Booming Mongolia

Source: THE ECONOMIST
January 20, 2012

Mine, all mine

The country that is likely to grow faster than any other in the next decade, and how it is changing, for better or worse

“GOIN’ to OT?” drawls Andy, a burly tattooed man with that worldly air common to those who have done time in the American army. The gate at Incheon airport in South Korea is packed with travellers, mainly Mongolian expatriates on their way home, waiting to board a flight to Ulaanbaatar. Andy’s is a fair guess as to the destination of one of the few other Western passengers. “OT”—Oyu Tolgoi, or “Turquoise Hill”—is in the middle of nowhere, a desolate spot in the Gobi desert, another hour-and-a-half’s flight south of Ulaanbaatar (inevitably, “UB”). But it is the site of the biggest foreign-investment project in Mongolia, a copper-and-gold mine that is springing up at a remarkable speed and is expected, by 2020, to account for one-third of Mongolia’s GDP.

For Andy, who normally “does security” in places such as Afghanistan, Nigeria and Somalia, OT is a rest cure. Conditions are comfortable, the locals are a delight, and nobody tries to shoot him. And there are the transits through UB, a veritable Bangkok of the steppes—at least if your comparators are Kabul and Mogadishu. In the OT bus from UB airport into town, Andy is on tenterhooks waiting for the overnight hotel allocation. He is delighted with his billet—one where overnight guests are readily tolerated. The other news is less cheery: the airport bus will leave at four in the morning.

UB is a boom town on the frontier of global mining. Hotels are bursting; the Irish pubs, of which there are several, are heaving with foreign miners, investment bankers and young local women with very long legs and very short skirts. French bistros serve steaks the size of tabloid newspapers. Dozens of cranes punctuate the skyline. The streets, empty 20 years ago, are now clogged. It is hard to believe on the clear sunny mornings the city enjoys much of the year, but UB’s air is now as polluted as anywhere—second only to the Iranian city of Ahwaz, according to a recent study by the World Health Organisation. In the winter, when temperatures average from -10 to -30 centigrade, and often fall to -40 at night, UB burns a lot of coal.

Another sign of a boom is the effort to keep the city functioning through these crippling winters. When a Singaporean firm was building a joint-venture brewery to make Tiger beer, it was so anxious to finish in time for the summer-drinking high season that it hired patio heaters the size of jet engines for the construction site. Without such aids, building stops in the Mongolian winter. It is too cold to pour concrete.

A glitzy mall on the corner of the main Sukhbaatar Square houses the sort of establishments you come across in the better class of airport: chic boutiques, pricey restaurants, expensive-watch shops and, of course, an outlet of Louis Vuitton, which sells posh luggage. The shops usually look empty, which is reassuring for those nostalgic for the UB of the recent past—small, drab and poor, and offering its visitors, as one unhappily put it, a choice of “mutton, mutton and mutton”, but at least refreshingly different from other capitals.

Central Tower, as it is known, is a new ornament to downtown Ulaanbaatar. It is built next door to the lot where once stood the former headquarters of the former Mongolian People’s Revolutionary Party, the MPRP (it has since dropped the “R” word), which for seven decades until 1990 ruled Mongolia as a one-party state and rock-solid Soviet satellite. The building was burned down in rioting in 2008 after a disputed election. The use to which the site has now been put is as good a symbol as any of the new aspirations of Mongolia’s ruling class.

Dreams under your feet

To pay for these dreams, Mongolia is being dug up and sold to China. Already, more than 80% of its exports are minerals, a proportion expected to rise in a few years to 95%. Mongolia makes mining geologists salivate over its known riches and unexplored potential—for copper, coal, gold, silver, uranium, molybdenum, and on and on. Some 3,000 mining licences have been issued.

It is not just that Mongolia is a treasure-chest of geological wealth. It is slap-bang next to the world’s biggest and fastest-growing market for most minerals. Put together Mongolian supply and Chinese demand, and Mongolia will be rich beyond the wildest dreams of a population many of whom, a generation ago, saw themselves as nomadic herders. With just under 3m people, Mongolia has a chance of becoming a Qatar or a Brunei: a country that has only a small population but almost all of it, in global terms, loaded. Brian Fisher, an Australian economist who has conducted a study of the economic impact of OT, says Mongolia “sounds like Australia in 1930”.

In the third quarter of 2011 Mongolia’s economy grew by 21% compared with the same period in 2010. Even sober economists think the country is going to have to get used to this sort of thing. The IMF expects growth to average 14% a year between 2012 and 2016. In 2013, the year production is due to begin in earnest at OT, it is forecast to reach 22.9%. Others think it will be at least twice that.

Indeed, OT is the force driving many of these short-term projections towards the sky. Its construction is a big factor in this year’s boom. From 2013 its sales will start adding an average of about five percentage points a year to the national growth rate up to 2020, when its impact on the economy will peak. By November last year over $3 billion had already been spent on OT, a figure that will rise to $6 billion by 2013 and $10 billion by 2020. For Mongolia, a $6 billion economy, this is enormous.

So is the scale of the logistical challenge of building one of the world’s biggest copper mines in the middle of the desert. All supplies have to be brought in by road, from China to the south. Some 18,000 workers, including about 10,000 Mongolians and 6,000 Chinese, have to be housed and fed. Water had to be found, and is to be piped from an underground aquifer over 50km (32 miles) away. Electricity is to be provided first from China, then by a purpose-built power plant. And local people have to be compensated, coaxed and cajoled into believing that the mine is in their interests, not just those of the foreigners who are running it.

The project is a joint venture between the Mongolian government (34%) and Ivanhoe Mines of Canada (66%), which is in turn 49% owned by Rio Tinto, the mining giant that is managing OT and has put up most of the money. Already the Turquoise Hill, where the colour of the soil first betrayed the presence of copper to prospectors decades ago, has vanished. A huge pit is opening up for the first phase of the mine. Two shafts have been sunk for the second, underground, phase. On top of one, a tower is soaring. It will be the tallest structure in the Gobi, and perhaps in Mongolia. The workers are housed in long prefabricated buildings or, for the luckier ones, traditional gers, circular felt tents (equipped with untraditional en suite facilities, TV and Ethernet cables).

All this is justified commercially by the expectation that this mine will produce 450,000 tonnes of copper a year, making it one of the world’s five biggest mines, as well as being a big gold producer. And it will have a life of at least 50 years. The more they look, the more potential geologists find in the area. It will be what Rio calls a “first-quartile” mine in terms of costs—ie, among the cheapest. And its proximity to China means that the cost of transport should not be prohibitive. The price of copper is especially vulnerable to swings in market sentiment. But global supply is constrained, and barring global economic Armageddon, demand is not going to collapse.

OT, however, matters not just in itself, but as a test of Mongolia’s ability to work with foreign investors to pull off such mammoth undertakings. Next in line is Tavan Tolgoi (Five Hills), the world’s biggest untapped coal deposit, also in South Gobi province. Notional shares in this project have already been distributed (electronically) to every Mongolian born before March 31st 2011. With a general election due in 2012, this adds political urgency to an ambitious scheme to raise billions of dollars for the mine through an initial public offering of shares in Ulaanbaatar and London. This will double the market capitalisation of the sleepy UB stock exchange.

Mongolian coal production is expected to increase from about 16m tonnes a year now to 40m by 2020 and 240m by 2040. Again China provides a ready market, but the mining boom has exacerbated Mongolian fears of a Chinese takeover by commercial stealth. So feasibility studies are under way on the costly options of building railways to take coal to Russia, and thence out to Korea and Japan via Vladivostok, or to Dandong on the Chinese-North Korea border and thence by sea to South Korea.

