The Report: Mongolia 2014
Since the country’s transition from communism two decades ago, the Mongolian economy has experienced rapid liberalisation. Sectors including ICT and insurance are expanding quickly and, while the mining sector has been responsible for making Mongolia a rising star in the global economy, there is great potential for further growth in all economic sectors. Politically stable and rich with natural resources, Mongolia has emerged as a bellwether for investor confidence in recent years. The 2013 commercialisation of the Oyu Tolgoi gold and copper mine is helping to diversify Mongolia’s mineral exports away from coal, while the government is working to improve the investment environment by adopting the new Investment Law, among other measures. Challenges do exist, however, from the long harsh winters that slow construction to the difficulty of connecting the sparsely populated nation through ICT and transport systems. In response, the government has partnered with the private sector on a number of fronts in order to promote economic diversification and competitiveness.
Country Profile
Mongolia is home to a vast desert in the south, large freshwater lakes in the north-west and dry, grassy plains throughout most of the rest of its territory. Although its borders stretch 8220 km, its only neighbours are the superpowers Russia and China, a fact that has shaped much of Mongolia’s political and economic history. The country has a vast wealth of mineral resources – over 6000 deposits of roughly 80 different minerals in total, worth an estimated $1.3trn, including coal, copper, gold, silver and iron ore. With a string of successful elections now under its belt, Mongolia’s democracy is more than two decades old. Debate can still be sharp, though, with issues such as the distribution of natural resources – particularly regarding the country’s vast mineral wealth – still in progress. This chapter contains interviews with President Ts. Elbegdorj; and Prime Minister N. Altankhuyag.
Explore chapterTrade & Investment
With its position adjacent to two of the world’s largest economies, Russia and China, Mongolia’s trade potential holds significant appeal for foreign investors. Furthermore, just as it strives to diversify the sources of its foreign direct investment, the country’s policy of cultivating “third neighbours” is set to broaden trade patterns geographically and should gradually improve the terms of trade. Exports to the US increased dramatically between 2010 and 2012, from $12m to $42m, while imports from the US grew from $116m to $665m over the same period. Despite this significant growth, trade with the US still represented a very modest share of Mongolia’s overall trade in 2012, when the country’s imports and exports were valued at $4.84bn and $6.74bn, respectively. FDI inflows are expected to reach $2.5bn in 2013, and then be lower in 2014, reaching approximately $2bn, with the overwhelming majority of these funds going to mining and resource extraction. This chapter contains an interview with Fumio Kishida, Minister of Foreign Affairs for Japan; viewpoints from José Manuel Barroso; President, European Commission; and David Johnston, Governor General of Canada; and an interview with Roger Gifford, Alderman and Former Lord Mayor of London.
Explore chapterEconomy
Having an estimated $1.3trn in mineral deposits at current market prices, Mongolia holds great promise for investors. With GDP standing at just $10.3bn in 2012, a single large project has the potential to significantly boost foreign direct investment and growth. The core budget deficit declined from $319m in 2012 to $178m in 2013, equal to 1.7% of GDP; however, off-budget spending was rising. The government has announced plans to re-launch the privatisation process, with the aim of reducing the number of state-owned enterprises by one-third. Future economic growth will depend on the success of a range of measures aimed at improving economic conditions and sustainability. This chapter contains interviews with P. Tsagaan, Chief of Staff, Office of the President; Ch. Ulaan, Minister of Finance; Jim Dwyer, Executive Director, Business Council of Mongolia; and B. Byambasaikhan; Managing Partner, NovaTerra LLC, and Chairman, Business Council of Mongolia.
Explore chapterBanking
Mongolia’s banking system is relatively young and untested, and, therefore, the Central Bank of Mongolia is facing a range of challenges. One such example is the rapid drop in the tugrik, which lost approximately 20% of its value over the past year, placing pressure on the banking system but also reducing the price of exports. Currently, there are no limitations placed on foreign ownership of banks, nor are there capital controls, and two banks are 100%-owned by foreign companies. The key to the future for the Mongolian banking sector is good corporate governance and sound supervision, while the challenge for the central bank will be to return to a traditional role, draining liquidity from the system, and easing back on policies without compromising the system’s strength. Developing financing for smaller companies will also be key to ensuring Mongolia’s long-term economic growth. This chapter contains interviews with Randolph Koppa, President, Trade and Development Bank; and Ayumi Konishi, Director-General, East Asia Regional Department, Asian Development Bank.
Explore chapterCapital Markets
For the Mongolian Stock Exchange (MSE), 2013 was a year of transition. While performance remained weak and trading was exceedingly thin, preparations were being made for a comeback. The hope is that the foundation has been set to make 2014 a year of recovery for the market. Under previous legislation custodian banking was not available; however, under a new law, international investors will not have to worry about the risks associated with investing in a market with no intermediary banking institutions. Despite having 79 registered brokers, only one firm oversees almost all trading on the MSE. In addition, risk management has not been well-developed and understanding of stocks is low among the general public. What is now needed most is for new issues to come to the market, and this will depend on the ability of the regulators to put new laws into practice. This chapter contains an interview with Masa Igata, Founder & CEO, Frontier Securities.
