The Report: Mongolia 2015

Given the significant foreign direct investment needed to achieve its development goals, Mongolia has strong motivation to improve its attractiveness to investors. The government is therefore adjusting its policies, while new laws are expected to gradually reinvigorate foreign investment flows.

Country Profile

Located between economic heavyweights China and Russia, Mongolia’s traditional balancing act between its giant neighbours has come under increasing pressure in recent months, while winning and maintaining international investor confidence continues to be a multi-faceted and essential task. Expectations of rapid and sustainable growth among the country’s citizens now exist within the framework of a more uncertain global economic climate in which mineral exports in particular – a staple of the country’s balance of payments – have proven volatile. In facing a challenging environment, however, Mongolia can draw on a number of significant strengths, both from its past and present. Not only are the country’s economic fundamentals impressive, but it also has a pedigree of resilience, which, together with a more recent history of democratic governance, vibrant public debate and openness to world markets, stands it in good stead.

This chapter contains interviews with President Ts. Elbegdorj; and Prime Minister Ch. Saikhanbileg.

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Trade & Investment

Wedged between two of the world’s largest economies, Mongolia’s trade and investment policies are something of a balancing act. Reliant on its neighbours for both trade and transit infrastructure, Mongolia’s small, open economy has integrated with the global one by developing relationships with “third neighbours” to improve terms of trade. As surging mineral exports in the past half-decade have exposed Mongolia to the volatilities of the global commodity markets, the government aims to leverage the nation’s abundant natural resources to develop value-added production and diversify away from exports of raw materials.

This chapter contains a viewpoint from Vladimir Putin, President of Russia; and interviews with L. Purevsuren, Minister for Foreign Affairs; and S. Javkhlanbaatar, Director-General, Invest Mongolia Agency.

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Given its small, open economy with abundant resources including coal, copper, gold, zinc and fluorspar, Mongolia faces the same boom-and-bust cycles of any resource-dependent nation. The country has the natural endowments to provide opportunities for its 3m citizens; however, managing fluctuating growth rates, ranging from -1.3% in 2009 to 17.3% in 2011, as well as investment, trade and fiscal revenues, remains a challenge. Drawing on support from its two neighbours in the short term, the government is trying to ensure a soft landing for the economy following a significant reduction in foreign investment. That said, a rebound in investment is expected for 2015 due to a raft of new legislation taking effect. As the government consolidates its expansionary policies, it will need to accept slower growth in the interests of economic stability.

This chapter contains interviews with Jim Dwyer, Executive Director, Business Council of Mongolia; Graeme Knowd, Associate Managing Director Asia, Corporate & Financial Institutions, Moody’s Investors Service; and L. Boldkhuyag, Chairman, Bodi Group.

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While early 2014 was a time of considerable uncertainty for the banking sector in Mongolia, the year turned out to be much better than expected. No banks failed or faced runs, and the institution that generated the greatest concern – Golomt Bank – fared well in the end. Questions about asset quality persist, and corporate governance may not yet be where it should be. However, with Golomt Bank looking increasing sound, sentiment has turned hopeful. Despite challenges, the sector continues to have good long-term potential as Mongolia’s considerable natural resources and stability promise to continue attracting international investor interest as soon as commodity prices recover.

This chapter contains an interview with N. Zoljargal, Governor, Bank of Mongolia; and a roundtable with G. Ganbold, Former CEO, Golomt Bank; Norihiko Kato, CEO, Khan Bank; D. Batsaikhan, CEO, State Bank; Randolph Koppa, President, Trade and Development Bank; and M. Bold, CEO, XacBank and President, Mongolia Bankers Association.

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Capital Markets

The capital markets in Mongolia have recently benefitted from a series of positive reforms, key hirings and the introduction of new legislation. Together, these measures promise to help breathe life back into the country’s stocks and bonds. After almost four years of declining equity prices, more than half a decade with virtually no initial public offerings (IPOs) and weaker demand for Mongolia’s foreign currency bonds, serious efforts are underway to attract investors. Given Mongolia’s open markets and abundant natural resources, its fundamental value is clear. The sense is that, once key problems are tackled, the country’s capital markets will boom.

