out the country’s debt mess.
— With assistance by Jake Ulick, and Jason Rogers