Investment Needs Smart Policy

How foreigners perceive us

How do large foreign investors perceive Mongolia? The following evaluation is the result of several interviews – some of which I conducted myself – with investors about their impression on Mongolia. Optimistic minded investors would likely reply that the reasons for investing in Mongolia lies in the fact that Mongolia and the Gobi area constitute a long-term, high quality, and low cost investment ‘product,’ whose location on the back of energy hungry China offers the huge advantage of lowering costs of transportation with comparison to continents and countries such as Africa and Australia. In other words, the cost of transporting Mongolian raw materials to China is minimal.  When the Oyu Tolgoi and Tavan Tolgoi mining deposits will be put into exploitation, when large companies’ financial transactions and shares will be circulated through Mongol Bank and the Mongolian Stock Exchange, the country’s financial market will rapidly expand and so will the number of companies participating to the development. 

However, some criticisms and complaints abound and persist after investors acquire an in-depth experience of Mongolia, its political, economic and legal environment. For example, it is believed that Mongolians do not have the money to resolve the problem of roads and transportations. This is a major issue as the size and quality of the country’s reserves of coal and copper are irrelevant if the infrastructure to transport and sell them is inexistent. Such a situation will leave Mongolia no other way than to sell its wealth at the minimum price offered by the neighboring countries – a price of course much lower than on the world market.
Investors also worry that, despite the country’s wealthy natural resources, it is unclear whether the capital that will be accumulated as a result will be adequately managed. In their views, it is ambiguous whether Mongolia’s development plan is valid and justified, what the future course of action is and what will be developed first. In other words, the Mongolian current policy is at the image of its rural unpaved and dusty roads, it lacks a road map. The difficulties to find a reliable and knowledgeable work force in Mongolia also reinforce these uncertainties.

Meanwhile, the property law and business legal environment due to protect investments are inadequately developed. For example, if a loan provider issues a loan to a Mongolian company and a problem occurs, the possibilities to sell loan collaterals and make up for the losses are scarce. It is also likely that the outcomes of a court settlement will be entirely left to the judge’s discretion.
The biggest difficulty when it comes to working in Mongolia is that the success of an enterprise relies on the politicians assuming function in the relevant offices - a lot of time is wasted on finding out what they think about your business – as well as the stability of the policy in vigor.

More criticisms arise from the fact that the balance sheets of Mongolian companies are not very reliable. In Mongolia for instance, capital expenditures are very high due to the instability of the loan interest rate. Similarly, inflation and the togrog exchange rate investment hidden additional cost are also very high. Moreover, the bank monitoring system is unreliable, making it hard to trust, and the monitoring system, and the banks. Such difficulties will be the cause of many headaches for those who invested in Mongolia. They will complain, shake their heads and say that Mongolians are too proud to understand that the “world will keep on turning with or without Mongolia.”

It can be concluded quite clearly that Mongolia, although resource rich, experiences a lot of difficulties and faces many challenges due to its underdeveloped infrastructure, precarious policy, lack of capable human resources, small and weak banking and financial market, weak corporate governance and unstable exchange rate.
 
What needs to be done?


It is of course understandable that foreign investors did not come for the simple joy of developing Mongolia, and they, being the ones with the money, should to a certain extent advance rather exigent demands. However, Mongolia possesses raw materials highly demanded on the world market and needed by the world industries. Their prices are increasing on the international markets, as a result of which investors are more than willing to invest in the country’s mining sector without being too dainty. However, this situation is far from being a blessing.

More than 80% of our exports are made up of mostly raw minerals such as coal and copper and the state budget is becoming too dependent on such exports. Rich mining companies are snatching off the best personnel from other sectors and raising expectations of average wages levels.  The strengthening of the togrog has lowered the competitiveness and income of companies in the trade, services and industry sector; while other expenses have increased. This is called the dutch disease, and the only way to avoid this is to diversify the economy. In other words, it is necessary to develop the country’s cashmere industry, banking and financing system, its tourism and freight companies to be capable of creating a substantial number of jobs and raise the percentage share of export and budget income.

But investors cannot be pushed to invest directly in these sectors. Therefore, the new generation needs to show some resourcefulness to inject into the national economy the profits resulting from all these investments. To do so, it is necessary to first, strengthen the overall investment environment in Mongolia; second, develop the monetary-financial environment; and third, promote domestic and foreign investments into specific sectors of the economy.  Of course, a lot of time will be required to reform the investment environment, especially when taking into consideration the improvement of the legal system. However, two or three matters urgently need to be paid attention to first.

With the issuance of loan certificates by the Government of Mongolia to the private sector, the issue of the banking and financial institutions in “raising capital from abroad” can be resolved; Government’s international bond will become a “benchmark” for the investors investing in the Mongolian capital market. Today, foreign investors considered Mongolia to be as black as night, and for the Government to sell bonds and determine basic interests according to market principles would be for them an event similar to the lighting of a torch in a dark tunnel. 

Indonesia is a good example of a country that started late but became one of the most efficient recent forces in raising capital. With the wealth of its natural resources and its well developed tourism sector, it has successfully raised capital using its own ‘weighted’ potential as a loan guarantee. 
In the future, Mongolia needs to create an investment fund similar to the Chile Fund, Chinese Investment Corporation or Singapore Temasek Holdings. This fund can render a vital financial support to non-mining sectors’ innovations and to promote export related activities, and become the main actor in indirectly diversifying foreign investments.