Great challenges and opportunities lie ahead for Mongolia. This Asian country nestled in between two great superpowers has now reached a new plateau in its very interesting and long history. For most of the 20th century, Mongolia was ruled by a communist regime where central planning dominated the economy. Now with democratic reforms beginning in 1990 and the nation’s first elections in 1996, the economy is opening up to Western ways. Great change has taken place and great change to the average Mongol citizen is yet to be achieved. Since 1997 alone, the population of its capital city Ulaanbaator has grown from 400,000 to a million as many Mongols abandoned livestock herding as their way of life and head to the big city in search of a new beginning. Of Mongolia’s 2.7 million people, the majority live in just a couple of cities and the rest are scattered sporadically throughout much of this landlocked country as much of the rural countryside is unproductive and uninhabited land characterized by desert. However, Mongolia’s Eastern Steppe located in northeastern Mongolia is home to over 1 million gazelles (animal) and other livestock. This area is also rich in natural resources including oil potential, minerals, uranium, etc. The Gobi Desert in southern Mongolia has now attracted worldwide media with a high profile copper-gold mining discovery presently being promoted by Canadian based Ivanhoe mines.
POLITICS: the former communist party, Mongolian People’s Revolutionary Party (MPRP) regained power in the July 2000 election. Today MPRP have repositioned to the centre-left politically as the party is now receptive of free market policies although they have slowed the implementation of some market reforms. MPRP do have a mandate to increase foreign direct investment in order to boost the economy while having an eye for social programs to help minimize the pain of economic transition. This change in ideology was strongly implemented by the previous government that held power for four years after throwing out the communist party in a 1996 election after 72 years of communist rule. The free enterprise party of the Democratic Union Coalition (DUC) that introduced market policies in attempt to modernize the Mongolian economy from 1996-2000 were defeated in year 2000 election as many Mongolians found the economic transition from centrally planned to free market economy too difficult. Mongolia achieved independence in 1921 although a communist regime was installed in year 1924. Next presidential election is scheduled for summer 2004.
ECONOMY: emerging economy, successfully transforming but slowly. Historically during the Soviet era, Mongolia’s economy was agricultural based primarily on livestock herding which is dependent on good weather. Now in the 21st century, the focus is on mining and exploiting Mongolia’s rich mineral resources including coal, gold, copper, nickel, zinc, several rare earth minerals and oil (no production as of yet). The overall Mongolian economy has been fairly successful in its transition from former communist planned economy to new market based principles with open trade although difficult periods were evident during the 1990’s. Up until the collapse of the Soviet Union in 1991, the Soviet monetary subsidy represented 30 percent of GDP for Mongolia of which the monies quickly vanished after 1991 with the political disintegration of the Soviet Union. Mongolia’s economy then quickly landed hard into a depression from 1991-93. Real GDP only returned to its year 1991 level 10 years later in 2001.
Since 1996, Mongolia with its new government at that time, DUC liberalized trade, opened the country up to foreign direct investment, reduced price controls and implemented free market reforms including mass privitization policies. And in 1997, Mongolia then joined the WTO. As announced in January 2004, Russia agreed to forgive a substantial part of the 11.4 billion rouble debt owed by Mongolia. The final debt settlement was agreed at $300 million USD which will be issued in T-Bills. This is a tremendous liablility removed for Mongolia as it will now allow the country to modernize and prosper quicker. In the livestock sector, adverse weather patterns have at times devestated the industry as was the case in 1999-2000 when millions of cattle & sheep died from harsh winter conditions. In fact, Ulaanbaator has claimed the title of the world’s coldest capital city during winter. It is estimated that upwards of half the population currently live as nomadic livestock herders where Mongolia is home to more animals (camels, cattle, sheep, etc - in the range of 10 million livestock) than people. Foreign aid assistance represents 35 percent of GDP and is expected to decline as Mongolia reaps the rewards of its new wealth creation industries.
Economic Statistics
GDP as measured by purchasing power parity is at $5 billion USD (2002) or corresponding GDP/Capita at $1,900 USD (2002). Market based GDP at $1 billion USD and corresponding market GDP/Capita is at $400 USD/year although 30 percent of the population earn only an average of $100 USD/year. GDP growth 2004 is estimated at 5 percent, year 2003 at 5 percent, 2002 at 3.9 percent and both year 2000 & 2001 were flat at 1 percent. Inflation for 2004 is currently running at 6.8 percent and is estimated at 5 percent for the year, 2003 at 5 percent, 2002 at 3 percent, year 2000 at 11.6 percent, 2001 at 8 percent, 1999 at 7.6 percent, 1997 at 30 percent, 1995 was at 53 percent. Since 1998, Mongolia has endured a deficit in both the current & trade account. Current account deficit for 2001 was at 7.5 percent of GDP, if no aid calculated, this figure would be 16 percent. In 2000, the current account deficit was recorded at 5.6 percent of GDP or 15.8 percent if no foreign aid was calculated. Fiscal deficit is at 5.3 percent of GDP for 2001, 6.8 percent in 2000, 12.2 percent in 1999 and 14 percent shortfall in 1998. Unemployment is at over 20 percent, one third the population live in extreme poverty. Services represent 50 percent of the economy. Export markets include China and the United States for copper, livestock, cashmere, etc. Import partners include Russia and China with products such as machinery, consumer goods, chemicals, energy, etc. Agricultural is declining in GDP output with 2001 at 25 percent.
