Mongolia Reverses Foreign Investment Law to Revive Economy

Mongolia Reverses Foreign Investment Law to Revive Economy

The Parliament of Mongolia held an emergency session between September 2 and September 6. The main issue discussed during this session was legislation governing Mongolian foreign investment. Due to a slow-down in the Mongolian economy, there are high hopes and plans to rejuvenate the economy by putting investors from overseas on equal terms with local companies, while improving the tax environment for these foreign investors.

Current plans involve the scrapping and reversal of laws that curb foreign ownership in certain sectors, with special emphasis on those sectors labeled as ‘strategic.’ ‘Strategic’ sectors, where foreign ownership had previously been limited, include banking and finance, telecommunications and mining. The proposal has to pass through parliament, where voting is likely to occur in late December, before being implemented.

These developments follow reports of the situation in the Oyu Tolgoi mines, the country’s biggest foreign investment project so far, where delays in expansion have not only led to around 1,700 job cuts in the sector, but have also severely affected investor confidence. Delays were caused by disputes surrounding $5.1 billion funding the Oyu Tolgoi copper and gold mine in a stalemate between the Anglo-Australian Rio Tinto miner and Mongolia.

Mining is an especially important sector for Mongolian foreign direct investment (FDI). A KPMG publication demonstrates the true extent to which the geology and industry sectors have made up the majority of FDI in Mongolia between 2007 and 2011.

In the first half of 2013, foreign investment in Mongolia was down 43 percent as a result of the Strategic Entities Foreign Investment Law (SEFIL) adopted in May 2012, according to Bank of Mongolia data. This legislation stipulated that any company looking to buy 33 percent or more of any Mongolian company, in one of the above-mentioned ‘strategic’ sectors, was to seek special government approval.

State-owned firms need approval for a purchase of more than 49 percent. Changes to this legislation would mean that these restrictions apply only to the acquisition of state-owned firms, and that distinct policies regarding ‘strategic’ and ‘non-strategic’ sectors would be removed.

On top of changes in regulations, Mongolia is also planning to establish an approval board for financial acquisitions, comparable to one that already exists in Australia. Moreover, a new entity, ‘Invest Mongolia,’ is to be created to attract and deal with more foreign investment. Hopes are that these changes will create a more stable and attractive investment environment.

A message from Sereeter Javkhlanbaatar, the director of foreign investment regulations and registration at the Mongolian Ministry of Economic Development, reads that “approximately 10 thousand foreign entities have been established and about 10 billion USD net investment has been raised since Mongolia opened up its market to foreign investors.”

This is a sign from the Mongolian authorities that the country is hoping to increase attractiveness and eventually investment—especially foreign—and to regain confidence in its economy. However, it will be a while before investors fully regain trust in the Mongolian market, and it is uncertain whether the new law will reverse investor confidence in the first place. Either way, it is unlikely that the new legislation will bring foreign investment back to the record-breaking economic growth level of 17.3 percent as seen in 2011.

About Author

Margaux Schreurs

Margaux lives in Beijing and works as an editor at a Beijing-based magazine and website, and writes on a freelance basis for a wide range of publications throughout the world, mainly focusing on East and Southeast Asian current affairs. She is a London School of Economics and Political Science MSc graduate.