A touch of Dutch on the steppes

Not everyone in Mongolia looks at the growth projections and goes giddy with delight. Many worry about the economic, environmental, social and strategic costs of becoming “Minegolia”. Economists fret about a “resource curse”, or “Dutch disease”. If even the Netherlands can be vulnerable to this—whereby wealth floods in as natural resources are exploited, pushes up the exchange rate, inflation, or both, and renders other industries uncompetitive—how is poor Mongolia to cope? And the Netherlands never had a year like the one Mongolia can expect in 2013, when the economy will grow by a quarter and the current-account balance will lurch from a deficit of 14% of GDP into surplus.

Furthermore, Mongolia, a 20-year-old democracy, is prone to populist policymaking. Even as the economy is booming, political parties are tempted to promise handouts. After pledges made at the previous election, every Mongolian, rich or poor, gets 21,000 togrogs ($16) on the 15th of every month. The big parties have declared a no-handout pact ahead of the next election, and the government has set up a “fiscal-stability fund” to smooth the commodity cycle. But the temptation to dip into the till will mount as voting nears.

For economists, the resource curse is a risk Mongolia has little option but to take. As Mr Fisher, the Australian economist, puts it, its comparative advantage is in commodities and mining services. There is no point in trying to compete in manufacturing with “the biggest factory on the planet” next door in China.

Mongolia is still a desperately poor country. It has just graduated, in development-bank speak, to “lower-middle-income” status, with a GDP of around $2,000 per head. The population of UB has expanded by 70% in the past few years, to about 1.2m now. Some poor people still spend the winter nights beneath the streets (open manholes are a pedestrian hazard), huddling near the pipes for warmth. The city is sprawling outward through valleys in all directions along dirt roads lined with clapboard fences, behind which former herders live in gers.

One such herder, given the name Igor by Russians he knew in his youth, describes a common life path. A few years ago, herding in Central province, he lost many of his sheep to a dzud, one of the periodic climatic disasters that hit Mongolia—a summer drought that results in too little pasture and too little hay for the winter, followed by heavy winter snow and colder-than-usual temperatures. Igor sold the rest of his livestock to pay for his children’s schooling, bought a pickup truck and moved to UB, where he makes a living hiring it out. He finds UB going from bad to worse, as more people come to town and scramble to earn money. All there is to look forward to is the summer pilgrimage home, to drink airag (fermented mare’s milk) with his friends in a ger.

It is not just the weather that drives herders into town. Some are mining refugees, fleeing environmental devastation. Besides the licence-holders Mongolia has tens of thousands of illegal gold prospectors, known as “ninja” miners because the green plastic bowls they carry on their backs to sift for specks of the metal make them look like mutant turtles. Their use of mercury and cyanide has poisoned rivers.

Mongolia’s most flamboyant environmental campaigner is a former herder called Tsetsegee Munkhbayar. He made his name helping clean up the Onggi river, and then for his extreme forms of protest, involving shooting at mining equipment or vehicles. In April 2011 he led a group of supporters into Sukhbaatar Square on horseback to demand talks with the government. Mr Munkhbayar, a grim-faced man looking out of place behind a desk in his UB office in knee-length boots and traditional jacket, believes that if Mongolians exploit the mines, “we will never develop.” He suggests an alternative future of herding, dairy-farming and tourism. As he talks he is interrupted by a loud blare of traditional Mongolian music. It is the ringtone on his mobile.

And not a drop to drink

One UB resident, visiting the OT site as an interpreter for a foreign journalist, cannot stop herself from weeping at what is being done to the area and to her country. For the outsider, the bleak brown desolation of the Gobi is not a landscape that evokes sympathy. And it needs an awful lot of Gobi to sustain a flock of goats and camels, so, vast though the OT project is, the number of herders directly affected is small. But the translator sees ruin: “You can’t drink copper; you can’t drink gold.”

In fact, the aquifer tapped for OT is too deep to affect surface water, too saline to pass human-consumption standards and so big it will be no more than one-third depleted after 50 years of the project. The big danger environmentalists see from its use is that even a future natural drought may be blamed on OT. It will be hard for the project to deny water to distressed local herders. That might lead to overgrazing.


the way it was

Such a massive undertaking is bound to distort the local economy and disrupt the environment. Compared with the ninjas, the multinationals and the development banks that will help raise the largest-ever project financing for mining can at least claim to be part of the solution. They are conducting impact assessments and bio diversity studies. The project is also providing jobs, and creating more employment for locals through subcontracts.

But it will struggle to be popular. Oyun Sanjasuuren, an independent member of parliament, says mining is bound to be political because it is “the main thing in the country”. And the face of Mongolian mining over the past 15 years has been “mostly ugly”. Miss Oyun says she entered parliament as a centrist, but now finds herself on the right as the main parties have shifted steadily to the left. OT has not been helped by tactless remarks made in the past by Robert Friedland, Ivanhoe’s boss, about “the cash machine we intend to build”, and how nice it was to have so few people around and “no NGOs”.

The wealth generated by the miners is an obvious target. And the militant Mr Munkhbayar has many fans even among young urban Mongolians who moan that development is arriving too slowly. Like him, they wish it could come from some other industry. Every herder, says one environmentalist, hopes that at least one person in his family will carry on the life. But that may be changing. Twenty years ago it was hard to meet anyone in UB who identified with the city. Even if they were born there, they saw “home” as the “aimag”, or province, from which their parents came. Now a new generation of city-dwellers feels less attached to the countryside and to nomadic herding traditions. Their numbers are swollen by young people returning from an overseas education to chase the new opportunities the mining boom is throwing up.

One such, a young man called Damdin, is finding life difficult. After 15 years in Fairfax, Virginia, he has forgotten most of his Mongolian. He left Mongolia with his mother, who was fleeing his alcoholic father. At school in America the other Asian students were scared of him, despite his short stature; Mongolians, he says, have the reputation of being psychos. Now back in UB, living in a ger with his father who spends his time playing games on Facebook, his ambition is to open UB’s first skateboard shop.

When The Economist encountered him, outside a derelict Buddhist temple in a ger district in the middle of the afternoon, and later at the nearby police station, he had just been punched and robbed of his phone by friends of the friend he had lent it to (“It was 4G, man!”). He was drunk, despite saying he is always teased as a wuss for sticking to beer when real men drink vodka. He was cradling a little street-puppy he had rescued from his muggers, knowing his grandmother would not let him take it home. He presented as forlorn a picture as could be imagined of the pain and dislocation of being caught between two worlds. But he said he had no intention of going back to Virginia.

China, Mongolia to Boost Ties

Source: CHINA DAILY
January 13, 2012

BEIJING Mongolia and China will cooperate in a number of mining and energy projects this year, Gombojab Zandanshatar, the visiting Mongolian Minister of Foreign Affairs and Trade, said in an exclusive interview with China Daily on Thursday.

“In Mongolia there are some large scale mining projects to be commissioned soon, and one of them is the Oyu Tolgoi copper and gold mine,” the minister said.

Aluminum Corporation of China has reportedly been trying to obtain a share in the Oyu Tolgoi copper and gold mine, but has not succeeded, according to a source from the Mongolian embassy in China speaking on the condition of anonymity. The mine, located near the China-Mongolia border, is one of the world’s largest undeveloped copper-gold projects.

In addition, according to an announcement from the Mongolian government last week, China Shenhua Group, a leading mining and energy company in China, has been selected as a stakeholder to jointly develop Mongolia’s Tavan Tolgoi coal mine, one of the world’s largest unexplored reserves of coking coal, the Wall Street Journal reported.

The Mongolian government selected a consortium including the US-based Peabody Energy, which accounts for 24 percent of the share, China’s Shenhua, which accounts for 40 percent and an unidentified Russian-Mongolian group, which accounts for 36 percent.

“Shenhua will play a very important role in the future development of this coking coal deposit,” Zandanshatar said.

The source from the Mongolian embassy in China told China Daily that the investment plan has yet to be approved by the Mongolian congress. The investment plan was reportedly previously suspended by Mongolia last October.

