The Report: Mongolia 2013
While a significant nomadic population still pushes its herds across the steppe, young adults in Ulaanbaatar use fibre-optic networks to access the internet. Heir to the legacy of Chinggis Khan, Mongolia is fast emerging as a land rich with economic potential – a country that is seeking growth while also working to preserve its unique national culture. The mining sector has made Mongolia a key player in the global economy and has spurred expansion in other industries. Since the fall of communism in 1990, Mongolia’s economy has experienced rapid diversification. The government is looking to expand these efforts going forward, and the country’s potential for development is as vast as its landscape.
Country Profile
With a population of 2.8m inhabiting its wind-swept, grassy steppes and vast expanses of desert, Mongolia is the world’s most sparsely populated country. Its primary religion is Buddhism, though it is estimated that 40% of the population does not practise religion. Ninety per cent of the population speaks Mongolian, most using the Khalkha Mongol dialect, which shares lineage with Turkic, Japanese and Korean languages. Nomadic tradition, particularly the herding of livestock, remains one of the biggest influences on the national culture. In 1990, Mongolia abandoned a single-party communist dictatorship and adopted a mixed presidential-parliamentary system. The nation continues to emerge as a key centre for mining investment, with a wide variety of important mineral reserves, and also offers potential in a variety of other sectors, including telecoms and IT, agriculture, transportation and logistics. This chapter includes interviews with President Ts. Elbegdorj, Prime Minister N. Altankhuyag, U.S. Secretary of State Hillary Clinton, Australian Minister for Foreign Affairs Bob Carr and Russian Federation Ambassador Victor V. Samoilenko.
Explore chapterEconomy
The main event for Mongolia’s economy in 2013 will be the opening of the Oyu Tolgoi copper and gold mine, which many see as a make-or-break moment. Coal, presently the country’s most important commodity, declined in price by some 15% in 2012, with volumes slipping by around 22%. In 2012 the current account deficit reached 16.7%, excluding mining-related imports, according to the IMF, compared to 11.3% in 2011 and 5.7% in 2012, with volumes slipping by around 22%. Exports fell from $4.7bn in 2011 to some $4.4bn in 2012. However, Mongolia seems set to see a commodity boom in 2013, with one high-profile mine starting production, and another planning to ramp up coal extraction. Yet mining is not the only sector with greater economic potential. A number of other areas also seem ripe for development, including tourism, agribusiness and renewable energy. This chapter includes interviews with Ch. Ulaan, Minister of Finance; P. Batsaikhan, Chairman and President of the Shunkhlai Group; and Jim Dwyer, Executive Director of the Business Council of Mongolia.
Explore chapterBanking
Key reforms implemented in the aftermath of the 2008-09 financial crisis have created a more flexible and resilient banking sector, just as the economy entered a period of slow growth in 2012. While the sector has expanded dramatically over the past two years, banks faced a liquidity squeeze in 2012 that has reduced the pace of growth. Over the long term, however, Mongolia’s leading banks stand to benefit from a rebound, although they will need to mobilise fresh sources of capital to sustain expanding loan books. To encourage higher non-interest income on banks’ balance sheets, provisions have been made for new sources of fee-based revenue, such as the sale of insurance. Larger banks have secured the necessary funds to maintain lending at a slower pace until economic growth rebounds, although persistent inflation is likely to keep nominal lending rates prohibitively high. While foreign banks are positioning themselves in the market through loans, credit lines and equity stakes to support the corporate sector, more sustainable investment is expected to come in the form of securities issuance offshore. This chapter includes interviews with N. Zoljargal, Governor of the Bank of Mongolia, and M. Bold, President of the Mongolian Bankers Association.
