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Paulius Kuncinas: What you call a “slow down” is to other countries a very fast rate of growth

By B.BYAMBADORJ

The following interview is with Paulius Kuncinas, Regional Editor at the Oxford Business Group. The Oxford Business Group is a global publishing and consultancy company which currently publishes up-to-date business and economic reports in more than 30 countries. The report contains comprehensive first-hand information on Mongolia’s most important sectors today: energy, tourism, banking, mining, construction and telecommunications.
The annual reports are an excellent source of information, and have a large audience ranging from politicians, universities, and people from the diplomatic world. It is an especially useful source of intelligence for businessmen and investors.
-Tell us about the Oxford Business Group (OBG) reports – its history, approach and aim.
-First of all, it is a British company founded by graduates from Oxford University almost 20 years ago. We are a privately owned company and we do not have any commercial relationship with the university.
The first of our reports were focusing the Middle East – countries such as Syria, Jordan and Turkey. Our founders saw that there was a lack of information on smaller emerging market countries that offered unique investment opportunities. There has always been a lot of information on big countries like Russia and China but smaller markets were not properly understood.

So they saw that there was a demand for an annual publication instead of a weekly or monthly. They thought that a lot of investors need a reference book on key investment sectors. The book is always divided into different sectors covering; banking, telecoms, mining and energy – all the main sectors of the economy. The template has been broadly the same from the beginning and it has proven very popular after the first few projects.
Then we started expanding into new territories in Africa, Asia and recently Latin America. In total we now we cover 34 countries. Nearly all of them are medium-level countries but some of them are larger like Indonesia with 250 million people. While, we are primarily focused on lesser known markets, those that are slightly outside of Brazil, Russia, India and China (BRICs), we will be opening an office in India next year.
I personally oversee Asia in my portfolio and I have 12 countries. The idea is to put a spotlight on investment opportunities, especially trade and investment between countries that previously did not know about each other. For instance many companies in; Thailand, Malaysia and Indonesia already have capital and they want to invest in sectors they understand. So, Mongolia would be an ideal location for them because they understand mining and they are familiar with the risks and regulations more than some western companies. That is why we are here – our job is to put the spotlight on investment opportunities in Mongolia.
-What are the major differences between collecting data from Mongolia and other similar countries?
-Mongolia belongs to a category of countries we call “frontier markets.” They are relatively new and they are still going through the process of transition to a fully functioning free market economy. One of the characteristics is that there is a lack of good-quality data and most of the data is often disputed e.g. we are still struggling to know even the simple statistic of how many mining licenses have been issued. We often get contradictory reports from sources on projects i.e. when mining is supposed to start and what is the completion date, and how much money is dedicated to the project. Getting a straight answer is not always easy.
Having said that, it is not unusual for these markets for information that we obtain today could be irrelevant tomorrow. So the challenge for us here is to stay on top of it and to keep up with the fast changing environment. We are very fortunate to have strong local partners such as Business Mongolia Council (BCM) Ernst & Yong and Clyde & Co who helped with their technical knowledge of business here. Overall I think at the end of the day we do end up presenting a fairly accurate picture of what’s happening.
-How have the current situation changed since the publication of the first Report Mongolia by OBG?
We know it is a very different country from last year as there is both hope and concern, investors in particular are worried. While, I think some of these worries are overstated, we are conscious of the fact that Mongolia is going through a very profound period of transformation for both good and bad.
At the end of the day I personally still believe that there is a huge amount of opportunity and Mongolia will do well, but at the moment we are also facing a lot of risks in the short to medium term. What international press calls rise of resource nationalism, inflation and lack of government revenue are cited as top concerns by investors.
-Do you feel doubtful about data obtained from Governmental organizations such as Ministries and the General Authority for State Registration? What would you say about the reliability and accessibility of Mongolian research data?
There is some good quality data coming out of, for instance, the Central Bank but this data differs from Ministry to Ministry. However, we do find that the quality of reporting overall is improving. There is more pressure for transparency and I think the new Government’s central aim is to introduce more accountability and transparency.
Overall there is still a lack of shared capacity and there are simply not enough people that provide consistent quality data. I quite often get reports from my analysts and team that there are gaps in data, there is missing information. So, I think it is a lack of technical constitutional capacity to constantly monitor and provide up to date information.
-Analysts and researchers have different views. How does the report by OBG differ from others?
-We tend to take a longer term perspective. So we focus on the five to ten year horizon. Our approach has been based on fundamentals and we are much more focused on the SWOT analysis to look at strength, weakness, opportunities and threats. We look at countries from their perspective of their relative competence and relative strength.
As I said earlier our main focus is; growth, trade and investment. Our mandate is to find and explain what the growth opportunities are, then describe the downsides and risks. I think overall we have possibly been more optimistic than the majority of analysts who tend to focus on just a few issues like the foreign investment law and also the renegotiation with Oyu Tolgoi. In the short term consensus is more negative verses a five to ten year horizon which allows a more optimistic outlook.