“Mongolia is interested in using these mineral resources very efficiently with all its neighbors,” Zandanshatar said, adding that China and Mongolia also agreed to address a number of important issues concerning other energy needs for Mongolia.

China is ready to provide petroleum products in the short term, and Zandanshatar hopes the two countries will reach an agreement soon to set up a joint refinery to meet increasing needs of petroleum products in Mongolia, according to a memorandum of understanding signed last year between concerned authorities from both sides.

Over the last decade, China was Mongolia’s largest investment and trading partner. “Now in 2011, our bilateral trade turnover increased by two times to $5.7 billion,” he said.

By the end of last year, 90 percent of Mongolia’s total exports went to China. More than 5,000 Chinese firms operate in Mongolia, with a combined investment of about $2.5 billion, and investment from China continues to increase, according to the minister.
Zandanshatar is paying an official visit to China from Wednesday to Sunday and is scheduled to meet officials from commerce and economic planning agencies.

Foreign Minister Yang Jiechi held a talk with Zandanshatar in Beijing on Thursday morning.
The two sides hailed the progress of bilateral ties and agreed to increase exchanges and cooperation in multiple fields to advance their strategic partnership in a sustainable way, according to a press release.

China and Mongolia established a strategic partnership in June 2011. “We also exchanged our views on how we can best enrich and deepen this partnership through political trust, economic cooperation and humanitarian exchanges,” Zandanshatar said.

China’s continued growth and stable development have a positive influence on the Mongolian economy and all phases of social development of Mongolia, he said.

“As a neighbor, we enjoy excellent relations and cooperation with China,” Zandanshatar said. “We will realize the existing potentials to expand and intensify this cooperation.”

The minister also said China’s rapid rise is “not a threat” to its neighbors but a great opportunity for development. “I am confident that China needs us as much as we need them in order to achieve a win-win situation,” he said.

“We have reconfirmed that both sides fully respect each other’s sovereignty, independence and territorial integrity as well as the choice of development paths.”

Bilateral cooperation may achieve further substantial progress in many areas, such as infrastructure development, grassroot exchanges and military exchanges, according to the minister.

In recent years, bilateral cooperation in the defense field has become active, so exchange visits of senior officials are now becoming regular and military cooperation is expanding.

In 2011, the Chinese Defense Ministry assisted in building the rehabilitation center of peacekeepers near Ulaanbaatar, Zandanshatar said, adding that both countries should strengthen concrete cooperation by signing military and technical cooperation agreements.

China and Mongolia are expected to work hard to ensure that “people-to-people exchanges, understanding and mutual trust are as good as government-to-government ones”, he said.

In 2011, during Premier Wen Jiabao’s visit to Mongolia, Wen highlighted the importance of youth exchanges. The first group of 100 youth delegates visited Beijing and Hohhot, Inner Mongolia, last October.

The bilateral strategic partnership is important to encouraging humanitarian exchanges of youth and others between the two countries, Zandanshatar said. “It is better to see once rather than hear a thousand times,” the minister said, quoting a Mongolian proverb.

China Daily

Mongolia’s Quest to Balance Human Development in its Booming Mineral-Based Economy

Source: BROOKINGS INSTITUTE
January 11, 2012

Mongolia—long ignored by Asia specialists as a sleepy nomadic ex-Soviet satellite—finally burst onto the world economic scene in 2011 when exploitation of its vast mineral deposits led it to a 6.7 percent economic growth rate that was 2nd highest in the world. During the fourth quarter of last year the economy was booming at a growth rate of close to 20 percent. Both the Asian Development Bank and the Economist Intelligence Unit are predicting a 2012 growth rate of 15 percent, and other forecasters contend that if Mongolia’s informal economy is taken into account the growth rate could approach 40 percent. Mining experts estimate that the country possesses as much as $1 trillion worth of untapped precious metals and minerals in at least 6000 sites. That works out to potentially over $333,333 per every man, woman and child in the country.[1] While this is undeniably a positive situation for Mongolia, the challenge facing the nation is to ensure that its mineral wealth benefits the whole nation rather than just certain sectors of society, as has been the case in some other resource-rich countries.

After wrenching economic difficulties in the 1990s caused by the collapse of its Soviet-inspired command socialist system, the Mongolian economy has grown by an average 7 percent a year since 2003. Foreign direct investment (FDI) has soared with the long-delayed but now operational large-scale western mining joint venture, the $4 billion Oyu Tolgoi (OT) copper and gold operation, now under development by Ivanhoe of Canada and multinational giant Rio Tinto. OT may hold as much as 32 million tons of copper and 1,200 tons of gold, according to government estimates. Annual output when the mines are developed is predicted to exceed 450,000 tons of copper and 330,000 ounces of gold. Per capita GDP in Mongolia has more than tripled to $2,200 in 2010 from $638 in 2004. Haruhiko Kuroda, president of the Asian Development Bank (ADB), has proclaimed that Mongolia is at “the threshold of prosperity,” while advising that further efforts must be made to make economic growth more inclusive to ensure that the benefits from high economic growth are distributed more broadly, and that people have equal access to opportunities and basic social services.[2]

In 2008 Mongolia’s Parliament [Great Khural] passed a National Development Strategy and created a Human Development Fund (HD Fund) with the ambitious goal of bringing Mongolia’s human development status to the same level as that of the developed countries by 2020. (The country has been ranked with a value of only 100th out of 169 countries by the United Nations Development Programme’s (UNDP’s) Global Human Development Report.[3]) This Fund made it legally possible for every citizen of Mongolia, for the first time in its history, to be equally eligible to own a share of the nation’s mineral wealth. In preparation for the establishment of the Fund, Mongolian economists looked at the $40 billion Alaska Permanent Fund, Norway’s sovereign wealth fund worth $410 billion, and Chile’s use of its copper resources to help drive growth. They also considered Canada and Australia as models for distribution of mineral revenues to alleviate poverty and avoid the so-called Dutch Disease, a curse afflicting some resource-rich societies.[4]

To avoid this destabilizing effect, in July 2009 the Mongolian Parliament passed a law, based on a similar Chilean act, that creates a mechanism for saving surplus revenue from mineral royalties when prices are high in order to stabilize the annual state budget when prices (and therefore mineral revenues) fall—as happened in 2008.[5]  The state budget each year sets a certain amount of money to be drawn from the HD Fund in anticipation of revenues to be earned; this draw is stated as an actual amount of Mongolian National Tugriks (MNT, the Mongolian currency), not as a percentage of the Fund’ value. The state budget must pay out the specified number of tugriks, regardless of whether the Fund has earned the money anticipated. The 2009 legislation is a way to keep the Government in compliance with the Parliament-approved annual budget while at the same allowing the flexibility to react to actual Fund earnings.

Initial capital for the HD Fund was drawn from the OT mine project, which is estimated will account for 30 percent of Mongolia’s GDP when completed and will generate $30 billion in tax revenue over 50 years.[6]Additional revenues for the HD Fund will be coming from development of Mongolia’s $2 billion Tavan Tolgoi (TT) coal deposit, the largest in the world. The country also has very rich uranium and rare earth mineral resources waiting to be exploited. The HD Fund’s other sources include income from sale of shares and dividends of state property connected with state-owned mineral deposits (because they were designated by law as large deposits of national strategic significance); fees for exploration and processing activities in these mining sites; advance payments and loans related to the exploitation of the strategic mining sites; and income from bonds, loan certificates, and savings interest from international and domestic financial markets for the Fund.