This chapter contains an interview with D. Angar, CEO, Mongolian Stock Exchange.

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Recording steady expansion, the Mongolian insurance sector’s prospects are good despite the difficulties faced more generally in the economy. Sector indicators, such as premiums per person, premiums per capita, total capital and total compensation, also suggest that the country’s insurance companies are in relatively good shape and growing fast. As in many developing countries, awareness and penetration are low, so increases come easily. On its own, this has allowed the sector to show resilience in the face of challenges elsewhere in the economy, but growth is also the result of effective strategies, the implementation of best practices and good regulation.

This chapter contains an interview with D. Bolormaa, Former CEO, Bodi Insurance.

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With a focus on curbing political risk to encourage new investment, Mongolian authorities are striving to build a competitive industry to develop the country’s abundant natural resources. Copper regained its place as Mongolia’s top export in 2014, and is the primary focus of new exploration alongside gold and niche minerals such as fluorspar and rare earth metals. While the coalition government has toned down its rhetoric of resource nationalisation, the challenge will be in implementing regulations and the treatment of existing disputes. Achieving a delicate balance between participating in projects and enabling private investment will be integral to commercialising strategic deposits, as well as building much-needed infrastructure. Despite recent delays, the government has made concerted efforts to rebuild investor confidence and expedite development of large projects, to the benefit of both the sector and the wider economy.

This chapter contains interviews with G. Batsukh, Chairman, Oyu Tolgoi; and George Lloyd, Managing Director, Xanadu Mines.

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Despite abundant resources, Mongolia has struggled to shore up its energy security and decrease its dependence on Russia for refined fuel and electricity. The government has made some headway in diversifying fuel imports and improving its terms of trade, while several mid-stream projects could develop domestic refined fuel production. Meanwhile, important refurbishments of Mongolia’s ageing power infrastructure in 2014 will ensure adequate electricity supplies for the next three years, but new greenfield plants are needed in the long term. New wind farms will provide some respite, but larger coal-fired and hydroelectric plants at various planning stages will be key to balancing fluctuating supply and demand. As Mongolia develops a mix of larger renewables projects and decentralised off-grid systems, it is also seeking to develop its coal value chain to produce both power and coal-based fuels.

This chapter contains interviews with Gérard Mestrallet, CEO, GDF SUEZ; and J. Oyungerel, Chairman, Petrovis.

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The transportation situation in Mongolia has improved a great deal over the past few years. Substantial additions have been made to the road system, with a total of 5469 km being built between 2012 and 2016. In terms of rail a number of breakthroughs were made in 2014 that promise to expedite progress on lines that have been long delayed. Overall, real progress has been made and momentum remains strong; however, the country still faces considerable transportation and logistics challenges. Questions remain about balance and focus, and the international community is encouraging Mongolia to prioritise logistics and key infrastructure. The right pieces are being put in place and the country will soon find itself better integrated with international transport networks.

This chapter contains interviews with P. Batsaikhan, Former CEO, Mongolian Railways; and T. Lkhagvasuren, Director-General, Civil Aviation Authority of Mongolia.

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Construction & Real Estate

Rapid economic expansion in Mongolia over the past half-decade has played out across many of the country’s constitutive industries, and construction and real estate are no exceptions. Much of this growth took place in the residential segment, which has been the focus of an increasing number of large-scale, state-led development projects in recent years. Given the attention the construction sector is drawing from the public and private sectors, most local construction firms are looking forward to higher revenues in the years ahead. Growth in the real estate sector can be attributed to a state-sponsored mortgage scheme, fast-growing demand for commercial retail space, and, more broadly, increasing urbanisation and rising incomes among the burgeoning middle class. Despite challenges, including the dip in real estate prices in late 2014 and early 2015, many property developers and market-watchers remain optimistic about the future.

This chapter contains interviews with G. Batdorj, Executive Director, Khutul Cement Shohoi JSC; and B. Jugder, President, National Development Corporation.

