OBG: Mongolia Year in Review 2013

Ulaanbaatar /MONTSAME/ The Oxford Business Group (OBG) Monday released a report on the Mongolian Year in Review for 2013. "After hopes of a mining-based boom in Mongolia last year were dented by global commodity price shocks and declining Chinese demand, the government is focusing on improving the investment climate in a bid to generate a turnaround," the report says. "In January 2014, ratings agency Moody’s placed negative outlooks on three Mongolian banks, citing concerns over a deteriorating operating environment, bad loans and slower economic growth. The warning came three months after the IMF revised its 2013 growth forecast for the country from 14% to 11.8%, blaming ongoing uncertainty and weakness in the global economy". Commodity price fall-out "With mining and resource extraction accounting for a third of Mongolia’s GDP and around 90% of exports, falling demand for coal from China last year weighed significantly on the country’s economic performance. "GDP growth was expected to remain in double digits until 2020 after reaching 17% in 2011, largely due to revenues generated by the Oyu Tolgoi, Rio Tinto’s massive gold-copper mine, and the Tavantolgoi coking coal mine. "However, a decline in commodity prices and China’s weakened industrial output took their toll on Mongolia’s economy in the first few months of 2013, with figures released in May by the National Statistical Office showing first quarter GDP growth of 7.2%, down from 16.7% for the same period in 2012. "International investor confidence was further eroded by wrangling over an underground expansion planned for Oyu Tolgoi, worth around USD 6 billion. While talks between the Anglo-Australian miner and Mongolian officials on revising the 2009 deal initially raised hopes of a national mining boom, they remained at deadlock for much of 2013". Expansionary stance examined "The government’s response to the slowdown in the first half of the year combined expansionary fiscal and monetary policies. Using proceeds from a $1.5bn bond sale in late 2012, the government invested heavily in infrastructure, including the construction of roads linking six provinces to Ulaanbaatar. Thanks in large part to the increase in state spending, GDP growth accelerated in the second quarter, reaching 14.3%. "The Bank of Mongolia lowered its policy rate multiple times between January and June, eventually reaching 10.5%, down from 13.25% at the end of 2012. The central bank also introduced a new state-backed home loan scheme in mid-June, which fixed mortgage interest rates at 8%, compared to the 15% average previously charged. "Credit growth, which had been sluggish, picked up rapidly. According to an early 2014 report from ratings agency Moody’s, between January and November 2013, loans ballooned by 55%, compared to growth of 23% the prior year, with much of the lending to the construction sector. "While the government’s policies seem to have been effective, the World Bank cautioned Mongolia in November that rising inflation and a rise in the current account balance might lead to a “harsh economic adjustment process in the medium term”. The IMF made similar remarks in the conclusion statement to its latest Article IV consultation, published in December, noting that the “continuation of expansionary fiscal and monetary policies could threaten stability”. Structural changes welcomed "Other measures aimed at improving Mongolia’s investment climate generated a more favourable response. In October, the parliament passed a new law replacing the Strategic Entities Foreign Investment Law, which was hastily enacted in 2012 with the aim of blocking the acquisition of a large mining firm by a state-owned Chinese corporation. While the prior legislation achieved its objective, it also deterred other overseas investors, helping depress Mongolia’s FDI levels. Foreign investment was down by an annualized 47% for the first eight months of 2013 to USD 1.8 billion, as overseas companies delayed new projects. "The new law, which went into effect on November 1, brought two important changes. First, foreign investors will no longer be required to obtain state approval before pursuing opportunities in the mining, banking and telecommunications sectors, although majority state-owned enterprises will still need government approval to invest in these areas. "Second, the legislation introduced tax stabilization certificates that ensure stable tax treatment for a defined period of time, ranging from five to 22 years, depending on the industry. The new rules will apply to value added tax (VAT), corporate income tax, mining royalties and Customs duties. Under the law, local and foreign investors will be charged the same rates. This has eliminated a great amount of uncertainty and will likely spur FDI. "The administration also launched a campaign mapping out its plans to modernize government operations, which it hopes will provide a confidence boost both at home and abroad. "The initiative, entitled 'From Big Government to Smart Government', will prepare the groundwork for far-reaching reforms, led by the separation of business and state, a new process for issuing licenses and permits, and increasing public officials’ accountability. Meanwhile, a securities markets law, which came into effect on January 1, will target institutional investors. "With the Oyu Tolgoi project seen as crucial to the country’s recovery, reports in recent weeks that the government’s dispute with Rio Tinto could soon be resolved signaled good news for Mongolia. Erdenes Oyu Tolgoi director Da. Ganbold, told local media that only 'a few critical issues remain”. "Mongolia is keen to persuade international investors to look beyond the current political and macroeconomic challenges weighing on its performance. Ensuring Oyu Tolgoi realizes its considerable potential and signaling an intention to work towards a more prudent fiscal framework could be instrumental in helping the country achieve its aim".