The HD Fund is expected to provide pension, health, housing, and educational benefits as well as cash payouts to all citizens, and thus be a mechanism to distribute the wealth obtained from Mongolia’s minerals equitably among the populace. The Parliament in 2011 stipulated that MNT805 billion (roughly US$567 million) from the Fund should be distributed to all citizens for health insurance and to students for tuition fees,[7] with MNT21,000 (about US$15) per citizen for cash payouts. Although the per capita amount is small, the amount distributed in 2010 was 16 percent of the state budget―and in 2011 almost 40 percent. Both the IMF and World Bank have criticized the 2011allocation as too expansionary, and a cause of the high 14 percent inflation rate.[8] Most of these payout monies were in cash,[9] which is opposed by 87 percent of the people who preferred the benefits be in cashless form.[10]

Originally, the HD Fund’s resources were to be applied for investment and capital repairs, to reduce the budget deficit, and for social welfare systems.[11] However, its use has become embroiled in Mongolia’s volatile election politics. In the 2009 presidential election, the two main parties, the Democratic Party and the Mongolian People’s Revolutionary Party (now renamed the Mongolian People’s Party), pledged to distribute as much as $6 billion, or up to 1.5 million tugriks (US$1,060) for every citizen, from the country’s mining wealth. However, because of a sizable shortfall in actual revenues as opposed to anticipated revenues, the Parliament at the end of 2009 authorized only the distribution of MNT120,000 (approximately US$92) as a cash grant for each citizen of Mongolia. In the just-approved state budget for 2012, HD funds are to be distributed in July 2012, which is around the time of Mongolia’s parliamentary elections, so many observers believe the distribution plans are once again most likely exaggerated campaign promises designed to attract votes.

Mongolia’s Prime Minister, Sukhbaataryn Batbold, wrote in 2011 that “human development is at the center of government policy and we are taking all efforts to achieve this goal. Yet, Mongolia faces many challenges…such as unemployment, poverty and inequality are coupled with environmental problems such as climate change, pasture degradation, natural disasters, droughts, dzuds, water and forest resource depletion, air and soil pollution.”[12] He and other Mongolian leaders emphasized that although economic growth is considered essential for the wellbeing of the people, the human costs of the growth are of serious concern for the nomadic pastoral society and contribute to a sense of vulnerability. Therefore, the government is committed to promoting human development as a central strategy for achieving economic sustainability.

Mongol herders, although accustomed to an extreme climate, periodically suffer under dzud (harsh winter drought) which can decimate the nation’s 40 million head of livestock herds and make the nation vulnerable to food insecurity. National leaders increasingly are concerned by climate changes which affect the delicate ecosystems of the countryside’s inhabitants (over 40 percent of the total population of 2.8 million) who depend upon a traditional pastoralism based upon herding sheep, goats, cattle/yak, horses and camels; degrade the grasslands;[13] and pollute the country’s very limited water resources. Such factors negatively influence the local population’s view of mining and agricultural development.

As of 2008, an estimated 35 percent of the population was still living below the official poverty line. Inequality remains high both within cities and between those living in urban areas and those in the countryside. Although poverty assessment studies may be exaggerating rural poor versus urban poor, there is no doubt that the poor lack access to clean energy and heating sources, clean water and sanitation, and educational and healthcare facilities. The government, in consultation with international organizations and the United Nations, aims to utilize budget resources from FDI-generated taxes pouring into the HD Fund to reduce the nation’s carbon and ecological footprints by 20 percent within five years and significantly reduce the high air pollution that engulfs the nearly one-half of the national population that lives in the Ulaanbaatar capital area.

In light of these challenges, discussion of how to distribute the HD Funds has been a hot topic in Mongolia for years. All stakeholders, including the countryside and urban poor, have actively expressed their opinions via workshops, community groups, environmental protests, and in the vibrant Mongolian press. While it is clear that in the 20 years of the democratic era Mongolia has made much economic progress, income inequality, unemployment, and a failure to measurably reduce the poverty rate have incited much public criticism and compelled the UNDP to call for greater promotion of human development at the national policy level, protection of human rights, and greater transparency and accountability in use of HD Fund monies. Another major aspect to the whole discussion is centered around how poverty in Mongolia’s traditional pastoral society should be measured and compared to the previous socialist era. However, there is a national consensus that the government should utilize mining revenues to focus on improving access to basic services and housing conditions, reducing inequality in life expectancy and material standards of living, and maintaining environmentally sustainable income flows to transform mineral wealth into renewable assets for sustainable and broad-based growth to meet Mongolia’s most significant development challenges.

The World Bank has warned that although so far Mongolia has managed well the global economic downturn, it must devise management skills to reduce the impact of cyclical mineral prices on Mongolia’s increasingly mineral-based economy, use fiscal rules to manage monetary policy and the exchange rate, develop and maintain a competitive and stable regime for the mining and private sectors, and encourage economic diversification in its herding and tourism sectors to sustain balanced growth.[14] But it appears that Mongolia’s present policies are being well received by some of the international community: on December 19, 2011 Standard & Poor upgraded its outlook on Mongolia to positive, citing that Mongolia had introduced a fiscal responsibility law to limit budget deficits to 2 percent of GDP from 2012. In the upcoming 2012 parliamentary election season in Mongolia, it is certain that widespread debate will continue on the HD Fund and its use in Mongolia to ensure that the wealth flowing in from rapid development of national mineral resources benefits all Mongolian citizens. If the electorate is not generally satisfied with the government’s overall mineral development policy and plans for utilization of the HD Fund, it is highly likely that this coming spring will see a renewal of the nearly annual street protest demonstrations in the capital which were particularly violent in 2008.

Mongolia is blessed with this wonderful revenue stream, and at least some of its leaders have long-term ideas for how to use it (a reserve fund for re-investment in the mineral industry; improving the quality of life of the people; mitigating climate change and pollution). Two challenges will be constant. One is to insulate this revenue stream from corruption on the part of the various actors who have some degree of authority over it. The other is to protect it from the temptation of politicians to ignore some priorities (reinvestment and mitigation) in favor of more immediate but comparatively minor problems in an effort to win votes.

 

Thoughts On Mongolia Growth Group’s Mandal Insurance Unit

Source: SEEKING ALPHA
December 18, 2011

Mongolia Growth Group (MNGGF.PK) was formed in December 2010. On June 20, 2011, a press release announced that their Mandal Insurance division was now the best capitalized insurance company in Mongolia. This article is a follow up on my November 25, 2011 article about Mongolia Growth Group’s private placement, and their real estate business.

How could Mongolia Growth Group become the best-capitalized insurance company in Mongolia in six months?

Mongolia Growth Group only needed $5 million to become the best-capitalized insurance company in Mongolia. The fact is that the penetration of the insurance market to-date in Mongolia is minimal.

To understand why there are not any major international insurance companies opening an insurance business in Mongolia, consider that the size of the population in Mongolia is about the population of Chicago. Now, take the population of Chicago and spread that population over the size of a country a little smaller than Alaska, and make the average annual income less than $5,000, with those below the median annual wages earning less than $3,600 per year. Add to that, a local language that is unique to the country’s small market size.

For these reasons, no major fast food company (no McDonald’s, no KFC) has entered the Mongolian market, let alone a major international insurance company making a footprint in the local market. The other side is that high-end retail stores such as Louis Vuitton, Dior, and Armani, have seen enough economic growth and wealth creation in Mongolia that they have opened stores in Mongolia.

Why start an insurance company in Mongolia?

The first guiding investment principal of Mongolia Growth Group has two parts.

Part 1: The economy of Mongolia is going to boom because it has significant untapped resources that will cause Mongolia’s GDP to grow more than 10% per year for the next 20 years.

Part 2: Find ways to gain leverage on the economic boom caused by Mongolia’s mineral wealth. Do not invest in mining. Figure out what other investments and businesses do well in countries that have had natural resource booms and invest in those.

What does the management at Mongolia Growth Group know about insurance?

The management team of Mongolia Growth Group determined that insurance was a good line of business to enter in Mongolia based on the history of growth in other natural resource country booms such as Qatar and Kazakhstan. Then, they studied the market and targeted personnel from locally run Mongolian insurance companies to bring onto their team.

