The Return of the “People’s Party”: A Risk Outlook for Mongolia

The Return of the “People’s Party”: A Risk Outlook for Mongolia

What are the consequences of the recent legislative elections for businesses and investors operating in Mongolia? Will Mongolia’s economic difficulties abate, continue, or worsen?

On June 29th the Mongolian People’s Party (MPP) trounced the ruling Democratic Party (DP) in parliamentary elections, taking home 65 of the 76 seats in the Ikh Khural.  The MPP will have plenty on its plate as it returns to power after four years as an opposition party: a dramatic economic downturn, poor investor confidence, simmering popular discontent, and massive public debt all plague Asia’s “Wolf Economy.” This article reviews the major causes and consequences of this transition, with an emphasis on how it could affect risks and opportunities for investors.

Omega Wolf

The MPP’s striking victory is the direct result of Mongolia’s recent economic malaise.  Mongolia’s GDP growth rate put it among the fastest growing economies in 2011, encouraging optimistic investors to flock to this aggressively expanding “Wolf Economy.” Following the election of a DP majority in 2012, however, Mongolia’s GDP growth rate has plunged, unemployment has risen, exports have plummeted, debt has skyrocketed, and foreign direct investment (FDI) has all but dried up. 72% of eligible voters turned up to cast their ballots, a dramatic uptick compared to the declining turnout in recent elections, largely due to frustration with the economy.

Source: World Bank

Source: World Bank

To be fair, several of these problems are beyond the DP’s control.  The two main drivers of Mongolia’s flagging growth are the global drop in commodity prices and China’s economic downturn.  Mongolia is heavily dependent on its mining sector – mineral resources make up a staggering 94% of its exports – and few countries have been as profoundly hamstrung by the crash in commodity prices as Mongolia. Mongolia is similarly heavily dependent on China, and has suffered from China’s ongoing slowdown. Without access to seaports or adequate transport infrastructure, Mongolia has nowhere else to sell to offset shrinking Chinese demand.

The DP has done little to improve Mongolia’s increasingly desperate situation, however.  The DP fought a long battle with Rio Tinto over the development of Oyu Tolgoi mine, delaying progress on one of the most promising opportunities in Asia and scaring off investors worried by growing resource nationalism.  Public debt also burgeoned under the DP’s watch leading Moody’s to downgrade its rating on government bonds from B1 to B2.  Finally, the DP made little headway toward diversifying the Mongolian economy or developing infrastructure to reach other markets.

People power?

There is cause for cautious optimism following the election of the MPP. Despite their Marxist-Leninist legacy, the contemporary MPP is a modern, market friendly, center-left party.  Their platform calls for a “knowledge-based, competitive, market economy… to create a favorable environment for human and social development.” This includes support for free trade, attracting FDI, strengthening education, and creating a “favorable business environment.” This liberal approach is desperately needed, as Mongolia’s business environment remains relatively uncompetitive and the government must take greater steps to attract FDI.

The MPP also oversaw the initial development of the Oyu Tolgoi mine which the DPP subsequently bungled.  Furthermore, the MPP has pledged to develop as many as 100 new factories generating 40,000 new jobs.  These are positive signs for investors hoping for a revival of the Mongolian economy.

There are also signs that the MPP majority will create greater stability and predictability in government. The MPP is Mongolia’s oldest party with strong party discipline and experienced, pragmatic leadership.  A solid majority, a significant popular mandate, and a strong shot at winning the presidency next year should empower the MPP to push forward sound economic policy and necessary reform.

Markets have already responded positively to the electoral results. Government bonds spiked after the MPP declared victory while shares in Rio Tinto similarly experienced a boost.  The Mongolia Stock Exchange (MSE) Top 20 Index also climbed.

Mongolia and the road ahead: no guarantees

Despite these positive signs, investors should not be overly-optimistic.  Several key policy questions remain unanswered.

First, although the MPP is led by veteran pragmatists, 40 of the recently-elected ministers of parliament are freshman. How competent will they prove?

Second, how will the MPP cope with debt? The party has yet to lay out a clear, comprehensive plan.

Third, will the MPP find a way to tackle Mongolia’s mounting environmental challenges – particularly overgrazing? If it fails to do so, food shortages could lead to unrest.

Fourth, will the MPP end the practice of doling out cash-handouts to the Mongolian people taken from mining revenue? If so, will they instead invest those revenues in reducing the debt and financing much-needed education and infrastructure projects?

Fifth, how will the international factors beyond Mongolia’s control evolve? Will China’s growth continue to slow and will commodity prices remain low? If so, Mongolia will continue to face an uphill battle even if the MPP pursues sound economic policy.

Finally, investors should remain cautious given the ongoing possibility of unrest. Mongolia is undergoing a major transformation that is eroding the traditional nomadic lifestyle many of its citizens are used to.  Food security remains problematic given chronic overgrazing and the recent harsh winter. Mongolia’s political institutions are also increasingly unpopular; despite the MPPs victory most Mongolians have little confidence in the ability of established political parties to govern effectively. All of these factors increase the chances for unrest.

Overall the MPP must make efforts to 1) diversify the economy, 2) cultivate human capital through better education, 3) bolster infrastructure to help its commodities reach additional markets beyond China, and 4) tackle the massive public debt in a sustainable fashion.  Investors should watch the MPP’s progress on these issues carefully over the coming months.

Categories: Asia Pacific, Economics

About Author

Erik French

Erik French is a PhD Candidate at the Maxwell School of Citizenship and Public Affairs, a supervisor at Wikistrat Inc., and a former Sasakawa Peace Foundation fellow with Pacific Forum CSIS. His research focuses on security, politics, and economics in East Asia.