By Tamara Henderson
During meetings in Ulaanbaatar
on Oct. 2-3, foreign investors praised Mongolia for its ease of
doing business, vibrant democracy and strong judicial system.
They also pointed out laws from overlapping jurisdictions
sometimes contradict. Laws also often change.
Investors overall seem to prefer to watch and wait until
green shoots from policy shifts establish stronger roots.
Indeed, Mongolia’s tugrik failed to sustain gains against the
U.S. dollar after the approval on Oct. 3 of a new investment
law, effective on Nov. 1. The law repeals the unpopular 2012
Strategic Entities Foreign Investment Law and aims to provide
stability so investors can better gauge returns on investment.
SEFIL triggered a collapse in foreign investment, down 43
percent in the first half of 2013. The new investment law fixes
the value-added and corporate income taxes, royalties and
customs duties for periods from five to 15 years based on the
amount and location of foreign direct investment.
The authorities also seem to acknowledge the need to address
investor concerns about past lapses in fiscal discipline. In
response to lower-than-projected revenues this year, the
government is cutting expenditures. January was the start of
implementation of the Fiscal Stability Law, passed in 2010,
which limits the budget deficit to 2 percent of GDP.
The central bank intends to double foreign exchange reserves
through gold purchases and a $10 billion swap line with China.
This may reduce investor concerns on the ability to finance a
massive current account deficit, which was 31 percent of GDP in
The central bank is working to keep inflation on track; the
target is 8 percent in 2013 and 2014, after which it will be cut
to 7 percent. Even with the cost of gasoline and diesel fuel
imports up by 30 percent and the currency depreciated by 20
percent, retail prices rose only 6 percent thanks to a central
Press reports suggest progress in an impasse between the
government and Rio Tinto, the project manager for Oyu Tolgoi,
which will be one of the world’s largest copper mines. Copper
shipments from Oyu Tolgoi commenced on July 9, concluding the
first phase of development and marking the culmination of a
three-year $6.2 billion project (60 percent of GDP). Rio Tinto
put the second phase of expansion, worth $5.1 billion, on hold
after the Mongolian government sought to improve the terms of
the original 2009 agreement following a 50 percent cost overrun
on the implementation of phase one.
The IMF is less sanguine. In an Oct. 7 press release, the
IMF noted an increasing amount of government spending taking
place outside the budget, a practice inconsistent with the
objective of the Fiscal Stability Law. Notwithstanding an
announcement by the government to cut spending in the 2013
budget by about 1 trillion tugrik, the IMF warned “expansionary
macro policies are likely to put pressure on inflation and the
balance of payments in the period ahead.” Moreover, Mongolia
needs to “change course” to avoid “risks of crisis” from
external shocks related to reduced liquidity and China’s
Mongolia’s growth relies heavily on investment and, thus, is
vulnerable to adverse swings in risk appetite, while China
accounts for 90 percent of its exports. Rising stress in the
balance of payments has contributed to a 17.3 percent decline in
the tugrik this year compared with 5.6 percent for Asian
currencies on average.
Tamara Henderson is an economist for Bloomberg based in
Singapore. To contact her: +65-6212-1140 or
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