In March 2011 Mongolia Growth Group announced a partnership to enter the property and casualty insurance market with United Mongolian Corporation [UMC]. The CEO of UMC, Mr. Ganzorig Ulziibayar, formerly also CEO of Prime Daatgal Insurance, continues in his capacity as CEO of UMC.

Prime General Insurance was one of the three best-capitalized insurance companies in Mongolia before Mongolia Growth Group’s Mandal existed (Prime’s 2009 annual report). The former CEO of Prime, Mr. Ganzorig Ulziibayar is now also President of Mongolia Growth Group’s Mandal Insurance unit. The former Executive Vice President of Prime, Mrs. Davaanyam Myagmar (aka M. Davaanyam), is now CEO of Mandal Insurance. Four other executives from Prime joined Mr. Ganzorig Ulziibayar and Mrs. Davaanyam Myagmar at Mandal.

Mandal launched their first national advertisement on September 15, 2011 (English translation of the ad appears in the link). According to Mongolia Growth Group’s October 2011 shareholder letter, Mongolia Growth Group’s new 5-story headquarters will be named the Mandal Building, a 5-story advertisement for the insurance unit’s business.

Who will buy insurance?

According to the World Bank’s October 2011 quarterly report on Mongolia, the average Mongolian earns $1.50/hour. This works out to less than $300/month. In light of this, it is understandable that the economy is growing rapidly and the government’s recent announcement of a 53% increase in wages for government employees makes sense. It is this low-wage small-economy starting point combined with vast untapped natural resource wealth that causes people to project 10% or greater growth for the Mongolian economy for the next 20 years. The coming wage growth will create a need for insurance that could not be there earlier because there was not enough money in the economy for insurance earlier.

2,000 Mongolia Tugrik = $1.48 per Yahoo! Finance on December 7, 2011. Source: NSO World Bank staff estimates, World Bank October 2011 Quarterly Report on Mongolia

It is also this starting point for growth that causes insurance penetration to be minimal currently. Auto insurance penetration is less than 5% of the population, however the government has a law pending making auto insurance mandatory by January 2013. Mongolia Growth Group’s November 2011 shareholder letter notes, “[O]n October 6, 2011, The Government of Mongolia passed a law mandating that all vehicle owners and drivers must purchase liability insurance starting in January of 2012. The traffic police will be checking the drivers for insurance in October 2012.”

Home insurance penetration also is currently less than 5%. One source quoted me actual insurance penetration of the Mongolia market at 3/10 of 1%. At this point, very few people use mortgages to purchase a home, and either buy a home outright, rent, or live otherwise (e.g. nomadically; also, every Mongolian at birth has the right to claim 6/10 of 1 hectare of land by putting up a fence around a property not claimed by anyone else previously). The government is changing the society’s outlook on mortgages in its current low-income housing project that will provide 6% loans on home purchases for first-time homebuyers. As the use of mortgages increases in Mongolia, insurance will become requisite on the home for both the lender and the person or entity that holds the mortgage.

There are more obvious lines of insurance in the mining sector in Mongolia. These companies, and their employees bottom to top, all have a full array of insurance needs. As the mining sector ramps up, there will be a ramp up in the number of people employed by the mining sector, and their insurance needs as individuals and as companies will grow with the development of the mining sector. Oyu Tolgoi, the copper-gold mine that will boost GDP by more than 25% by itself is slated to begin production in the second half of 2012. Other mines large and small are close behind it.


Source: ACI Mongolia, The Financial Markets Association, Mongolia Growth November 2011 presentation.

Additionally, the November 2011 Mongolia Growth Group newsletter highlighted a previous announcement by the company that “Mandal officially rolled out its dedicated Expat VIP services last week. It has been in beta testing for two months and the response has been very positive. Foreigners wants a sales team that doesn’t just speak their language when buying insurance; they want a full package that even involves a representative arriving at the scene of an accident and handling their insurance claim in their preferred language as well. Thus far we are impressed by the response from the Expat community.”

For all these insurance issues, the Mandal Insurance team has an expert group of personnel with experience insuring in Mongolia working together with conservative risk analysts from Canada questioning each risk line by line. They have shared with me some proprietary methods of how they analyze the insurance market, and they are thinking about the details of the market in detail oriented and innovative ways.

For the truly detail oriented, a brief history lesson on Prime Insurance in Mongolia

Top management at Mandal came with experience from local top insurance company Prime. Petrovis, a privately held Mongolian company that is the largest Mongolia petroleum concern, formed Prime in 2001. In 2010, Tenger, a local conglomerate that most notably also owns Xac Bank in Mongolia, became a 50% owner of Prime alongside Petrovis. In 2011, six top executives at Prime left to go to Mandal Insurance, the company that is now the best-capitalized insurance company in Mongolia. Other local insurance competitors in addition to Prime Daatgal include Mongol Daatgal and Bodi Group’s Bodi Insurance.

Disclosure: I am long Mongolia Growth Group (MNGGF.PK) and long Ivanhoe Mines (IVN). I have not placed any trades in Ivanhoe Mines in the 72 hours prior to publication of this article and will not for 72 hours after publication of this article. I am participating in the current private placement of Mongolia Growth Group that closes December 23, 2011. I have had a request in to fact check my data with the World Bank in Mongolia for one week. I have not heard back yet and have decided to publish the data based on their reports on wages and earnings in Mongolia as I have interpreted them. Any errors are my own and will be noted upon clarification from the World Bank in the comments.