Explore chapterInsurance
Mongolia’s insurance industry is expected to grow rapidly over the next few years as the economy expands and more firms and individuals become familiar with insurance products and the need to be covered. The market is open – a rarity in Asia – and international investors and strategic partners are taking a close look at potential acquisition targets and partners. With the state controlling the insurance sector until 2003, and the population largely rural, many individuals remain unaware of what insurance is and now it works. However, this is changing, and the arrival of multinational firms has resulted in a rising awareness of insurance products. The prospects for the sector are excellent. If consolidation takes place and if insurance awareness increases as expected, margins will be solid and growth almost certain.
Explore chapterMining
The mining sector is a major contributor to the local economy, accounting for 22% of GDP, 61% of industrial value-added, 94% of exports by value and 85% of foreign direct investment in 2012, according to figures from the National Statistics Office. Mongolia’s main proven reserves include coal, copper, hard-rock and placer gold, silver, iron ore, molybdenum, fluorspar, zinc, tungsten, lead, tin, uranium and rare earths. Key challenges include inadequate rail infrastructure connecting mines to target markets, a shortage of processing facilities and the fact that the majority of exported coal is semi-soft. While ebbs and flows in the regulatory framework have caused concern over the authorities’ respect for contract sanctity, in 2013 the government appeared intent on clarifying the long-term framework in an effort to restart investment. While global commodities markets are set to remain challenging in 2014, Mongolia’s strong natural fundamentals and location near major demand centres are set to continue attracting investors. This chapter contains interviews with Jean-Sébastien Jacques, Chief Executive of Copper, Rio Tinto; Ya. Batsurri, CEO, Erdenes Tavan Tolgoi; and D. Dumba, President, Mongolian National Mining Association.
Explore chapterEnergy
Despite abundant reserves of coal and rich potential for wind, solar and hydroelectric power, Mongolia has lagged in exploiting its natural resources. From generation to transmission to distribution, the country’s power infrastructure is outdated, and reliance on foreign imports is growing. Aware of this, the government has been pushing to fast-track a range of projects that, if successful, should reduce the country’s dependence on any one supplier, and may in time sprout an industry in its own right. The state is now planning to upgrade its power distribution network, is trying to attract private investment to greenfield plants, and is gradually liberalising trade tariffs and creating new laws to spur exploration for crude oil. The state’s energy plan aims to reach 100% electrification by 2020, up from about 65% in 2013, despite the difficulty of spanning Mongolia’s huge, yet sparsely populated, landmass. Production of crude oil in the country’s two eastern blocks jumped from 2.2m barrels in 2010 to 3.9m in 2012, and is set to almost double in the medium term. Attracting private investment to new initiatives will be key to helping Mongolia develop its abundant natural resources – fossil fuel-based and renewable – into the energy it needs to reach its goals. This chapter contains interviews with B. Unenbat, CEO, Newcom; John Lee, President & CEO, Prophecy Coal; and R. Batbayar, President, M. Oil.
Explore chapterTransport
As roads are being built, and as related infrastructure is developed, Mongolia’s connectivity and logistics are greatly improving. Significant investments in transportation have been made in recent years, especially in 2013, and more are expected. The government is spending $200m to revamp 33 intersections in Ulaanbaatar, and it has set the goal of connecting all of Mongolia’s 21 provinces to the capital. Furthermore, given that the city’s current logistics facilities are regarded as inadequate, an integrated logistics centre being planned. This will be established as a public-private partnership and involve project financing from outside sources such as international organisations, development banks and private investors. The country is home to a number of local airlines; however, it has been suggested that the market is getting overcrowded and consolidation could be on the way in the future. Mongolia’s connections are likely to continue improving over the next few years as more roads are finished and after the new airport is operational. This chapter contains an interview with G. Jargalsaikhan, President & CEO, MIAT Mongolian Airlines.
Explore chapterConstruction & Real Estate
Although the construction sector faces a number of challenges, such as the lack of a well-trained local workforce and low levels of domestic materials production, the sector is expected to benefit from increasing government investment in housing and infrastructure. Mongolia has a severe lack of affordable housing, and addressing this shortage is expected to be a major driver of construction activity in the foreseeable future. In addition to housing projects, modernizing and expanding Mongolia’s transport links and utilities networks is a key area of focus at present. Only Mongolian citizens are currently allowed to own land; however, foreigners can obtain usage rights to land and own buildings and other structures. While a number of challenges remain, most local players expect Mongolia’s real estate sector to continue to grow for the foreseeable future. New activity bodes well for the country’s long-term development prospects. This chapter contains interviews with E. Bat-Üül, Governor of Capital City and Mayor of Ulaanbaatar; and E. Jargalan, CEO, Erel Group.
