Mongolia needs to diversify to avoid recession

Mongolia needs to diversify to avoid recession

Mongolia is suffering from an over-dependence on mining as global commodity prices and demand from China decrease: diversification is urgently needed.

Having capitalized on the global commodity boom, and its proximity to a ravenous China, Mongolia has until recently seen rapid economic growth. As Chinese growth forecasts in the coming years sink towards the mid single-digit range, Mongolia enters 2016 skirting with recession.

Mongolia seeks to bolster finances

As commodity exports dry up, Mongolia is faced with a revenue shortfall. On March 14th, the government received a $250 million loan from Credit Suisse. Furthermore, Mongolia also recently issued $500 million in government bonds, in order to raise needed capital. Taken together, the new bonds and Credit Suisse loan represent efforts to raise funds equivalent to 6.5% of GDP.

These are vital cash injections, as Mongolia has seen its GDP growth rate drop from a high of 17.5% earlier in the decade to just 0.1% for 2016 and 0.6% for 2017, according to the Asian Development Bank (ADB). Ayumi Konishi, director general of the ADB’s East Asia department sums up the situation facing Mongolia.

“Consistent fiscal policy, effective continuing efforts to diversify the economy, and ensuring social protection are important challenges of economic management in Mongolia. In this light, the decline in the country’s consolidated deficit from 11.4% of GDP in 2014 to 7.9% in 2015 is a commendable achievement, although further steps are needed.”

Problems in the mining sector

Mongolia’s mineral wealth is well documented, and accounts for 94% of the nation’s exports. This over-reliance was feasible during the days of heady commodity prices and double digit growth rates in China, but is increasingly causing problems. As commodity prices have dropped, foreign investment in Mongolia has effectively dried up. While economic factors are limiting extractive sector growth, political and public tensions are also exacerbating the issue.

Divisions in Mongolia’s parliament saw the government block a development proposal from an international mining consortium (including China’s Shenhua, and Japan’s Sumitomo) in 2015. On March 30th, thousands demonstrated in Ulaanbaatar, protesting the unequal distribution of wealth that has arisen in the wake of the nation’s mining boom. Opposition lawmaker Battulga Khaltmaa, spoke to the crowd, “our wealth is being shipped outside of [the] country. Where is that money going?”

Despite the billions from mining concessions, one third of Mongolians still live in poverty, with Battulga arguing that around two dozen families associated with both the ruling Mongolian Democratic Party and opposition Mongolian People’s Party are reaping the rewards. Through their ties with the state run Mongolian Mining Corporation, listed in Hong Kong, a small group of elite families are profiteering from Mongolia’s mining dependence.

Battulga and his supporters are especially critical of Rio Tinto’s $5.4 billion Oyu Tolgoi copper mine, as the mine’s expansion has been bogged down by government demands for more money. Similarly, there is opposition to efforts to revive the Tavan Tolgoi coal mine, as mine income is seen as only benefiting local elites. This is not the first hurdle faced by Tavan Tolgoi, as the mine saw a $4 billion expansion deal fall through in Q3 2015 due to slowing demand in China.

Other efforts to jumpstart mining in Mongolia have met with similiar opposition, such as the government’s plans for increasing uranium mining. In 2015 the government issued three uranium mining permits to French mining firm Areva, with production slated to begin in 2017. This endeavour has drawn protests from locals, and does not bode well for Areva, which was already forced to cease operations in 2013 due to local opposition.

Environmentalists and local advocacy groups in Mongolia are also protesting efforts by the government to join the 1994 Nuclear Safety Convention and 1997 Joint Convention on the Safety of Spent Fuel Management. If Mongolia accedes to these treaties it will be obligated to accept and dispose of nuclear materials which originated from Mongolia. Opponents claim that Mongolia does not have the capacity or resources to do this.

It is likely that the government is considering joining these conventions in order to make it attractive to Russia and China; two major nuclear energy users. Mongolia may be trying to position itself as an attractive location for nuclear waste management, thus seeking additional income from user countries. This may find fertile ground as environmental concerns among Chinese citizens pressure Beijing to export its waste to quell public anger.

Mongolia seeks to diversify economy, faces hurdles

Commodity price volatility has highlighted the need for Mongolia to diversify its economy. To this end, Mongolia has received a $60 million loan from the ADB to improve the country’s credit guarantee system. According to ADB country director for Mongolia, Robert Schoellhammer “the project will help…Mongolian SMEs get more access to finance from commercial banks which will help diversify the economy.” With the ADB’s help, the Credit Guarantee Fund of Mongolia will offer $432 million in SME sub-project loans.

Despite the monies from said fund, SMEs in Mongolia are facing many hurdles. For instance, Mongolian SME’s are facing headwinds from new government VAT legislation that came into effect January 2016. Under the new guidelines, businesses are able to recoup 20% of their VAT expenditures, yet must do so by providing receipts from a standardized cash register. Many small Mongolian businesses do not use receipts, and as such are unable to receive the tax refund.

Furthermore, Mongolia’s tourism sector; which accounts for 9% of GDP, has potential yet requires more support. Tourism to Mongolia has risen from 55,000 in 1997 to 476,000 in 2012, with the government aiming for a million annual visitors by 2020 – an ambitious target in a country of barely three million people.

Currently, Mongolian tourism firms are facing a decline in visitor numbers are their two largest tourist source countries – Russia and China – are facing difficult economic times. Sanctions and low oil prices in Russia, and slower domestic growth in China are leading to fewer visitors. Furthermore, Mongolia’s relative isolation is a major problem for its tourism industry: Chinggis Khaan International Airport only has direct connections to nine destinations. That being said, flagship MIAT Mongolian Airlines is expanding its fleet by 40%, adding two Boeing 737-800s.

Lastly, to add to Mongolia’s worries, the country is experiencing a zud or a severe winter in which many livestock die due to an inability to graze. Estimates of livestock death are around 1.2 million for the 2015/2016 winter, with Mongolia receiving UN relief to aid communities suffering from the die-off.

Mongolia’s mineral wealth to population ratio gives it the potential to create prosperity for all its citizens, yet sustained flourishing remains predicated on stable economics and diversified risk.

About Author

Jeremy Luedi

Jeremy Luedi is the editor of Asia by Africa, a publication highlighting under reported stories in Asia and Africa, as well as special features on how the two regions interact. His writing has been featured in Business Insider, Huffington Post, Yahoo Finance, The Japan Times, FACTA Magazine, and Seeking Alpha, among others.