Development Bank to Test Global Debt Market

Source: UB POST
December 11, 2011

While the rich nations of the European Union heed warnings about the potential collapse of their market for sovereign debt, Mongolia is going to tap the global debt market. The Mongolian Development Bank had announced that it would issue USD 600 million equivalent of medium-term Euro bonds with the assistance of global financial giants such as ING, Deutsche Bank, and HSBC. The bonds are planned to be sold in several stages through the Singapore Exchange (SGX) this December and into 2012.
Open up a window
The idea of sovereign bond issuance isn’t new for Mongolians. In order to fight financial crisis in 2008, Mongolia planned to issue USD 1.2 billion in sovereign bonds. Even last year, officials from the Ministry of Finance said that discussions were underway to get into the global debt market. However, since then, the expectations have melted away and the sovereign bond hasn’t come to the global market as Mongolia has had access to concessionary lending at low rates and with long maturities.
Thanks to its vast reserves of mineral resources, Mongolia has outgrown its status as a poor-income-country, which means times when free financial assistance was solicited are over. It was then understood that the Government couldn’t afford to finance ambitious projects from the budget. Therefore, Mongolia needs commercial external borrowings.
“Although the Mongolian Development Bank was formed only five months ago, it has already become an important tool to implement the financing of nationwide infrastructure development projects of the Government,” said Mongolian Prime Minister S.Batbold. According to the Development Bank the bonds will finance ambitious projects such as a new railroad, The Sainshand Industrial Complex, and The New Development Program.
On other hand, the Government wants to establish a benchmark to help Mongolian companies access the capital markets. “Sovereign bond issuance will open up a window for private companies to go and raise money,” explained Ch.Ganhuyag, Vice Minister of Finance. Today, only the Trade and Development Bank (TDB) has experience issuing bonds out of Mongolia.
Market Situation
The Development Bank’s debt issuance depends on the market situation, said experts. Since the European dept crisis has worsened and the United States has lost its triple-A rating from Standard & Poor’s, investors are afraid of the bond market. Due largely to these factors, the yields of Mongolian bonds may be much higher than expected before. Surprisingly, although the world capital market environment is not favorable at present, the Development Bank of Mongolia managed to issue the bonds in terms compared with countries in a similar situations, according to its official statement.
The international rating agency, Standard & Poor’s has rated the Development Bank of Mongolia’s bonds similarly to the Government of Mongolia, -(BB-).
Foreign experts explained that the bonds of emerging countries are attracting investors seeking to diversify risks as well as earn high returns. According to The Express Tribune, today emerging markets represent 10-15 percent of the global debt market, up from 6 percent in 2000.
The good news is the situation of Mongolia is generally sounder than developed countries, where potential economic recession fears can spook the market. The economy grew at a furious pace with the World Bank data showing GDP growth of 20.8 percent in third quarter, following 17.3 percent growth in second quarter. Moreover, the Mongolian total public sector debt is equivalent to 42 percent of GDP, compared to 100 percent for USA and other historically rich countries.
The Development Banks` bonds would offer investors a chance to diversify their Asian sovereign bond portfolio and it would be expected to attract attention of foreign financial and investment banks interested in operating in Mongolia.
“Foreign investors are eying Mongolia,” pointed B.Batjargal, chairman of the Development Bank, “because of this, the bond issuance likely to be successful”.
After the Fund Raising
Some experts did not hide their pessimism and skepticism that the newly formed Development Bank can implement large-scale projects by issuing bonds.
“The Development Bank first needs to differentiate among projects it can finance. Only projects that are determined to be profitable, for which feasibility studies are prepared must to be implemented,” pointed out Rogier van den Brink, a lead economist at the World Bank.
He explained that at the World Bank for example, the preparation of implementation of one project requires at least one year.
“If the Development Bank issued bonds and raised capital today, what will be done with this capital? No projects have been estimated, and none are ready to be implemented,” Rogier warned.
We should keep in mind, that the Development Bank will be the first Mongolian entity to issue bonds with sovereign guarantees, which means in case the Development Bank cannot pay off its debt, then the Government will pay for it.
Of course, USD 600 million is not a big deal for large foreign investors, even though, it is s big number for Mongolians, amounting for almost 10 percent of the GDP. Therefore, the Development Bank needs to assign high responsibility.
“In a country like Mongolia, where there is a big conflict of interest between the public and the private, we should make a perfect contract and make all of the process open and transparent in order to create these ambitious construction projects by credit,” pointed out D.Jargalsaikhan in his article entitled Bond-Access to the Sea.
After the bonds are issued, then the most important thing would be the Development Banks` capital expenditure and its result.
“If we fail to implement the ambitious projects in a timely and efficient manner, then the credit rating of our Government would be even worse,” Jargalsaikhan added.

In Election Year 2012 All Citizens Will Receive Rest of Promised Bounty of 1.5 Million MNT(1168USD) in Form of Cash, Shares of Strategic Deposits, Tuition, Health and Residential Purchase Payments

Source: FRONTIER SECURITIES
October 12, 2011

According to Media Office of Government of Mongolia(open-government.mn) on September 30,2011, Prime Minister of Mongolia S.Batbold has made a statement in connection of submission draft budget for 2012 and draft budgets for Social Insurance Fund and Human Development Fund

• The budget is aimed to fully fulfilling action program of Government
• At the end of 2012 GDP per capita will reach 6.3M MNT of 5362USD
• Equalized budget revenue in 2012 would be 6.4 trillion MNT or 36% of GDP, total expenditures 7.1 trillion MNT or 39.5% of GDP, budget deficit will be 4.1% compared 9.9% this year
• Record 1.5 trillion MNT will be invested from budget into investment and productive development

Also PM made a statement,

Regarding salaries,

• Salaries, pensions and subsidies are to be increased in 2012 by 53%. Average state public servants salary is be increased by 200,000MNT and will reach 600,000MNT(467USD)
• Salaries increased will be scaled, initially all equal 80,000MNT , next stage same percent 23%

Regarding 1.5M MNT from Human Development Fund

• In 2012 Government will implement fully 1.5M MNT bounty reflected in its action program from revenues of strategic deposits
• It has been reflected in the draft budget for the remaining 1M MNT to be issued to 334.2 thousand seniors and developmentally challenged citizens in cash-334.2B MNT, in tuition payment form to 170 thousand students – 83.6B MNT, in form of health services payment to 5 thousand citizens – 5B MNT, in residential purchase payments to 100 thousand citizens – 100B MNT.
• In coming year citizens will fully receive 1.5M MNT. Government is planning to issue 1M MNT with option to choose from either cash or shares of mineral deposits. In another words, citizens will have full freedom to sell those shares to Government and cash them.

According to IMF, International Monetary Fund (IMF) mission visited Mongolia during September 14 – 20, 2011, to hold Post-Program Monitoring discussions. The team met with the Mongolian authorities and others to discuss recent macroeconomic developments and policies and at the conclusion made the following statement:

We have had in-depth discussions with the authorities on the economic outlook and policy challenges. We believe that Mongolia has a bright economic future as it continues to develop its vast mineral resources. In the near term, however, we see substantial risks to the economic outlook.

• First, the economy is overheating. Inflation is already high and likely to rise further, which is exacting an especially heavy burden on the poor, and eroding the ability of Mongolia’s private sector to operate effectively. Rather than contending with these pressures, macroeconomic policies have returned to the boom-bust approach that culminated in the last crisis in 2009. Second, this heightened domestic risks of macroeconomic instability come at a time when the global economic outlook is worsening. Should international commodity prices fall sharply Mongolia’s exports and budget revenues would both be hit hard. The policies to address both high and rising inflation and to lessen vulnerabilities are clear: restrain fiscal spending and tighten monetary policy.

• The 2011 budget already included a sharp increase in spending of around 30 percent. This is a key factor behind the current overheating. Now the government has proposed a further increase in spending of 6½ percent of GDP just in the fourth quarter of this year. Such an increase would be highly risky and ill-advised. GDP growth in the second quarter already exceeded 17 percent and imports of consumer goods have risen by more than 80 percent. Further fiscal spending would only add to fuel to this overheating economy at a time when it least needs it.

• Similarly, in the 2012 budget, spending should be kept at or below the level that parliament already approved in the medium-term budget framework. Within that budget envelope the government should introduce a targeted system of social transfers.

• Finally, the newly created development bank is of significant concern. The development bank should not be used as a means to circumvent the fiscal stability law or as a vehicle for off-budget government spending. Doing so will add to fiscal risks, reduce fiscal transparency, and undermine the credibility of the landmark fiscal stability law passed last year.

• The recent tightening of monetary policy is welcome, but more needs to be done. The central bank should use a variety of tools. The policy interest rate should be further increased. For much of the year it has remained below the pace of increase of underlying inflation, allowing for a very rapid pace of credit growth (now reaching nearly 50 percent in real terms). Interest rate hikes alone, however, will not be sufficient. In addition, a range of macro-prudential measures should be implemented to help slow the pace of credit growth. These include measures to increase capital adequacy requirements, start to require provisions on new lending, raise reserve requirements, and tighten liquidity ratios. At this stage in the business cycle it is especially important to proactively manage risks and strictly enforce prudential regulations in order to prevent the buildup of future credit quality problems in the banking system (as become painfully evident in 2009).

According to World Bank on 08/24/2011

Inflation
• Mongolia is again experiencing high levels of inflation. UB inflation was up 11.4 percent yoy in July, up from 5.5 percent in the previous month.
• Core inflation, excluding volatile energy and food prices, increased even faster, by 13.7 percent yoy
• the livestock herd continues to recover from the dzud and China’s food prices, especially meat, continue to rise (34 percent yoy in July), food prices are likely to remain high
• inflation is being stoked by increased government spending (up 27 percent, with most of it on wages and transfers), high spending by the private sector—producers and consumers alike—as reflected in the large import bill relative to last year: imports are up by 106 percent.

