The Mongolian Stock Exchange, after a 15% fall in the local index, was poised for a comeback after the end-June sweeping victory of the opposition People’s Party (MPP) on a business-friendly and experienced technocrat platform. It beat the ruling Democratic Party with 65 out of 75 seats on almost 75% turnout, with the race turning on voter desire to return to “wolf economy” status before the commodity and Chinese crashes under incumbent rule.
The outgoing Prime Minister Saikhanbileg did not even win his constituency, after belated backtracking on mining disputes and banking and fiscal expansion which soured the country’s foreign investment reputation and public finances. Growth is barely positive this year and $1.5 billion in external debt repayment of “chingiss bonds” comes due through 2018, as a new administration, with a former Finance Minister holding an advanced economics degree in charge, faces another turnaround task.
The MPP previously handled the crises of the immediate post-communist era and 2008 global meltdown with ample support from the IMF and other donors curbing traditional state control and interference tendencies, but this time it will be tested mainly on its own record of multinational business partnership and reform commitments.
Mining accounts for one-fifth of GDP and 95% of exports, and around 40 listings on the 200-company stock market. Industry experts estimate mineral wealth at trillions of dollars, and the copper-gold Oyu Tolgoi (OT) project, a joint venture with Australia’s Rio Tinto, will entail $1 billion annually in capital spending over the next five years.
It entered a second phase of operation in May after prolonged suspension by the former government, which tried to change original deal terms. The impasse, aggravated by the detention of foreign business executives to influence negotiations, caused FDI to evaporate to just $100 million in 2015.
Goaded by multilateral partners including the World Bank and Asian Development Bank, OT’s resumption without sweeping contract changes doubled the figure to $225 million in the first quarter. Another flagship concession, for Tavan Tolgoi’s coal deposits, was recently restarted and compensation will be offered to a Canadian operator for a cancelled uranium license.
China has also been a big commodity player, but grew wary over debts accumulated to aluminum producer Chalco. It moved several months ago to reactivate trade and transport links through the China-Mongolia-Russia Economic Corridor, and proposed a hydropower dam loan over Moscow’s objections on environmental and geostrategic grounds.
The MPP, with another stint in office, promises to maintain investment climate predictability and improve the 60th place World Bank Doing Business ranking. It specifically intends to open 100 new factories and create 40,000 jobs, while following sound fiscal and monetary policies.
The chronic budget deficit should be alleviated by higher miner tax collection, and inflation has come down from 9% to 2% the past year, allowing the central bank to cut interest rates. However off-balance sheet spending through banking channels, as with a special state-run mortgage program, has ravaged the sector and broader economic stability, and prompted recent sovereign and industry credit rating downgrades.
Bad loans are 15% of the system, and deleveraging should be a priority with profitability under pressure, according to Moody’s latest review. The government Trade and Development Bank, the main external bond issuer, is scrambling to cover debt service and recently acquired Russian mining interests to help the bottom line. Sector consolidation and revamp is an urgent priority dating back a decade when the MPP was last in control, and it barely featured in election rhetoric.
Myanmar was another market greeted with initial enthusiasm upon leadership transition, but after 100 days the business community still awaits the Aung San Suu Kyi government’s economic road map, and passage and implementation of new company and financial institution laws.
On slower 7% growth FDI was up 20 % to $9.5 billion for the fiscal year ended in March, with private equity starting to participate in a range of consumer goods deals. Local banks will soon be listed on the nascent Japan-owned Yangon Stock Exchange, which may allow international buyers as regulatory and sanctions complications ease, but after three months in operation wolf-like appetite has turned into an occasional prowl.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.
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