The ‘London Eye’ looking at Mongolia
When deciding which country to invest in, those who are from investment banks in London perhaps take a ride on the giant ferris wheel located at the north end of Lambeth Bridge that crosses the River Thames. They look beyond the city to seek investment opportunities. While this huge observation wheel called the London Eye was turning around, the Mongolia Investment Summit took place as it does every year. It was evident to participants that the investors were zooming into the political and economic realities of Mongolia.
London is a place where those who seek foreign investment come. The largest banks in the world lend and borrow huge amounts of money to each other in London, the capital city of the international money market. Libor, the London Interbank Offered Rate, has become a benchmark for short-term interest rates around the world.
Transactions as big as 2 trillion USD (37 percent of forex transactions, BIS Statistics, 2010) and 1.2 trillion USD in interest rate derivatives take place daily in London. Almost half of the world’s financial market (46 percent, 2010) resides here. It is also said that you do not qualify as an international bank if you do not have an office in the City of London or the Canary Wharf. It’s also said you are not an international airline company if you do not fly into Heathrow airport.
London is a place where investment decisions are made based on careful analysis of opportunities and risks. International banks, their lawyers, consulting firms, foreign and domestic companies operating in Mongolia, representatives from the government and executives of the central and commercial banks regularly have this summit in this city. This proves that a lot of foreign investments are being made in Mongolia and there is still more room and opportunities for investment in the future.
Although the population is not even three million, Mongolia has a territory as vast as Western Europe. We have ten mineral deposits – resource potential of which have yet to be tested- worth 1.3 trillion USD at the current prices. Also, it is worth mentioning that Mongolia has so far developed a geological map for only one fourth of its territory. Everyone at the summit acknowledged that there is an opportunity for Mongolia to have an absolute advantage by supplying coal and copper from the nearest location to the expanding economies of China and Russia.
Furthermore, it was noted that Mongolia is a democratic country where the central government supports businesses and is planning to establish a Sovereign Wealth Fund to be utilized when needed. Also, the participants agreed that Mongolia has a legal environment that protects properties and imposes relatively softer terms and conditions regarding taxes and, despite some occasional faults, the government has a good policy direction overall.
Many of the participants were quoting the results from an economic outlook produced by the IMF that projected Mongolia’s economy to grow from 7 billion USD to 24 billion USD in 2011-2020 and GDP per capita to reach 8,300 USD in 2016.
An interesting point was raised by R.Koppa, President of the Trade and Development Bank, that a total of USD 68 billion is needed to develop Mongolia in the near future. He said that 20 billion USD of it will be spent in the mining sector, 12 billion in infrastructure, 8 billion in urban development, 2 billion in agriculture, 20 billion in trade and industry, 2 billion in environmental protection, 2 billion in social development and 2 billion in finance. He also pointed out that 14 billion USD will be raised from FDI, 18 billion from internal sources, 6 billion from government bonds, 16 billion from international capital markets, 12 billion from international financial organizations and the rest, 2 billion USD, from donor countries.
Kh.Altai, CEO of the Mongolian Stock Exchange, said that technical and workforce requirements needed for raising capital from international markets have all been fulfilled as a result of cooperation between the Mongolian Stock Exchange and the London Stock Exchange. He also mentioned that the required legal conditions will be met as soon as the new securities law is passed. Graham Marshall from the Bank of New York, Mellon said that, if the new securities law is passed, custodianship will be made possible and Mongolian companies will be able to raise capital by trading a certain proportion of its securities on the London Stock Exchange through depository receipts.
Many people at the summit said that they expect the new securities law to be the key to raising the capital needed for development, restoring the domestic capital market and introducing market principles that are fair, open and efficient.
Neil Ashdown, an Asia Pacific Specialist from HIS, said that, although the government of Mongolia is perfectly committed to implementing large development projects, they face two types of risks: a budget problem and geopolitics play. A company specialized in preparing reports associated with political risks says that these two types of risks are likely to emerge when there is more political competition.
Ashdown went on saying that it is likely Mongolian politics could become unstable. He said that it is too early to say that there is a stable political environment because of factors that contribute to instability such as elections, changeable government and economic difficulties.
When meeting with representatives from companies that are preparing to invest in Mongolia, they mentioned that every press agency closely watches Mongolia and said that the Mongolian government’s policy is neither stable nor long-term and laws are changed too often due to emotional decisions based on insufficient research. They were illustrating their point with the example of the foreign investment law from last year which created uncertainty and misunderstanding among foreign investors. This law later changed to regulate only foreign state-owned companies.
It is true that corruption is spreading due to insufficient supervision on large government properties. The brightest example is that political loans were acquired through three state-owned companies and led them to the brink of bankruptcy. It is an undeniable fact that political parties acquired 350 million USD through Tavantolgoi, 250 million USD through Oyu Tolgoi and 90 million USD through Erdenet and spent this money on their election campaigns.
Despite the fact that our government is getting bigger and prices of coal exports are falling down as well as its sales, which comprises 40 percent of our total state budget revenue, the ruling political party is still reluctant to cut its spending. On top of that, the opposition party is demanding to increase everyone’s salaries. It was inevitable that Moody’s degraded the credit ratings of Mongolian banks.
Instead of weighing economic outcomes of a big project first and looking at political consequences afterwards, the government is prioritizing the politics, not the economics. For example, the participants of the summit were talking about the need to look at the most economically efficient options first when discussing the railway gauges.
Next turnaround of
the Ferris wheel
One of the speakers at the summit said that Mongolia seemed very extraordinary and unconventional because it had a Louis Vuitton store, but not a McDonald’s. At this summit, Mongolia listened to the opinions of foreign investors, their banks and lawyers. Cameron McRae, President and CEO of Oyu Tolgoi LLC, the company which is implementing the largest project in Mongolia, summed up what was discussed at the summit in a few words. He said that the three most needed things were; immediate stability of the legal environment that supports investment, successful project financing and the guarantee of the sanctity of contracts.
Many factors such as the presidential elections, trending populism and patriotism, China’s weakening demand for coal, cheaper coal prices, positive changes from strategic investments, the draft mining law, sales of Chinggis bond and the international attention on Mongolia will all have their own impacts on our economy before the next summit comes the following year.
All the participants must not forget that Mongolia will spend another year of development and will need to experience a significant improvement in the living standards of our people by the time the “London eye” looks at us again next year.
Note: It was evident that the staff of the Embassy of Mongolia in London were hardworking and capable people. This is based on the fact that they were showing great effort in giving presentations and engaging with different stakeholders, despite the absence of their senior officials.
Translated by B.AMAR
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