Banking sector
• Credit in the banking sector is growing very fast. The stock of outstanding loans grew by 46 percent yoy in real terms in July 2011.
• It is therefore imperative that the BoM enforces prudential norms on all Mongolian banks, and ensures that they maintain adequate buffer capital to absorb potential losses.
• The stock of the Non-Performing Loans currently stands at MNT 382 billion including those of the two failed banks. Together with loans in arrears, the ratio to total outstanding loans is about 10 percent in July and decreasing.
• However, because the volume of outstanding loans is rising fast, this should not be a reason for complacency.
• The volume of MNT deposits reached a record MNT 2.6 trillion in July, a 73 percent yoy increase.
• However, since real interest rates on local currency deposits are currently again in negative territory because of rising inflation, the attractiveness of local currency deposits must stem from the public’s expectation of an appreciating currency.
• Compared to July 2010, the average monthly exchange rate against the US$ appreciated by about 9 percent, or about one percent compared to the previous month. Nominal interest rates on US$ deposits are high by international standards: for certain time deposits they are as high as 14 percent. Such high rates are a cause for concern, as they may reflect liquidity problems rather than an unusually high profitability of project lending.

FISCAL
• On a 12 month rolling basis, the fiscal surplus reached 7.4 percent of GDP yoy in July.
• Annual revenues and grants grew by 46 percent in real terms in July yoy, in addition to increases in royalties, VAT, customs duties and corporate income tax.
• On the expenditure side, there was a very large increase (27 percent yoy) in expenditures in July, with capital expenditures up by 57 percent and current transfers up 48 percent, owing to cash handouts to citizens through the Human Development Fund (HDF).
• Such large increases in public expenditures risk throwing Mongolia back to a pro-cyclical fiscal stance.
• To counteract this tendency, the Fiscal Stability Law (FSL), passed in 2010, locked in counter-cyclical policies.
• However, because the core of the FSL—the structural balance of minus 2 percent of GDP—only starts in 2013, risks exist concerning its implementation, especially with elections around the corner in 2012. The FSL was supported by a large majority in parliament and will assist Mongolia in avoiding the typical pitfalls of growth for resource rich countries, especially the Dutch Disease. In the Netherlands, the Dutch Disease was eventually ―cured through a similarly broad-based political agreement centered on fiscal and wage restraint. If the Dutch example holds a lesson, it would be for Mongolia’s parliament to hold the course to implementing the letter and the spirit of the law , and to pass a supportive new budget law in the fall session.

OUTLOOK

• Mongolia’s economic outlook depends heavily on global macroeconomic factors: the current uncertainty and poor growth prospect s for the global economy are cause for concern.
• If there is another global recession, Mongolia’s small, open economy will be affected.
• In that case, China’s policy reaction will be crucial for Mongolia.
• If China reacts as fast and as strongly as it did in 2008 /9 then the effects of a global recession on Mongolia will be mitigated, largely owing to Chinese demand for minerals from Mongolia.
• Beyond this, it is up to Mongolia to capitalize on its excellent long term prospects by continuing the reform agenda it embarked on during the 2008/9 crisis.

According Frontier Securities,

Macro

• Mongolia is still a very small economy on the verge of a major expansion.
• Average annual real GDP growth over the coming 5 years will be at least 13% although we believe this is still a very conservative projection.
• Much of Mongolia’s fortunes will depend on future copper and coal prices which are significantly higher now than baseline scenarios in past GDP growth projections.
• While commodity prices might moderate we see a higher base as the more realistic scenario.
• In either case Mongolia will be the fastest growing economy worldwide over the coming 5 years.

Inflation

• On the monetary front inflation has been very volatile ranging from 30% to flat out deflation in the course of just one year (2008/2009). Inflation has recently picked up again and is currently 8.9% and with recent rapid money growth, food price increases and expected fiscal expansion we expect this to be towards 14-16% by the end of 2011 only to moderate post-election in 2012.
• From 2013 the new fiscal stability law will come into force limiting the ability of the government to spend and borrow.
• It will then also become easier for the Bank of Mongolia to manage money flows as most major mining equipment investments for Oyo Tolgoi will have been dealt with.

Outlook
• In a small economy like Mongolia many interests are linked leaving the system open to shocks. We do see efforts by politicians to implement reforms and believe that after the election next year the need for populist policies will diminish.
• Overall, as expected in any frontier growth market, there are many opportunities but also plenty of challenges in Mongolia.
• On balance, we are confident that Mongolia is set for some spectacular growth and that risk factors will not derail its progress, perhaps only slow it down.

Dalian port ideally placed on the cusp of prosperity

Source: THE NATIONAL.AE
September 16, 2011


DALIAN // Ganbat Chuluunkhuu, a young banker from Mongolia, is on a reconnaissance mission from his landlocked homeland to China’s Yellow Sea coast.

“This is impressive,” he says, as the ferry carrying him rounds a tanker unloading crude oil and enters the container terminal behind a sea wall at Dalian.

Dozens of blue and yellow gantry cranes tower over the quayside; trucks towing containers trundle along multicoloured metal corridors and railway tracks snake off through forested hills to the industrial and agricultural hinterland of north-east China.

Dalian is about 700km from the Mongolian border and is one candidate in Mr Chuluunkhuu’s search for a coastal export route for millions of tonnes of coal and iron ore expected to flow out of his country within five years.

Mongolian interest is just one example of the growing demands on Dalian port, which sits strategically on a tongue of land guarding the Bohai Straits, equidistant from Beijing to the west and the Korean peninsula to the east.

Australian liquefied natural gas is sucked into pipelines at one end of the sprawling complex, while Chinese corn pours on to bulk carriers from its 800,000-tonne grain silos next door. In another bay on the rocky peninsula, reddish-brown iron ore lies in symmetrical mounds awaiting a train journey to a steel mill 200km inland. Beyond the container port, a seagoing leviathan designed to carry 8,000 cars casts a shadow across a matrix of thousands of identical, brightly coloured passenger cars parked nearby.

Dalian is one of a dozen ports that have helped China realise its export-driven economic miracle.
Dalian port, attached to a city of 6.6 million people, was occupied by Russia and Japan for much of the first half of the 20th century precisely because of its strategic location. It returned to Chinese sovereignty in 1955 but had to wait three decades for trade to take off. The government moved the port from a downtown location to a few kilometres outside the city in 1996 and trade has climbed at an average 15 per cent every year ever since. It is now the sixth-largest port in China, handling 250 million tonnes of goods a year, compared with 150 million tonnes at Dubai’s Jebel Ali, the largest port in the Middle East.

While commodities are an important part of the business, it is the container section that has had the fastest growth. Since the new terminal opened, the number of 20ft containers carrying anything from seafood to hairdryers has grown by 20 to 25 per cent a year and now stands at 5.5 million annually.

“From our analysis, we are sure this growth will continue for the next three years,” says Zhang Fengqiang, the public relations manager of the port, apparently unfazed by reports of a global economic slowdown.

The outlook is not just benefiting from China’s growth, which motors ahead at 10.5 per cent annually, but the emerging industries within Dalian’s extended sphere of influence that are seeking a voice on the stage of world trade. The port has already prepared a huge tract of waterfront opposite the existing container terminal, where new cranes can be installed as soon as the expected demand materialises, Mr Fengqiang says.

Joint ventures have been one ingredient of Dalian’s success, creating partnerships with the Port of Singapore; Maersk, the world’s largest shipping line; and China Shipping in various phases of its development. Access to capital markets and a huge free zone covering the whole port footprint are others. Dalian has attracted foreign investors including Intel, the microchip maker, Subaru, the Japanese car maker, and Itochu, a Japanese trading giant.

Cherry, the Chinese car manufacturer, is building a 12 billion yuan (Dh6.89bn) integrated plant on the waterfront that will produce 300,000 cars annually when it is complete in five years.

So, will Dalian also be the port of choice for Mongolia? Mr Chuluunkhuu, who left a banking career in New York to set up an advisory practice called Liberty Partners back home in Ulaanbaatar, is not saying.

