ULAN BATOR, Nov 11: A new prime minister was confirmed in early August, ending weeks of uncertainty after June’s parliamentary election proved inconclusive.
Norov Altanhuyag of the Democratic Party (DP) has taken over from the former ruling Mongolian People’s Party (MPP). The key risk for the mining firms – the engines of economic growth in Mongolia – remains the influence of resource nationalist lawmakers, who were among the big winners in the poll.
Until and unless the new coalition government sends signals that it is in favour of foreign investors and does not intend to renegotiate key contracts or pass legislation to limit foreign ownership of mineral deposits, these firms will be wary of making big new commitments to the country.
The priority for Mongolia is the development of its tiny but fast-growing economy, and foreign investors want to know if the government can create a stable legal environment while pleasing its impatient citizens as well as its two giant neighbours, Russia and China.
Following is a summary of key political risks to watch:
INVESTMENT POLITICS
In August, newly appointed mining minister Davajav Ganhuyag said Mongolia should raise its stake in Rio Tinto’s Oyu Tolgoi copper and gold project, adding to worries about increasing hostility towards foreign mining corporations.
Few major Mongolian projects are progressing smoothly.
The government wants to launch a $3 billion initial public offering of the Tavan Tolgoi or “Five Hills” coal deposit. State-owned Erdenes Tavan Tolgoi had been planning to list 29 percent of the company in London and Hong Kong in 2012, but it cannot until Mongolia’s parliament passes a securities law.
The state-owned developer of Tavan Tolgoi has invited U.S. Miner Peabody Energy to help build infrastructure and be a temporary mine contractor on the project ahead of a much-delayed bidding process.
After struggling for years to find the right investors, Mongolia might yet choose to develop Tavan Tolgoi’s western block on its own, an executive with the state-owned firm in charge of the project said in April.
In mid-May, Mongolia’s parliament passed a controversial law aimed at capping foreign ownership in “strategic” industries such as mining, but investors expressed relief that the legislation was weaker than first anticipated.
The bill was watered down considerably since first drafted by a group of backbench lawmakers who were alarmed by a decision by Canada’s Ivanhoe Mines to sell its 58 percent stake in coal miner SouthGobi Resources to Chinese state-controlled Chalco. That deal collapsed in September when Chalco walked away, blaming the difficulty in winning regulatory approval.
The ownership law says foreign investors are allowed to own a maximum of 49 per cent of companies involved in the mining, finance, media and telecommunications sectors before being subject to scrutiny by a government panel, but it now only applies to deals valued at above 73.66 million dollar or ones involving state-owned companies.
What to watch:
The new government’s relations with foreign investors, and whether pressure from resource nationalists is brought to bear on lawmaking.
Whether the government can produce an investment agreement for Tavan Tolgoi that will satisfy foreign partners and keep the public happy, and whether it can do it in time.
THE RESOURCE “CURSE”
Mongolia’s economy grew at 16.7 percent year-on-year in the first quarter of 2012, according to the World Bank, more than double the pace of China, making it the fastest-growing in Asia.
The country is already showing classic symptoms of “Dutch disease”, including soaring inflation and high interest rates.
In July, ratings agency Fitch said “rising systemic risks” could leave Mongolia vulnerable to a repeat of the boom-and-bust cycle it experienced in 2007-2009, should commodity prices fall rapidly. The risks are a result of an extremely loose credit environment, high inflation despite interest rates of 13.25 percent, and a widening fiscal deficit, the agency said.
The government is trying to bring in structures that will protect it against fluctuating commodity prices, and wants to use the proceeds from mining to pay for infrastructure, health and education, and develop other sectors.
It is under pressure to spread the wealth, and has already extracted pre-payments from foreign firms involved in both the Tavan Tolgoi and Oyu Tolgoi projects in order to give money to the public.
What to watch:
Economic indicators, especially signs of overheating.
How Mongolia uses the income from its mining projects. It has set up education and fiscal stabilisation funds, but it has also promised benefits for Mongolian citizens.
How it deals with rapid economic change as well as inflation as foreign investment transforms the country’s mainly rural economy. The International Monetary Fund has warned that Mongolia’s economic policies are creating inflationary pressures.
GETTING ON WITH THE NEIGHBOURS
Many of Mongolia’s 2.7 million citizens are concerned about growing Chinese and Russian influence, and their fears were not allayed by the plan to hand the majority of Tavan Tolgoi’s western block to Chinese and Russian interests last year – a decision that was later reversed.
China already dominates Mongolia’s economy, buying 90 percent of the country’s exports in the first half of 2011, though the government wants to bring this number down and diversify Mongolia’s markets.
Mongolia’s reliance on Russia and China for fuel, power and transportation also poses a major risk to its mining sector. Russia has been known to turn off supply taps, and China is not averse to closing crucial railway links.
Mongolia also depends on Russia’s railway network to fulfil plans to deliver coal to Japan and South Korea. Mongolia’s plans to build itself a railway network capable of transporting coal to foreign markets is likely to be delayed.
What to watch:
– Will efforts to ease dependence on China increase Russia’s influence, and vice versa? Is the Chinese market for coal and other minerals its only option in the short term? How will the government handle growing nationalist sentiment, and fears about the role of foreign firms and workers? ($1 = 1357.5000 Mongolian tugriks) (AGENCIES)
–
Trending Now
E-Paper
Follow our WhatsApp channel