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Telecoms & IT

Since it was liberalised in the early 1990s, Mongolia’s telecommunications sector has grown rapidly. As of the first half of 2014 the four major mobile operators reported more than 4.3m registered users in total. This figure is considerably higher than the population, which means many residents own more than one SIM card. Increases in mobile penetration have facilitated rapid technological improvements across all four mobile operators, as well as steadily rising competition. Given the growth potential in the data segment, local players are looking forward to rising revenues. Indeed, Mongolia’s nascent ICT industry – which overlaps considerably with the telecoms sector – is in the early stages of what many local firms expect to be a period of considerable innovations. Despite broader challenges facing the country, the domestic technology industry is regarded as a strategic growth area and the government has made a concerted effort to encourage the sector to invest in expansion. With this in mind, most local players see a bright future for Mongolian ICT.

This chapter contains interviews with Ts. Jadambaa, Chairman, the Information Technology, Post and Telecommunications Authority; and R. Ganbold, CEO, Unitel; and a viewpoint from P. Margad-Erdene, Executive Director, ICN LLC.

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Industry & Retail

Holding up during difficult times and helping to take the edge off the commodity cycle, industry in Mongolia has contributed significantly to the economy. While resource prices have been dropping and related economic activity and foreign direct investment are not at expected levels, manufacturing and processing have been growing, with industrial production up almost 15% in 2013, providing a measure of countercyclical support. More investment is needed in the industry and retail sectors, and many of the most promising industries have been largely ignored by investors and the government, crowded out by mining and minerals opportunities. Still, the events of recent years have demonstrated that a more diversified economy is needed and manufacturers are evolving to capture new opportunities.

This chapter contains interviews with M. Oyunchimeg, CEO, Mongolian National Chamber of Commerce and Industry; and Ts. Erdenebileg, CEO, APU Company.

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Over the past decade or so the agriculture sector – one of Mongolia’s oldest industries – has remained integral to the country’s long-term development strategy. Until just a few years ago the majority of Mongolia’s population was involved in herding or farming in one way or another, and as recently as 2011 more than 30% of the country’s workforce was employed in agriculture. While this figure is expected to decline in the coming years, largely as a result of steadily increasing rural-urban migration, a considerable percentage of the population will likely continue to be involved in agricultural activities – primarily in the livestock segment – for the foreseeable future. Generally speaking, production levels and overall food quality are improving across the sector, and exports are increasing apace. The cashmere segment in particular continues to provide high revenues for many Mongolian companies and individual herders, and opportunities for meat and other animal-product exports bode well for future growth.

This chapter contains an interview with Sh. Gungaadorj, Former Mongolian Prime Minister, and Head, Mongolian Farmers and Flour Producers Association.

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The tourism industry has taken on an increasingly central role in Mongolia in recent years. In 2013 the country saw more than 415,000 incoming visitors and reported market turnover of $263m, which represented about 4% of GDP at the end of the year. These moves are in line with the government’s ambitious short-term and medium-term objectives, which include increasing international arrivals to 600,000 in 2015 and 1m by 2017. These goals will be supported by a considerable reworking of Mongolia’s tourism regulatory framework, which was under way as of April 2015. Broadly, under the new legislation, the government plans to take on a more active role in the development of the tourism sector and to work to facilitate increased transparency and competitiveness in the private sector. Most local players agree that Mongolia has the potential to eventually become a sizeable and highly profitable tourist destination. The country’s many tourism assets bode well for growth, as does the government’s restructuring effort.

This chapter contains an interview with B. Indraa, Executive Director, Tourism for Future NGO, and Director of the Governing Board, Mongolia National Tourism Organisation.

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This chapter outlines the tax environment in Mongolia, focusing on the new investment law, account regulations, corporate income taxation and other subjects. It also contains a viewpoint from D. Onchinsuren, Country Managing Partner, Deloitte Onch LLC.

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Legal Framework

This chapter outlines the Mongolian legal environment, focusing on changes that include a new Investment Law, Petroleum Law and an amendment to the Minerals Law that is expected to boost FDI. It also contains a viewpoint from David Beckstead, Foreign Legal Consultant at Lehman, Lee & Xu.

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The Guide

This chapter contains useful facts for visitors, a list of suggested hotels, as well as phone numbers for important contacts, including ministries, foreign missions and airlines. It also contains features pieces on Mongolian fine artist, G. Zanzabar, and the country’s unique tourism opportunities in its rural expanses.

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