Will the investment boom facilitate Mongolia’s development?

According to the numbers and statistics available, investments in Mongolia are increasing at speed of light. If last year the amount of foreign direct investments in Mongolia reached a record 1.5 billion US dollars, this year experts estimate that it could well reach up to USD3 billion. What will such huge sums bring to Mongolia’s economy? At a macro level, the good news is that the foreign exchange reserve is getting close to USD2.4 billion, and it is believed that the economic growth will reach 10% this year. However, attention should first be paid to the micro level, how the livelihoods of Mongolians will be affected and what effects these investments will have on the industries and business entities down to ordinary households.  

More than just dollars

As mining ‘sharks’ such as Vale, Rio Tinto, Peabody Energy, and Leighton already conducts  their operations on the Mongolian territory, the world scale Oyu Tolgoi and Tavan Tolgoi projects are about to be put into exploitation. As a result, a large number of employees – miners mainly - will inject cash in the economy by consuming, buying food, clothes and use banking services. Therefore, just to satisfy their consumption needs, many opportunities to develop for a numbers of local companies will arise. On the other hand, these world scale projects will require products and services reaching international standards. It is time for Mongolians to think about these issues now, intensify their activities and produce high quality products.
Fortunately, large transnational corporations will not bring dollars only to Mongolia; they will also bring techniques and technologies representing assets much more valuable than money itself. More than an injection of cash, Mongolia will profit from a large intellectual and technological input. It will be a real asset if miners - all the way up to the suppliers – absorb not only the money but also the knowledge. The favorable conditions have been created to learn from experienced large companies, import European standards and introduce corporate governance and the art of management. If the private sectors show some initiative in this area, they will be the long term winners. If managed, the future is in the hands of Mongolia. Mongolian citizens will truly become ‘rich’ and Mongolian companies will themselves become strategic investors. All depends on the efforts and determination of the Mongolians.

Mining operations increase 

Ivanhoe Mines Co. announced last year that it plans to spend USD2.3 billion on construction works at the Oyu Tolgoi mining deposit. Once Tavan Tolgoi’s huge coal deposits are put into exploitation, many investment issues regarding infrastructure and the construction of railways and roads will arise and will require an amount which might well exceed USD3 billion. But it is untrue that money only brings wealth. There are numerous examples of countries that went through much hardship because of their wealth.
The so-called ‘dutch disease’ or ‘silent plague’ that managed to infect such countries as the Netherlands, Saudi Arabia, Nigeria and Mexico, silently accompanied the large flow of money or “hot money”… International organizations warn that Mongolia is facing just such tremendous challenge. The symptoms of dutch disease can be summarized by the strong inflation of the value of a national currency, which leads other non-mining sectors of the economy to lose their competitiveness. In 2010, the Togrog’s exchange rate against the US dollar was the highest in the world. 
How assess a situation when the mining sector in Mongolia is alone “swallowing” more than 80% of foreign direct investments, and other sectors such as tourism, information technology do not absorb a single percent of this wealth? Mining resources constitute 30% of Mongolia’s GDP and more than 85% of its exports. However, instead of developing the non-mining sectors of the economy with the capital accumulated from the mineral resources, Government officials distribute cash handouts and approve a state budget deficit equal to 10% of the country’s GDP.

In conclusion

Vice Chairman of Foreign Investment and Foreign Trade Agency Mr Z.Battushig declared that very soon Mongolian companies will become capable of investing abroad. It is truly great to see how local companies are growing bigger. Local as well as joint companies such as Petro Matad, Mongolian Mining Corporation, Hunnu Coal and Haranga Resources were able to accumulate large amount of capital from the London, Hong Kong and Australian stock exchanges. International markets that just few years ago were a dream for Mongolia are knocking on its doors today. It is no longer unusual for local business entities to purchase large companies that were once established through foreign investment.  For example, the Shukhlai Group bought last winter the shares of the Korean owners of Skytel.   

The Investment boom is opening the doors to a new era. However, a new era requires a new thinking and new policies. The Government of China supports its local companies in investing and conducting business operations abroad. In Mongolia, specific laws and legislation on Domestic Investment are still lacking. The US and some European countries set high criteria for investments into the banking, media, energy, and insurance sectors. However, Mongolia completely lacks such regulation in its legislation. As well as this, there is also a lack of a governmental policy to prevent and overcome the risks of dutch disease and ‘hot money.’
For many years foreign investors have set their eyes on the wealth of the Gobi area. However, they, probably, kept their distances because of corruption and political instability.  But today, things have changes and investments in Mongolia have intensified. How much money will be absorbed by Mongolia’s economy will greatly depend on its official policy, public sector initiatives and its citizens’ efforts.