www.business-mongolia.com September 4, 2013
Following interview with the SGK Speaker Z.Enkhbold is the translation from the Daily News newspaper edition appeared on 3rd of September, 2013.
When there are analysts stating our country is in an economic crisis, there are also people who says the whole world is under crisis. In your opinion, are we going through a crisis?
Crisis is perceived when the economic growth diminishes and unemployment increases. Currently, our economic growth rate is 11% comparing to last year, and we created 3000 thousand jobs so far. So, it is not a matter of crisis. However, we can call this as an economic difficulties. People who has interest in making things look worse are making these kind of statements.
But, there are solid reasons such as decrease of foreign investment and export revenue. The most notable example is the mining sector, would you agree?
Of course there are obstacles. SGK is the reflection of the people. The demand from the people that there are too much mining operations, license trading, environmental pollution, and request to cease the license issuance made a big effect at the parliament in 2008 and 2012. Presidential ordinance was released to cease all the license issuance. Therefore, we can say that mining sector’s fall was reflected through the government policy that has been requested by the people. This is the accumulative result. The foreign investment was not diminished in a single day.
Mineral’s license is still prohibited. We concluded that the current issued licenses will be sufficient for the country to develop economically, thus, voiding the need for further license issuance. There are some temporary difficulties, I admit. The commodity prices have fallen at international markets. In connection with that, the foreign trade volume has been decreasing. If we earned 100$ selling a ton, now we are earning 50$. Thus, it does not matter if we increase the coal mining two fold because the revenue has been decreased by two-fold as well.
Foreign investment has decreased sharply. The reason is the OT project. The project has two phases, and the initial phase has been completed. No investment is needed for the open pit, and it is fully operational now. Mongolia now has an open pit mine that can produce as same amount of product as Erdenet JVC. The underground development will require further investment. It is clearly stated in the law of Mongolia what is considered investment in the country. Cost that has been incurred in some other part of the world cannot be included as an investment. The law is clear.
Please elaborate on what is an investment that has came into Mongolia?
Equipment that came into Mongolia through customs, salaries paid for the people who worked in Mongolia is considered as an investment in the country. Salary of someone who didn’t work in the country is not. Because, we are paying one third of the investment as a shareholder, OT investment is under a strict verification. The work of OT related contractors have been stopped because there aren’t any need. The job cuts occurred in these companies were necessary. The financing of the OT project cannot be continued without a disruption. I will state again, the first phase has been completed and the second phase is on hold. Also, it is the reason for the decrease in foreign investment.
How did the opposing attitude on mining sector effected the fall of the sector?
The opposite attitude has been impacting the foreign investment every year. The Strategic Investment Law made it worse. It is apparent that this law made a significant contribution to make the situation worse. Secondly, the foreign trade has decreased. Thirdly, we are in deficit. We planned our budget very optimistically making an enormous spending. The income didn’t become reality, and the spending as well. Thus, we have these three obstacles. I would reiterate what I said earlier, this is not a crisis but a difficulty. SGK and the government is seeking for the solutions.
We view that the new Investment Law that will be discussed in the special session of the SGK will be one of the solutions to the these obstacles. What is the content of the law?
Mongolia approved a law that is dedicated for only foreign investment back in 1995 after categorizing the investment into big, small, foreign, and domestic. The Strategic Investment Law was approved last year. So, the new law will be that of replace both of these laws. The principal is very simple. Main concern any investor is the tax environment. Biggest risk is for example when a calculated 10% tax is amended to 20% when the investment hadn’t paid back yet. It will impossible to see the return on investment. Any investor would want to see the returns of its investment or at least a full payback. This is the sole purpose of an investor.
There aren’t any investor who is investing in sake of generosity or charity. Tax and legal environment stability is the main concern for investors. Countries compete on this. Unfortunately, our country have been shaking the environment by the laws such as 68% windfall tax.
If we keep doing this kind of things, nobody would be interested in investing in our country. Today, the SGK is trying to approve a law that guarantees the stability of the legal environment. It means that changes after the agreement has been made will not affect the agreement. It will be applicable to all investments, from MNT5 million to USD5 billion. All the investors will be protected under this law. It doesn’t matter if it is a MNT 5 million bakery or the multi-billion dollar OT project. If the bakery can earn their investment in 1 year, there will a guarantee for a year, and if OT will require 30 years, there will be 30 year-guarantee. We are trying to approve law that has a table that includes the time and investment amount. If an investor has made a MNT5 million investment, it will only be registered.
The draft of the new law indicates that the foreign state-owned enterprises will have to get an approval if they are going to invest in the country. Is the guarantee period same as with those who are privately owned?
The state-owned enterprises will have to get an approval. If approved, the period of the guarantee will be the same.
The bond money is being spent on certain sectors. When will we see the benefits?
Some people are seeing the bond money as a physical investment. However, since the bond money entered Mongolia, it has been keeping the stability of our financial system. It had a good effect. The physical investment has been made on road and construction materials production. The result will be apparent after 2, 3 or even 10 years.