POSITIVE: foreign investment in the mining industry, inflation is relatively low, 99 percent literacy rate, good relations with the United States and a strong supporter of fighting international terrorism, Ulaanbaatar - entire city now wired with fiber-optic cable. CONCERN: fresh water resources, social problems and segmented poverty, severe and difficult climate - summer drought to harsh winters, high infant mortality rate.
BANKING SYSTEM: reforms have been implemented, strengthening. As of November 2003, net international reserves were at $266 million USD (4 months coverage) up 32 percent from a year earlier. After communism collapsed, the banking system restructured to reflect Western ways, Mongolia now has a two tier banking system including a central bank, Bank of Mongolia (BOM) established in 1991 and a commercial banking sector. BOM has a legal mandate to ensure the stability of the national currency, the ‘tugrik’ in addition to managing interest rates, issuance of currency, BOM will intervene on the exchange markets when required to manage the currency value of the tugrik, etc. In addition, BOM has increased supervision of the commercial banking industry to enhance its credibility. Mongolia has had its difficulties in the banking sector, banking crisis dates include 1994, 1996, 1998, 2000. In year 2000 alone, non-performing loans reached 40 percent of the portfolio resulting from the fear that foreigners at that time were leaving and taking their investment monies with them. Technology advances particularly in the banking system as Mongolia has researched the development of smart cards that can carry up to $150,000 USD.
REGIONAL ANALYSIS: China, Russia
Mongolia geographically is wedged between two superpowers, China and Russia. China may very well be the economic saviour to Mongolia as it buys Mongolia’s rich mineral resources in the years ahead. Conversely, Russia is a very important trade partner to Mongolia as it is presently a major supplier of oil.
KNOWLEDGE: Mining Exploration Boom
Global mining guru Robert Friedland who is Chairman of Canadian based Ivanhoe mines is very active in copper-gold mining exploration in Mongolia. Ivanhoe is exploring at the Oyu Tolgoi gold & Copper project also known as ‘Turquoise Hill’ located in Mongolia’s southern Gobi desert which is only 50 miles from the Chinese border. This mining play is currently a big international news story. To date, Ivanhoe has invested over $60 million USD defining the resource to date plus Ivanhoe more recently purchased $50 million USD of Mongolian T-Bills to help the country settle its Russian debt liability in early 2004. Turquoise Hill is widely speculated to be one of the largest gold and copper porphyry systems in the world today. Wide areas of unproductive land do exist in Mongolia although Western modern exploration techniques are now making this previous unproductive land potentially very economically viable. The Turquoise Hill mining project is thought to have upwards of $50 billion USD in ore of which 80 percent is in copper and 20 percent in gold. For starters, it is projected that $1 billion USD will be required for investment & development to get this mining project underway for capital infrastructure, power generation, transportation, etc. A new 260-kilometre railway is in the works to connect China from the mine site.
Market giant China surrounds a great portion of Mongolia’s border is now the number one destination export market for much of Mongolia’s mineral resources. It is expected with China’s huge growing economy in areas of car production for example, demand for copper will only increase in the years going forward with favorable pricing. China is well in its transition towards middle class status. Mongolia is now geographically fortunate to have this large growing market right next door unlike its violent history. The mining industry will be vital to Mongolia’s economic fortune as it will help to transform the country and to modernize it with advancement into social services. Mongolians themselves support mining as they see it as necessary venue to better their lifestyle. Turquoise Hill will be the biggest project in Mongolia’s history and quite possibly one of the largest mineral discoveries in the world. The net impact for Mongolia is quite positive economically, some analysts have suggested that average GDP/Capita may increase upwards of 20 percent due to Turquoise Hill alone. Further, the government is encouraging pro-mining policies, liberal tax & investment laws and business friendly. Copper output currently represents 30 percent of Mongolian exports that is most likely to increase as mining takes front and centre stage over the next 20 years plus in Mongolia.
CURRENCY: ISO Symbol ‘MNT’, Mongolian tugrik, togrog. At time of review on March 20, 2004, the Mongolian tugrik had an exchange value of 1179 MNT to 1 US-dollar ‘USD’. Floating exchange rate regime is in place.
CURRENCY HISTORY: historical valuations include: year 1995 at 474 MNT to 1 USD, 1996 at 694, year 1998 at 840, 1999 at 1022, 2000 at 1,076, 2001 at 1,097, year 2002 at 1,134.
CURRENCY FORECAST: BI.C is forecasting a multi year bull market in gold and copper ahead. Gold price at March 19, 2004 at $411 USD/oz with some analysts calling for $475 US/oz by year-end 2004 and higher in 2005-06 as difficulties with the US-dollar still loom. The world high grade copper price as at March 19, 2004 was valued at $1.38 USD/lb, the price has just about doubled in the last 2 years from an average price of 73.8 US cents/lb in 2002. Major rating agencies have a stable outlook for Mongolia, BI.C forecasts a stronger currency going forward now that Russia has removed a large albatross by writing off a great portion of Mongolia’s debt. Although mining exploration in Mongolia is having success, it is important to note that actual production at Turquoise Hill in the Gobi desert for example remains several years away. However, Mongolia can get an immediate investment boost from capital investment to build mines and infrastructure then followed by an annual dividend as mineral production yields greater revenues to the national treasury. BI.C thinks the tugrik may actually realize appreciation pressures versus a declining US-dollar particularly. Don’t be surprised to see the tugrik below 1000 MNT (ie. 950 MNT) to the USD in the next 2 to 3 years.
UPDATED: March 20, 2004