Explore chapterCapital Markets
The State Property Committee (SPC) created the Mongolian Stock Exchange (MSE) in 1991 as a vehicle for privatising state assets during the transition to a market economy. Despite early attempts to broaden the share ownership in state firms, shares became concentrated in the hands of a few, and, by 2010, it was estimated that 80% of the market’s capitalisation was owned by a dozen individuals. The MSE experienced a record-breaking year in 2011 when share prices surged thanks to foreign investor interest in the commodity-driven economy. Mining sector stocks performed especially well, with some coal producers seeing shares rise over 200%. Strong growth prospects over the medium term will ensure high returns for investors and will likely lead to the strengthening of the local currency. While some value investors will snap up cheap valuations during the economic rebound expected in 2013, the enactment of the new securities law is crucial to opening the market to new liquidity and issues. This chapter includes a viewpoint from James Passin, Principal, Firebird Management.
Explore chapterInsurance
While insurance in Mongolia remains in its nascent stages, important ongoing reforms may yet drive penetration, build local underwriting capacity and develop the first pool of domestic non-bank institutional investors. While the aggregate sums involved remain modest, buoyant growth bodes well for the medium term. The market is dominated by eight firms, which together account for 89% of non-life premiums. Three underwriters alone account for 54% of the market. New entrants are spurring competition with established players, driving innovation in product development and distribution channels. New rules for private insurers will have to be matched by wide-ranging reform of the states social insurance system. Promoting social acceptance of insurance will be crucial for long-term growth, with underwriters still to overcome distrust of private cover. This chapter contains an interview with T. Batzul, CEO, Mongol Daatgal.
Explore chapterMining
The mining sector was a key growth driver of GDP in 2011, when the economy expanded 17.3%. Since 2012 there has been a moratorium on new licences, which is officially set to expire at the end of 2012. Although the major projects are not producing as yet, mining is already the country’s most important economic activity, contributing 20.2% of GDP in 2011, according to preliminary estimates. Coal production and exploration have risen annually since 2003, but new laws are allowing the government more influence over foreign investment. The tax burden on mining companies is also likely to rise. Over the long term the logic of establishing Mongolian mining operations is compelling: only about a quarter of the country is thoroughly explored, and most of what is known comes from outdated knowledge from the Soviet period. That means decades of work for mining service companies – just not in 2013 or perhaps in the short-term future, given the ongoing legal uncertainties in the sector. This chapter contains an interview with Cameron McRae, President and CEO, Oyu Tolgoi.
Explore chapterEnergy
Outdated power plants and grids, alongside a legal environment and tariff regime in need of upgrading, has made investment difficult. However, several efforts, focusing on boosting and diversifying supply for electricity and fuels, and establishing a positive track record for Mongolia as a viable destination for private investment in large-scale energy projects, are under way. The good news is that Mongolia does not lack domestic sources of energy. Coal is plentiful and supply is available to meet the needs of electricity production. The country’s first wind farm is due to begin feeding into the central grid in early 2013 and solar power is already leveraged on a small scale. While most energy is still produced by burning coal, growing energy needs could be met by a more diverse mix, including the possibility of hydrocarbons and nuclear energy. The government appears intent on opening electricity generation to private investment. This chapter contains interviews with M. Sonompil, Minister of Energy, and Willem Van Twembeke, CEO and President, GDF SUEZ Energy Asia.
Explore chapterTransport & Logistics
Its sparse population, landlocked location and extreme climate make developing Mongolia’s transportation and logistics infrastructure a challenge. The government is tapping into international markets to address its transportation and infrastructure issues, and in late November 2012 the country raised $1.5bn in a two-part bond offering. Diverse efforts are under way to improve transportation and logistics via roads, sea, and sky. Plans for a new airport are on the nation’s agenda, as an increase in air traffic is anticipated. Perhaps the most notable development, however, is the total of 5683.5 km of new railroads set to be built in three phases. These rail lines will link to existing tracks in eastern Russia, providing access to a key Pacific Ocean port. Enhancing rail transport capacity is vital to realising economic potential, both to facilitate exports of minerals and to import other goods. This chapter contains an interview with A. Gansukh, Minister of Roads and Transport.