One of the projects that has been financed by the bond money is the house production plant. When we talk about a prefabricated houses we think of the old Russian buildings that loses the heat quickly, and of a bad quality. How is it better than this?
Russia had the same plant we have today. They replaced their technology by German’s, so it satisfies the European standard. This technology enables them to build houses that can be mass built, affordable, and with better heat preservation. Mongolia is the last to upgrade to this technology. This technology will allow us to build districts as big as the current 3, 4th district, and of course by European standard. Energy efficient, heat preserving housing will be built from next year. 30% of the financing was paid by the bond money. European quality is obviously good, and we will have advantage to learn the technology training our engineers locally. Drafting companies will also learn the standard. The related infrastructure will also be in place following this.
So, from next year there will be no lack in supply of housing, and thus increase in prices?
The plant will enable us to build houses that for 10-15 households per year. The current capacity in the country is 25 thousand annually. Therefore, the capacity will be 40 thousand apartments a year. This is a sufficient number.
One the reasons of housing price increase is concrete. Number of projects are being implemented by national companies. Some will be in operation soon. There was a news that Chinese invested concrete plants are going to be in operation soon. Is it really necessary to allow foreign investment on the goods that the national companies can produce?
As for the construction materials, we used to have the capability to produce it. There was two concrete plants in the previous era. Private owned factories are taking long time to be built. Khutul plant has been upgraded and the operation is just beginning. It has been said that the price for one square meter of an apartment is MNT1 or 2 million. Instead, we have to focus on the content. Where is the concrete, reinforcing, and the labor force. If the labor force in the construction sector is paying foreign laborers, and they are just taking away their wages out of the country, we cannot support this. Also, it is not good if it is being built 100% by foreign imported materials. In these cases, the mortgage will make no sense. It will be an income that is irrelevant to us. But, if the concrete, reinforce, and the labor force is Mongolian, it will be economically beneficial for us. The whole world is following the principle that if it can be produced locally, it shall be made domestically. In the other hand, we should invite foreign investment in the sectors we hadn’t developed. Of course, in the future we will be able to do things that we weren’t in the past.
The government raised the bond money with very low interest rate. However, today the yield is over 7%. What would be the negative effect on us because of this?
Our country is not responsible for the increased yield. This is a concern for those who holding these bonds. We issued the bond with 4.5% initially. We will pay that price. This is one of the features of the bond market. The people that are blaming us are the people who don’t have the ABCs in economics. There are also people who are panicking over the increase in yields. We issued the bond once. Therefore, the yield volatility is a concern for those who are in secondary markets. If we are perceived favorable for the foreign investment, the yield will decrease, and if we approve laws such as the one we approved back in May last year, it will be increased. Thus, bond yield is the measurement towards our economy, not a debt we have to pay.
But we are planning to issue another bond. It will have a direct effect. For example, is there possibility of another bond issuance next year?
There will be a negative effect if we issue another bond. We don’t see any possibilities this year and the next. The we issue another bond on remaining USD3.5 billion, we can talk about it after our economic indicators are positive, ratings are improved, and the OT second phase financing is approved. After that, it will be economically viable. This is not the time. Countries issue bonds at the right time after assessing the situation carefully. We also stopped trusting the international rating agencies. Our bond was sold over the ratings. Bonds of countries like us that have BB- ratings usually sells at 7-8%, where ours have been sold at 4.5%-5.5%. This proves that the ratings cannot reflect the reality. Lately, they have been lowering our rating. However, we don’t know how much it will be valued in the actual markets.
One of the laws that are being waited by the investors is the 2006 Minerals Law. Is the law going to be amended or renewed?
We consider the 2006 law is a fair one. Our opinion is that it is preferable if we amend the current law instead of considering the law that has been initiated by the president. It will be more stable. The industry participants also suggested the same opinion. Therefore, the SGK will make a choice between the new law or the amendment of the current law. Currently, there is the amendment of exploration possibility on approved areas.
What laws and decision will be made regarding the economic issues at the special sessions of the SGK?
The new Investment Law will be approved at the session. A resolution will be made on fighting the economic difficulties. The budget adjustment will be approved, and at the regular sessions we will discuss about state budget. Due the new circumstances, budget will be cut significantly. We have to cut our coat according to our cloth. We will give further information on Minerals Law. Also, the final answer on whether to renew or amend the law will be apparent soon. The law initiated by the president went through a discussion by the investors. The result was that the 2006 law could be sufficient if it had relevant amendments.
You have mentioned that the budget adjustment will be discussed at the special session. Is there going to be many changes?
No. We will cut the optimistic projections. Also, there are some planned buildings that doesn’t even have drafted blueprints that will be deleted from the budget.
Can you elaborate more on the policy on fighting economic difficulties?
First, foreign investment has been halted. We are trying to fix it by law. Second, there are unreal incomes planned in the budget. Also, we are deleting the investments on buildings that has no drafted blueprints and no tender had been announced. It means we cutting both income and spending. A certain decision will be made on increasing the currency reserve. The gold reserve will be centralized at the Bank of Mongolia. Only the Bank of Mongolia will be able to export gold. Gold increases the currency reserve.