“They seem receptive,” he says. “We still have to see several ports in China and several ports in Russia,” he adds, before heading off to his next stop: Dandong, on the border with North Korea.

tashby@thenational.ae

China pushes for construction of Northeast Asia free trade area

Source: XINHUA
September 07, 2011


Mongolia’s Vice Premier M. Enkhbold delivers a speech during the 5th High-level Forum on Northeast Asia Economic and Trade Cooperation in Changchun, northeast China’s Jilin Province, Sept. 6, 2011. (Xinhua/Wang Haofei)


Seo Gilbok, Vice Minister of the Ministry of Commerce of Democratic People’s Republic of Korea (DPRK) delivers a speech during the 5th High-level Forum on Northeast Asia Economic and Trade Cooperation in Changchun, northeast China’s Jilin Province, Sept. 6, 2011. (Xinhua/Wang Haofei)

CHANGCHUN, Sept. 7 (Xinhua) — China is seeking to push forward the establishment of a free trade area among Northeast Asian countries in order to further boost the economic and trade exchanges in the region, a senior political advisor said Wednesday.

“All countries in Northeast Asia should make efforts in building a regional cooperative framework and exploring the construction of a free trade area under the backdrop of global and regional economic integration,” said Bai Lichen, vice chairman of the National Committee of the Chinese People’s Political Consultative Conference (CPPCC).

Bai made the remarks at the ongoing 7th China Jilin Northeast Asia Investment and Trade Expo in Jilin’s capital city Changchun.

The six-day trade fair that opened on Tuesday is expected to attract 50,000 exhibitors and visitors from Japan, Russia, the Republic of Korea, (ROK), the Democratic People’s Republic of Korea (DPRK), Mongolia and other regions.

Japan, Russia’s far east, the ROK, the DPRK, Mongolia and China’s provinces of Heilongjiang, Jilin, Liaoning and northeastern part of Inner Mongolia Autonomous Region make up Northeast Asia, which covers a combined area of nearly 9 million square km and is home to about 300 million people.

Combined gross domestic product (GDP) of Northeast Asia accounts for about one fifth of the world total and more than 70 percent of that of Asia.

In spite of its position in the world economy, economic cooperation and exchanges in Northeast Asia remain at a low level compared with other regions such as East Asia or Southeast Asia, Bai said.

“Northeast Asian countries and nations used to be isolated historically and lacked an efficient environment for mutual communication,” Bai said.

“The foundation for economic and trade cooperation among these countries remains unstable,” he added.

Bai proposed to push forward the exchanges among Northeast Asian countries by giving priority to the economic and trade cooperation while setting aside ideological differences.

“Countries with more economic correlation should lead in expanding bilateral and multilateral cooperation in order to push forward cooperation in the whole region,” Bai said.

Jiang Zengwei, Vice Minister of Commerce, said at the expo that the world economy is recovering from crisis but with difficulties and uncertainties.

“Under these circumstances, it is more important to further promote the regional cooperation in Northeast Asia,” Jiang said.

China has been making efforts in enhancing bilateral economic ties with countries in the region over the years.

In June, China and the DPRK jointly kicked off construction of the Rason Economic and Trade Zone.

Meanwhile, China is speeding up construction of highways and railways that link China with Russia, Mongolia and the DPRK.

Statistics from China Customs show that trade volume between China and Japan has jumped 19 percent to 162 billion U.S. dollars in the first half of the year, and China and the ROK have witnessed trade growth of 20.5 percent to 118 billion dollars during the same period.

Khan Investment Management to Launch Mongolia Equity Fund

Source: PR NEWSWIRE
July 05, 2011

SINGAPORE, July 5, 2011 /PRNewswire/ — Khan Investment Management (http://www.khan-management.com) announces the launch of the Khan Mongolia Equity Fund in August to capitalize on the growth opportunities in Mongolia and provide investors with both diversified and liquid exposure to one of the world’s most resource rich and fastest growing economies.

“Mongolia is forecast to have the fastest growing economy in the world over the next decade.  Growth will be primarily driven by the development of the nation’s mining sector, which includes some of the world’s largest coal, copper, gold and uranium deposits,” said Travis Hamilton, Managing Director of Khan.  Prior to founding Khan, Mr. Hamilton was a Director at the Helvetica Group, a boutique asset management and fund management firm with USD3.5 billion under management, which in 2006 launched the first collective investment vehicle, now listed on the London Stock Exchange, to access the Qatar Stock Market.

The Khan Mongolia Equity Fund will invest in companies with significant assets and operations in Mongolia listed internationally and on the Mongolian Stock Exchange, while opportunistically participating in Mongolian initial public offerings.  The Fund has partnered with industry leading service providers to achieve its capital growth objectives.

Gordian Capital Singapore Private Ltd, a specialist fund management group offering full service fund management infrastructure and operational support, has been appointed as the Investment Manager of the Fund.  Gordian operates a number of funds with total assets under management in excess of USD 300 million.

Monet Capital, a leading investment banking firm based in Ulaanbaatar with a seat on the Mongolian Stock Exchange, has been appointed as chief Investment Advisor.  As more Mongolian companies offer their shares to the public Monet is well placed to participate in this  segment of the market that is expected to grow rapidly over the next few years.

Mr. Hamilton noted, “Mongolia’s location between China and Russia, coupled with its vast natural resources allows Mongolia to efficiently supply raw materials to key consumer nations. Given our unique capabilities and strategic partnerships we can provide key opportunities in the Mongolian market which few investors have the ability to access.”

Khan Investment Management is a Cayman based asset manager specializing in providing global investors with access to a wide range of investment opportunities in fast growing Mongolia.

For further information please contact Travis Hamilton, Managing Director
travis.hamilton@khan-management.com, +65 9819 2655

SOURCE Khan Investment Management

Mineral-rich Mongolia plans to issue first sovereign bonds

Source: FINANCIAL TIMES
May 11, 2011

Mongolia plans to issue its first sovereign bonds this month, marking a milestone for capital markets in this resource-rich democracy.

The newly created Development Bank of Mongolia will issue $700m in sovereign bonds to fund lending programmes, Chuluundorj Khashchuluun, chairman of the national development and innovation committee, has told the Financial Times.

Mr Khashchuluun said the issuance would take place in tranches beginning this month, with the first slice likely to be $100m. The bond will be in tugrik, the Mongolian currency, which has appreciated by 1.6 per cent against the dollar since January.

The Development Bank of Mongolia is set to be inaugurated on Thursday and has a mandate to do policy loans in areas that include infrastructure, industry, energy and roads.

“With the launch of the Development Bank we hope the investment system will be modernised,” said Mr Khashchuluun. “Policy loans have not been done for a long time in Mongolia and commercial banks cannot support these needs.”

Mongolia houses some of the world’s largest untapped mineral deposits and investment in the mining sector has soared in the past two years along with global commodities prices.

Government revenues from the mining sector are set to jump next year as the Oyu Tolgoi copper and gold mine comes online, and politicians in Ulan Bator are looking for ways to manage the coming influx into state coffers.

The Development Bank is being set up with training from the Korean Development Bank and the Development Bank of Japan. Two bankers in Ulan Bator voiced scepticism about the timing of the issuance, which has been under discussion for several months.

“It’s great for putting Mongolia on the map in terms of developing the capital markets here,” said Eric Zurrin of Rescap, a corporate finance advisory firm. “However, I struggle to see how it will happen so soon.”

He added that yields on the bonds could be quite low, perhaps 6-8 per cent.

The Development Bank may be the first Mongolian entity to issue bonds with sovereign guarantees, but it is not the only one. Politicians in Ulan Bator have talked about issuing bonds to support a variety of industries, including for a cashmere subsidy fund.

Mongolian sovereign debt has a B1 non-investment grade rating from Moody’s, the credit rating agency. “Mongolia’s rating has been constrained by susceptibility to destabilising boom-bust cycles,” noted Moody’s in its annual report on the country.