Explore chapterIndustry & Retail
Although it may never compete with neighbours with well-established manufacturing sectors and economies of scale, Mongolia has the potential to meet domestic needs and produce goods, such as meat and cashmere for export. The move into mass production faces a host of constraints: Mongolia has a small domestic market, poor infrastructure, a growing minerals sector competing for labour and capital, and its neighbours, China and Korea, are world leaders in low-cost mass production. At the same time, Mongolia is an open economy, with low tariffs and limited non-tariff barriers, and as such, goods can easily enter from abroad. Nevertheless, Mongolia has the potential to develop a strong and healthy industrial sector: domestic demand is climbing, quality is improving and interest rates have, over the long term, been falling. If the programme to improve cashmere manufacturing and the investments to raise the quality of meat production pan out, exports of manufactured goods could become a meaningful economic contributor. This chapter contains an interview with B. Chuluunbatar, President and CEO, Monnis Group.
Explore chapterTelecoms & IT
With an overall population density of only two people per square mile, and 40% of the nation living nomadically, providing 3G services has been more challenging than in other countries. However, as of December 2012, 3G services became available in all provinces. With 27% of the population under the age of 15 and a GDP that grew 15.7% per capita in 2011, the number of 3G users is expected to increase in the years to come. Debate is ongoing over which technology will prevail, however, with 4G demand expected to be highest in Ulaanbaatar and other large cities. Prospects for the telecoms sector are generally good. Also promising is the IT sector, thanks to a new corridor and fibre-optic networks. At the end of December 2012, the nation was ranked ahead of other players in the region, such as China and Indonesia, in terms of download speeds. The country is quickly becoming wealthy, benefitting from the fact that the market is relatively open and free. More competitive operators are expected to meet the market’s needs. Crucial to development will be how the government manages its dealings with the private sector. Companies must also ensure that employees are well-trained and qualified to work with rapidly evolving technology. This chapter contains a roundtable with B. Byambasaikhan, Chairman, Mobicom; D. Bolor, CEO, Skytel; and R. Granbold, CEO, Unitel.
Explore chapterConstruction & Real Estate
Mongolia’s real estate sector is likely to feature fast-rising rents, land values and sales prices for at least the next several years. Per capita GDP is forecast to triple by 2016, creating a jump in buying power that will add to an already short supply of homes in the capital. Thus Ulaanbaatar seems poised to experience major price hikes. There is an increasing demand for housing as the nation’s young population is moving from extended-family households to nuclear ones. There has been little interest in building low-cost or middle-income housing so far. According to some estimates, another 175,000 housing units are needed in the capital alone. However, the construction sector’s present building capacity is estimated at around 6500 apartments per year. Mongolia’s construction industry is young and growing and thus far has been unable to keep up the demand generated by the mining boom. Should Mongolia succeed in firming up its legal environment, it can expect a great deal more foreign interest and investment. This chapter contains interviews with D. Battur, President of Jiguur Grand Group, and J. Od, President of MCS Group.
Explore chapterTourism
Endowed with isolated, unspoilt nature and nomadic Buddhist culture, Mongolia has managed to develop a small but potentially profitable tourism sector that is expanding through support from the government and a focus on the adventure and nature segments. The country’s main sources of genuine leisure tourism over the past decade have been more affluent countries, including Japan, South Korea, North America and Western Europe. Tourist arrival numbers have fluctuated in recent years, although the country continues to attract visitors from across the globe. Some 460,360 tourists arrived in 2011, up 0.9% from 2010. The expansion of tourism may have been overshadowed by fast economic growth, but it remains a tribute to the country’s vibrant private sector and the attractions of the pristine landscape. While the development of new hotel infrastructure in Ulaanbaatar is necessary to cater to growing business travel, the government will certainly need to pay close attention to supporting smaller ecotourism projects and initiatives in the countryside in order to preserve options for tourists. This chapter contains interviews with Ts. Oyungerel, Minister of Culture, Sports, and Tourism, and U. Jalsa, President and CEO, Nomadic Expeditions.