The underground development of OT has been stopped. One of the biggest levers would be continuing the project. Will we find a common language with Rio Tinto?
There are no opposing personas. We just have to agree on certain numbers.
How long would it take?
The two sides must be on agreement on the numbers. It is not possible to allow errors that has occurred on the first phase. Nobody will be in favor of considering the costs incurred somewhere in the world as an investment in our country. The reason is that we are also paying for the project’s development.
The foreign currency is steadily increasing. Will the Bank of Mongolia intervene?
The increase of USD against local currency is result of many of our actions. USD is as just same as the other goods. If many people want to buy a certain shoe, despite the production cots of the shoe, the price will be increased. In the other hand, if massive volume of these shoes will be on the market, regardless of its original cost, the price will fall. The is the principal of market economy. If the buyer and seller are at the equilibrium, the price will be stable. USD is just as same as the shoe. If the channels that flows USD into the country such as foreign investment is good, and there is no foreign trade deficit, USD will be stable in our country. Our consumption is not going to decrease depending on the disruption on these channels. If there are more buyers than sellers of USD, then there will be a change in currency. That is what’s happening.
There are ways that central bank intervenes as a temporary solution. We see this as an unviable solution. We will end up just wasting the 2USD billion reserves we have. Instead, we shall see this period as an opportunity. We have been appealing to develop the domestic manufacturing for over 20 years. We are even importing the goods that we can produce locally. The most simple example is rapeseed. We export the rapes we grew to the south, and import vegetable oil. Because it is cheaper to buy it from Earlian, China. But, when USD increases, the price of the vegetable oil will be increased. It will be economically feasible to process the rapes and produce oils. Of course, we can’t substitute all the goods we need. For example, we cannot grow bananas. Therefore, producing the vegetables oils that we can is a good side of the increase of USD.
So, are you saying that we should just leave USD to the market to resolve?
Even if we want to manage, we don’t have the resources. The economy is adjusting itself. It is sign for businesses to produce certain goods domestically. It means that we have to send our children to domestic schools. It will be expensive to study abroad. It means we should be the domestically produced Yanmal socks. When USD increases, domestic producers and manufacturers are happy. Exporters are happy. The unhappy people are the importers such as Urbanek, because it will be expensive to buy vegetables grown in Poland. But, Gazar Shim LLC is enjoying the moment, because if they sell more, more local vegetable growers will be able to benefit from it. All the vegetables in this salad is being grown in the country. Like this, we have to see it as an opportunity for the local producers. There is no regulation that the exchange rate must be locked at MNT1400 or 1500. The market is adjusting itself, so, it is not because the cabinet or SGK and Bank of Mongolia is doing bad job and increasing the rate of USD.
But, most of the goods in the market are imported. Inasmuch as the increase, the price of the essential goods will be increased, and the main impact will be on the people?
One day, we will be using our local produced products. As long we hold USD through artificial methods, the development of the local industries will be delayed as by that long. The increase in exchange rate means that want it or not, you have to live by the market rules.
There are some fear that spending the bond money massively will affect the rate of USD?
The people who are responsible for this are making the necessary adjustments. Leaving USD to the market doesn’t mean that it doesn’t matter how much it will be. It means that when the market is adjusting, the suitable interference will also in tact. Bond money is affecting the financial sector in a good way. It was spent on roads and railroads. Of course, we haven’t spent the whole USD1.5 billion. We planned some funds to re-planning the ger-area infrastructures. We haven’t spent it yet. There are also funds planned on some projects that we haven’t spent a single dime.
A way to increase the value of our coal is to build a railroad. How is the process of the railroad project?
The work has started. Some construction is taking place at the moment.
When we will be able to use the railroad?
If we complete the fill and put the tracks, it will process rapidly. From next year, the Tavan Tolgoi – Gashuun Sukhait track will be operational.
The discussion of wide or narrow gauge has not finished to this day. Economists argue that it is viable to have narrow or world standard gauge. What will be the decision?
SGK has decided on the policy. The cabinet has a right to seek a final decision on tracks that will carry export products.
What is your personal opinion on the matter?
We have to do the calculations. When the coal price was at a certain level, it was profitable for us to transport it even via heavy trucks. But, when the price falls, the transportation cost becomes a bottleneck. So, in principal, there must a be railroad. The decision on the gauge can be decided by the request of the cabinet by SGK.
Besides coal, we have significant reserves of uranium, rare metals, and shale. What is the policy on exploiting these?
It has been five years since we established our policy on uranium. We hold the same policy. It will not be changed because of some conservationist shouts that uranium is poisonous. We are adding a chapter on the Petroleum Law that includes the non-traditional oil. We have included no only shale-oil, but coalbed methane, and other non-traditional oil sources. We have to become independent on petroleum. There may be new sectors that will be in use.
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