09 Dec 2011
Today I would like to share some of the tentative conclusions as a preview of our upcoming investment and economic Report on Mongolia that will be launched in March, 2012.
We at Oxford Business Group view Mongolia as a compelling relative value investment opportunity offering above average returns over next 5-10 years as inflows from mining and minerals.
Despite its clear appeal, Mongolia is in competition for foreign private capital with huge funding needs over the next five years – anywhere between 45-60bn USD.
While most of it will be absorbed by mega projects in mining and infrastructure I would like to focus on relative value opportunities in non-resource based sectors that will benefit most from sudden increase in domestic income base.
In our forecast we assume that Mongolia will succeed to unlock its mineral wealth and that the economy will experience double digit growth every year until the end of this decade.
Oyu Tolgoi’s operators forecast that the copper mine alone could account for a third of Mongolia’s GDP by 2020.
Thıs is indicative of mining’s importance to the economy, but also of the logic of greater diversification.
At the moment there is not much beyond mining:
The main risk is that given all the attention and complexities of getting the mining sector on the road policymakers will lose sight of other sectors. That would be a grand policy error as it would land Mongolia in the same resource trap that has plagued a number of countries.
Mongolia needs to have an eye on reaching ‘advanced economy’ status in 20-30 years, and avoid falling into Middle Income trap.
Mining can get it to Middle Income but not to Advanced economy status. For that you need high value added sectors, first class education and infrastructure and deep institutions.
Having been ignored for a long time we feel Mongolian policy makers have been thrown in at the deep end having to mastermind their development strategy in a very brief period of time.
It needs to import best development templates from abroad that suit its unique circumstances.
Key will be to enter into a sustainable social contract with the population that elimenates social tensions as wealth disparities increase.
We believe that the urbanisation we have witnessed in the past few years will continue putting pressures on Ulaanbaatar’s infrastructure, social provision and most importantly labour market.
To ease social unrest politicians need to put in place incentives for private sector to create jobs.
Real Estate & Construction is clearly one of the lowest hanging fruits. There is huge pent up demand for residential housing with both banks and government keen to finance a fast expansion in overall stock.
Concentration on this sector we believe will create speculative pressures and could generate asset bubbles that we have witnesses elsewhere in Asia in the 1990s.
We therefore think there is an urgent need to set up a development plan that prioratizes other non-resource sectors.
Mongolia lacks any domestic refining capacity. In consequence, the country imports all its petroleum products, with 890,000MT of these imported in 2010, with recent annual growth in imports of around 10%, according to the Petroleum Authority (PA)
There is an obvious opportunity here which the government looking for foreign investors to invest into new refining capacity.
The real smart value added we think however lies in renewable energy. According to industry insiders Mongolia has excellent potential in both wind, solar and hydro.
Indeed, the country’s first new power generation project in 30 years, now underway, is a 50MW wind farm.
Solar potential is also evident. Mongolia enjoys one of the highest number of hours of sunshine of any country on earth, with an average of 257 cloudless days a year.
Wind and solar are widely estimated to each have a potential minimum of one terawatt of generating potential in Mongolia, if fully harnessed.
Other non-resource opportunities lie in food processing and tourism. It is our firm belief Mongolia can become self sufficient in a number of agricultural staples such as meat and meat products and can even become an exporter to the region. As in other countries the policy focus should be on resolving land and property rights issues as well as consolidation and modernization of the supply chain. Key agribusiness sectors such as dairy and milk products remain highly fragmented.
Tourism is one of the most attractive propositions. Mongolia enjoys an established international brand name with a strong appeal to people interested in nature, history and adventure seekers. Tourism unlike mining is labour intensive and would help to address the issue of structural unemployment.
The tourism product however is yet to be fully developed and internationally marketed. Despite efforts of a number of hospitality groups the sector still lacks both middle and high end facilities. We believe though these are now underway helped by flourishing business travel market. Wıth Hong Kong, Beijing, Seoul and Moscow acting as convenient transport hubs the local and international airlines can up the frequency of flights once Mongolia has the capacity to host more tourists. The focus on infrastructure bottlenecks such as roads will help to boost the sector though initially we believe the main routes will service the mining sector with many of Mongolia’s most attractive destinations still hard to reach.
Once again Mongolia needs political vision and will to ensure that mining proceeds are used wisely to develop these non-resource sectors. It will be the key determinant factor on whether the country can move beyond middle income to advanced country status in the next two to three decades. We think on fundamental basis and with the benefit of hindsight Mongolia can avoid repeating the mistakes of its peers. But the main message that I would like to get across to international investors is that they should look at opportunities outside the mineral and mining sectors to tap into substantial pent up demand and help Mongolia drive the diversification process.
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