Explore chapterAgriculture
Forty per cent of Mongolia’s population is employed in the agricultural sector, which makes up 15% of GDP. The sector, which involves the raising of livestock for meat and wool, as well as the cultivation of grains and vegetables, has the biggest impact on the lives of average Mongolians. What is particularly encouraging for Mongolia is the possibility of becoming self-sufficient in terms of food, but agriculture can do more than simply meet domestic needs. It is a major source of export revenues, second only to mining and minerals. Issues surrounding foreign investment in the mining sector have thrown a spotlight on the importance of developing a diverse economic base that will enable sustainable progress. Agriculture plays an important role in this economic model. This chapter contains an interview with T. Nasankhuu, President of Monfresh Group.
Explore chapterHealth & Education
While it is much improved from its state of near-collapse following the end of the Soviet period, health care has failed to truly recover. Thanks to the work of a number of donors, a few local doctors, and small investments made by international medical groups, it has experienced some improvements. However, the health care industry is underfunded, lacking in qualified doctors, and almost devoid of preventative care. Despite the sector’s weakness, it has a number of assets that could help it over the long term, including an extensive history of traditional medicine, which is enjoying a revival. Mongolia also has many well-qualified and experienced doctors who have the technical knowledge to help push the sector forward. The education sector is underfunded and poorly managed. With the country set to come into substantial wealth from mining, it needs to spend that money wisely so that its citizens have the skills, expertise and knowledge to make a living from the industry now as well as continue to thrive after the minerals are depleted. Boosting bilingual education is a new initiative, and steps will be taken to improve the quality of higher education institutions. The government is open to foreign participation, but is most interested in tangible aid, such as school construction. This chapter contains an interview with Peter Morrow, Chairman of the American University of Mongolia
Explore chapterMedia & Advertising
Opportunities for new media outlets blossomed following the fall of the one-party communist regime in 1989-90, with private print and broadcast players entering the market soon after. As of the start of 2012 there were 469 media outlets nationwide. Mongolia has a vast range of outlets, from national newspapers and TV channels to local radio stations broadcasting to herding communities. The country’s advertising sector, meanwhile, has been strengthening fast on the heels of economic growth, as foreign interest and subsequent investment have increased. There has also been a diversification in advertising platforms, from traditional television ads to digital billboards. With continued expansion and rising incomes, the period ahead is likely to see greater sophistication in Mongolian media, along with greater competition.
Explore chapterTax
Currently, Mongolian legislation allows for several forms of business entities, which include joint stock, joint venture and limited liability companies. Economic and business activities in Mongolia are regulated by a variety of laws, including the Law on Foreign Investment of 1993 and the Company Law of 1999. To establish a registered presence in Mongolia, foreign companies may also choose to operate through a representative office or branch. There are many financial, legal, commercial, and tax implications arising from the choice of business vehicle. In this section, Ernst & Young Mongolia gives an overview of the Mongolian taxation system, featuring a viewpoint from Christian Pellone, Head of Tax.
Explore chapterLegal Framework
Two issues facing any prospective investor in a developing nation are what activity is permitted and whether the laws of that country will protect their investment. For several years Mongolia’s tremendous potential has been recognised, not just in terms of its mineral resources, but also in agriculture and renewable power generation. The country treasures its independence, but as a functioning democracy, it recognizes the need to respect the rights of its citizens and foreigners alike. Significant strides have been made in the past 20 years to produce a body of Mongolian law that achieves this aim. In this section, Clyde & Co gives an overview of the legal framework for conducting business in Mongolia and features a viewpoint from Stephen Tricks, Consultant at Clyde & Co.
Explore chapterThe Guide
This chapter contains useful information for visitors to Mongolia, including visa requirements, accommodation options, and contact information for foreign missions, hospitals, and other institutions. You can also find highlights of Mongolian culture with a special feature on the revival of the traditional sports of polo and archery. Finally, this section provides guidance regarding etiquette, dress, language, and other subject matter necessary to comfortably navigate a journey to Mongolia.
Explore chapterTable of Contents
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