Can Mongolia Keep Going?

One of the world's fastest-growing economies starts to skid.

Is the Mongolian economy poised for a comeback, or will it continue to cool down from the recent years of soaring profits?

According to the latest economic update report from the World Bank, Mongolia’s real gross domestic product (GDP) growth is expected to continue to descend in 2014 but remain in double-digit growth at just over 10 percent. Those are growth numbers that most countries can only dream of, and they will likely keep Mongolia amongst the top ten fastest-growing economies in the world. Moreover, Ulaanbaatar’s growth will still be larger than any other country in Asia with the possible exceptions of Turkmenistan and Afghanistan. The country also benefits from leadership stability–in a transparent manner–with last year’s reelection of President Tsakhiagiin Elbegdorj.

But, while Mongolia remains a successful model in many ways for its abilities to reform politically and economically, there are still some questions on its ability to sustain its economic success and court foreign direct investment. For example, FDI inflows, as a percentage of GDP, have plummeted over the past three years from nearly 60 percent to less than 20 percent. Moreover, Mongolia’s fiscal deficit has nearly tripled and inflation has been volatile. All of this has impacted Mongolia’s bottom line, as its exports have consistently fallen for three consecutive years.

What is behind the economic decline in Ulaanbaatar? One of the simplest–and partly accurate–explanations is the continued uncertainty in the global economy which has also served to cool down the minerals market, which Mongolia relies on heavily. But this does not complete the story or fully explain why FDI has fallen off a cliff since 2011. Due to Mongolia’s dependence on its minerals industry, its ability to attract foreign investment has ebbed and flowed along with the status of its key investment projects. Most notable of these is the multi-billion dollar development of the Oyu Tolgoi cooper-gold mine led by Australian mining company Rio Tinto. While some point to snags in Mongolia’s strict mining investment laws as the culprit for curtailed growth, Mongolian authorities have alternative explanations. In a wide-ranging interview with the Diplomat last year, the head of Mongolia’s new Investment Agency remarked that the real reason for the drop in FDI was because the Oyu Tolgoi project finished its phase one after 2012. In other words, the FDI was artificially inflated during 2011-12 due to the Rio Tinto project.

But there are other reasons for this dip besides the gap between Oyu Tolgoi’s phase one and two. One significant factor was the imposition of a strict investment law in 2012 that handcuffed foreign investors and focused too much power in the hands of Ulaanbaatar rather than the private sector in Mongolia. Another troubling sign has been the long delay of an initial public offering (IPO) for its lucrative coal mine in Tavan Tolgoi, which is supposed to open at nearly $3 billion USD. Tavan Tolgoi is believed to contain the world’s largest undeveloped coking-coal deposit. The mine is situated in Mongolia’s southern Gobi desert, which has made it an appealing location for Chinese investors. But there have been repeated delays in awarding contracts and Ulaanbaatar has wavered several times during the bidding process due to protests from other foreign investors that the process was rigged in favor of a Chinese-Russian-American consortium. The lagging international market for coal has also been responsible for delays on Tavan Tolgoi.

After FDI plummeted following the investment law’s approval, the Mongolian government quickly backtracked and introduced more investment friendly securities legislation. The new investment law, which was passed last November, introduces new protections for foreign investment in Mongolia and also provides tax incentives. The government also passed a new securities law on January 1, which adds transparency to the Mongolian market and hopefully will help the Mongolian Stock Exchange to work more seamlessly with other foreign exchanges.

Adding to this good news is the fact that Elbegdorj is a savvy leader and is well equipped to leverage his power to minimize Mongolia’s exposure to economic risks in the coming years. Earlier this month, the Mongolian leader announced a new initiative called “From a Big Government to a Smart Government” which is focused on taking several efforts to improve the efficiency and effectiveness of governance in Ulaanbaatar. According to Elbegdorj’s office, the new decree “reflected the country’s priority to restrict government’s business activities and operations in order to transmit the state into an economical and efficient regime by correcting the present situation of a state which is mixed up all economic activities.” More specifically, the reforms focus on centralizing most of the government’s implementing and regulatory agencies through the privatization of the central Khangarid Palace, a tall building located in the heart of the Mongolian capital.

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