Explore chapterIndustry & Retail
Mongolia faces significant challenges in manufacturing, as neighbouring China has a prominent edge in production of many goods. The northern country can also be an expensive country for manufacturers, with high transportation and labour costs. In May 2013, the minimum wage was raised from $87.75 per month to $120 per month. Government investment in textiles manufacturing in 2012 saw $68.8m directed to cashmere production, $45m to wool goods output and $13.5m to sewing operations. Still the potential for industry in Mongolia is under-appreciated. The prospects for the sector are positive, but the country must be careful. Mongolia has the right mix of wealth and income growth that will promote strong consumer demand in the medium and long term. Despite concerns about the future of high-end retail, Mongolia remains one of the most promising retail markets globally. This chapter contains an interview with S. Demberel, President, Mongolian National Chamber of Commerce and Industry.
Explore chapterAgriculture
Agriculture, which accounts for 16% of GDP and 40% of employment, benefitted from good climatic conditions in the first half of 2013, allowing the industry to grow 20.6% year-on-year. The government has concentrated its efforts on developing the sector in a sustainable fashion with a series of programmes such as the Mongolian National Livestock Programme and the State Policy on Food and Agriculture, which are expected to run until 2021 and 2020, respectively. While Mongolian producers have historically been able to meet the domestic demand for meat, consumption has been on the rise and, since 2009, meat prices have increased while exports have fallen. Mongolia is estimated to be 60% self-sufficient in vegetables and 100% self-sufficient in potatoes. The government and the private sector alike are working to transform Mongolia into a producer of high-end luxury agricultural products, which will likely be initially marketed in the West. Achieving this goal will require a series of investments in local processing, technology, transport networks and training. So long as these issues are addressed, the sector could potentially become a major and sustainable source of export revenues. This chapter contains an interview with U. Boldsaikhan, President, Ensada Holding.
Explore chapterTelecoms & IT
In 2012 the ICT sector as a whole posted total revenues of MNT650bn ($390m), up more than 17% from the previous years, according to the Information Technology, Post and Telecoms Authority. In the telecoms segment, the country’s four mobile operators are making plans for a considerable amount of capital expenditure in order to meet the needs of Mongolia’s rural population and to develop new higher-speed networks in Ulaanbaatar and a small number of other population centres. The country’s new foreign investment law has been widely praised and is expected to result in new interest from foreign investors. Mongolia’s reputation as a centre for ICT in Central Asia has risen considerably in recent years. On the World Economic Forum’s 2013 Networked Readiness Index, for example, the country was ranked 59th place out of 142 nations, up from 63rd place the prior year. With planned developments in mind, many local players expect to see increased levels of competition, potentially from international players. This chapter contains interviews with David Holliday, CEO, MobiCom; and N. Battulga, Executive Director, ITZone.
Explore chapterTourism
Visitor arrivals have jumped substantially in recent years, topping 475,000 in 2012, up 3.4% from the previous year and from less than 150,000 in 2000. As of mid-2013 the government has been working with the private sector to overhaul the country’s tourism regulatory regime and development strategy. In March 2013 the minister of culture, sports and tourism announced that the government had allocated $600,000 for tourism marketing in 2013, including $300,000 for promotional activities, $120,000 for international tours and expositions, and $180,000 for advertising. As of 2012 the industry’s direct economic contribution was 194m, or 2.3% of GDP. This figure was projected to rise by 7.2% in 2013 and by around 7% annually through to 2023. While major challenges remain – including how to attract visitors during the long, cold winter months – many local operators are broadly optimistic about the sector’s long-term potential. This chapter contains an interview with Ts. Oyungerel, Minister of Culture, Sports, and Tourism.
Explore chapterTax & Accounting
Featuring a tax and accounting interview with OBG partner Peter Markey of Ernst & Young, this chapter offers guidance on the local tax system to those interested in opening a firm or investing in Mongolia.
Explore chapterLegal Framework.
This chapter explores the laws and regulations that affect businesses and investors in Mongolia. It also features a legal framework viewpoint from OBG partner, David Beckstead, Foreign Legal Consultant with Lehman, Lee & Xu Mongolia.
Explore chapterThe Guide.
The Mongolia Guide contains useful information for visitors, including business culture, etiquette, climate, transport and how to obtain a visa. Those interested in doing business in Mongolia can also find a list of suggested hotels, as well as contact information for embassies, hospitals, travel agencies and other important resources. The chapter also features guide pieces on dog-sledding and basketball, two sports that are gaining popularity and drawing visitors across Mongolia.
Explore chapterTable of Contents
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