-What do you do with data that are incomplete and hard to evaluate and get to a conclusion?
-We keep trying and we meet with; Ministries, Agencies and the Private Sector analysts. We sometimes try to extract data from different sources like private companies. But, there are times when we can’t get the required information.
I will give you an example. It is very difficult to see what’s behind the visitor numbers as there is a difference between business and leisure travel. I mean tourism is, as we know, driven by leisure travel. The more time spend on the ground, the more money they spend but we are struggling to know the exact number of tourists and so we can only estimate the number from talking to hotels and airlines. I can’t say we have the definitive number. So the best we can do is to take the official visitor numbers and then use our sources to try to get an estimate of how big the tourism market component is.
That, by the way, is a good example of where data is still missing.
-The OBG released its first report when Mongolia’s economy was in a more “favorable” condition. But now its growth is slowing down and foreign investment has decreased. What are the differences between the two? What is causing the economic growth to slow down? How does it look in the future?
-First of all, everything is relative. What you call as “slow down,” to other countries it seems to be a very fast rate of growth. We are talking about 11 percent – double digits – which is still, by world standards, very fast.
Obviously the investment environment has deteriorated from foreign investors’ point of view simply because there are more risks as the regulation is less clear and possible changes in regulations. So investors in this situation move to the sidelines and wait out the uncertainty. I don’t think people have given up on Mongolia but they are temporarily sitting out this period where politicians need to make up their minds on what will be the rules of the game will be.
We all know that China’s economy is slowing down. It is not falling off the cliff – it’s simply going through a gradual slowdown. That obviously impacts the price of all the commodities including Mongolian coal and copper. I don’t think it is something dramatic, China is slowing down and this could be a good thing because it is more sustainable. I would argue that Mongolia may do better if it grows at a rate that’s not much above 10 percent and the reason I say that is because fast growth leads to high inflation. It is so-called the phenomenon of overheating and the boom-bust cycle. You go through a very fast period of very high growth and then the economy simply overheats, people borrow too much, and they invest into assets like real estate and sometimes stock exchange. Sometimes they make bad investment decisions and when the economy slows down and you have what you call “crisis.” It’s a classical market economy text-book phenomenon. I know from talking to the Central Bank and the Government that they see that fighting inflation is one of the top priorities because inflation erodes people’s income.
I think it is more important in managing the rate of growth and keeping inflation pressure down rather than achieving 20 percent growth every year.
-Can you please describe the general outlook of Mongolia social and economic situation today?
-Another top priority for this Government is to make sure that there’s growth that we see can be actually felt by the people in the streets, the so-called “inclusive growth.” This is not a theoretical statement, it is about demonstrating and distributing wealth. People need to see and feel the increase in wealth. They need to see it through better supply of Government services, they need to see; better infrastructure, better roads, more electricity to homes, more fiber and broadband to schools, and better health service. They also need to feel; real income, have access to banks, be able to buy first car, television, home and first smartphone. The longer they have to wait for these benefits the more social tension we will see in the country. Inevitably this could lead to both political crisis and social unrest which we have seen in other countries that have enjoyed fast resource boom economy. So it’s a very real problem that really needs to be addressed. I think the Government realized this and there are some positive signs: they are raising capital on the international markets in order to try and borrow today to invest into this social “inclusive growth”.
-What would be the difference between pre-election Mongolia and after-election Mongolia?
-The main difference, as I said, is attitude has changed in foreign investments. I think Mongolians wants to change the terms of engagement which is not unusual, I can name at least two or three countries that are going through the exact same process. It is a global phenomenon. One positive aspect I noticed on this trip is that there is more focus on not just exporting raw materials, but actually going more downstream and investing in more value added processing. There is talk about it – I won’t be naive and say this will happen overnight but this Government seems to think along the right track in terms of thinking that “you just don’t want to export that product or your raw resources,” which are non-renewable resources. You want to make sure that you create more jobs, you also need to control inflation due to the fast inflow of money that causes prices and wages to rise rapidly. This is the biggest challenge that needs to be addressed in the short and medium term.
-Would you like to say anything else that the public needs to hear?
-People say that I am too optimistic. I see the world in relative terms and as I travel across 12 markets at least 5 or 6 of them have similar dilemmas that Mongolia faces. They have resources they need foreign capital but at the same time they do not want to sell all their resources to foreign investors. I think it is understandable as development must be sustainable. The main thing and I keep saying this to; Indonesian, Papua New Guinean and to Thai investors, is to find out what the end game is. You can engage in a negotiation just make sure it is done transparently and that it holds water. What the investors dislike most is uncertainty and right now Mongolia is going through a great uncertainty. I think the sooner this period of indecision ends the better it is for Mongolia itself. So, I hope very much that by next year this process will have run its course as I continue to believe that Mongolia represents one of the best and last frontier market opportunities for foreign investors.
They just want to be clear about the long term rules of engagement.

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Posted by on Nov 30 2012. Filed under Топ мэдээ. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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