MIBG 2014 Economic Outlook - Feb 17 2014 (2)

COUNTRY RESEARCH 

Economic and Political Coverage 

Date of Publication 

February 17 th 2014 

_ 

Economic Indicators 2013 2014f 

GDP CP 11.13 11.99 

GDP PPP 17.02 19.32 

Total Investment 56.46 58.53 

Gross National Savings 29.82 37.25 

Inflation Avg Con Prod 9.67 7.48 

Volume Imports -7.64 14.42 

Volume Exports -5.18 31.21 

Gov Revenue 5.74 6.79 

Gov Revenue (% GDP) 34.24 33.88 

Gov Expenditure 7.64 8.26 

Gov Expenditure (% GDP) 45.58 41.19 

Current Account Balance ($bn) -2.96 -2.55 

Current Account Balance (% GDP) -26.63 -21.27 

Government Finances (% GDP) 

Revenue and Grants 34.24 33.88 

Expenditure and Net lending -11.33 -7.3 

Current Balance -26.63 -21.27 

Current Balance ($ bn) -2.96 -2.55 

Growth and Inflation (% change) 

Real GDP Growth 12 10.3 

Mineral -1.65 * 

Non Mineral 3 * 

Consumer Prices (Annual Average) 9.67 7.48 

Consumer Prices (End-Period) 9.28 8.35 

Ratings Ratings Outlook 

S&P BB- NEG 

Moody's B1 STA 

Fitch B+ NEG 

Contents 

Page 

Introduction 1 

Core View 2 

Review Of 2013 3 

Outlook For 2014 5 

Long Term Outlook 6 

Contributing Analysts 

Bilguun Ankhbayar 

Chief Executive Officer 

bilguun@mibg.mn 

Chris MacDougall 

Managing Director 

macdougall@mibg.mn 

Naranchimeg Gankhuyag 

Associate 

nadya@mibg.mn 

+976 1136 2620 

MONGOLIA- COUNTRY OUTLOOK: 2014 

This document is one in a series of Mongolian Economic Outlook 

research reports. We aim to analyze various economic and political 

forces that are taking place in Mongolia, hence providing 

opportunities for our clients to identify key economic sectors and 

businesses that may outperform the overall investment horizon in 

2014. 

The report provides an overview of the legislative, regulatory, and 

business environment while highlighting the important changes that 

have taken place over the past 6 months. The current report mainly 

concentrates on those activities that MIBG foresees taking place in 

the first half of the year. 

Introduction 

The fundamentals of Mongolia are as strong as they have ever been. 

The country is resource rich,sitting on the doorstep of China – the 

most populous and the second largest economy in the world. The 

somewhat rocky political landscape of Mongolia is reminiscent of any 

democratic nation.Political instability does present challenges, 

however the country’s policymakers have remained true to its 

development platform –which has relied on it’s free market economy, 

private sector, and foreign investors during its 24 years of democratic 

history. In fact Foreign Direct Investment (“FDI”) plays a major role 

within the economy as it accounts for over 40% of Mongolia’s annual 

GDP. 

Mining to the rescue 

We believe that Mongolian policy makers will have to rely heavily on 

its “prized” mining sector to get the economy out of the perceived 

slowdown. Notable developments that we forecast for 2014 include: 

1. Oyu Tolgoi Gold-Copper mine to restart its underground 

development stage, which will attract over US $4 billion. 

2. Mineral exploration tenements will re-open for new acquisitions, 

fueling further capital gains and exploration spending activities for 

Mongolian junior mining companies. 

3. Railway gauge issues will be resolved, the GoM will likely pick the 

Chinese standard,“narrow gauge” in order to boost export revenues 

from Mongolia’s coal mines. 

4. Mongolia’s Minerals law will undergo amendments, resulting in 

positive changes. This will likely include the removal of possible 

Government interventions and protectionist sentiment. 

Mongolian Investment Banking Group LLC 

Suite 305, Colorado Business Centre, Amarsanaa 

Street 12/1, Gandan 16040, Bayangol District Page 1 of 8 

Ulaanbaatar, Mongolia, +976 1136 2620



Even though we expect a stable and favorable environment for FDI 

over the next year we still expect some uncertainty with regards to 

the potential amendments to the Minerals Law and the proposed 

underground development of the Oyu Tolgoi mine. This possible 

instability is the result of Mongolia’s early stage of development, low 

economic base, and vast mineral potential. With a GDP per capita of 

only US $3,600 per person, a functioning democratic system, and 

enormous natural resources there will always be some level of 

philosophical debate within the country as to how to best manage the 

prospective growth. This struggle can be described as a battle 

between former soviet mindsets and capitalist ambitions, a difference 

in opinion on the distribution of wealth. Fortunately, the 

overwhelming majority believes in the capitalist system and the 

benefits that it will bring to the country. 

CORE VIEW 

As stated in previous weekly and quarterly analysis, Mongolia’s 

legislative environment for foreign investors has taken a significant 

turn for the positive. This change in direction has been initiated by 

the country’s economic slowdown (11.7% real GDP Growth in 2013 

as opposed to 15% forecasted) and the Tugrik (“MNT”) devaluation 

(-25% in 2013). The catalysts for the worsening economic conditions 

and the sell-off in the MNT were a set of protectionist policies 

introduced by the Government of Mongolia in mid-2012. However, 

Mongolian policy makers have taken major steps forward in 2013 to 

reverse the protectionist policies of 2012, resulting in a far more 

attractive investment environment for foreign capital. 

Fundamentally speaking, Mongolia is an FDI driven economy. Based 

on recent changes in the legislative environment we believe that the 

Government finally realizes this fact. Furthermore, it would appear 

that they share our view that resurgence in FDI is needed in order to 

stabilize the economy and provide the necessary foundation for 

continued expansion. To this end, the legislative reforms that have 

taken place over the past year have been directly focused on 

attracting FDI and providing a stable investment climate for foreign 

capital. So what are these changes? 

1. Approval of the new Investment Law and establishment of the 

new Invest Mongolia Agency (abolishing SEFIL) 

2. Approval of the newSecurities Market Law: allowing dual 

listings, creating a relaxed capital market environment, and 

introducing international best practice 

3. Approved Investment Fund Law, aimed at attracting 

institutional investors into the market 







4. Approved GoM Mining Policy 2025 (Final document not 

released yet) promises to limit state involvement in exploration 

and mining activity 

5. Amended Minerals Law to include Gold Transparency Initiative, 

decreased Gold royalty by 50% to 2.5% for producers who sell to 

the Mongol Bank 

6. Expected amendments to the Minerals Law in accordance with 

the Mining Policy 2025. Moratorium on new exploration licenses 

will likely be lifted 

7. Expected amendments to the Law on Government of Mongolia 

to stop appointing parliament members to ministerial positions. 

Populist sentiment at the cabinet level will be reduced and policy 

continuity will materialize offering further stability 

Each of these pieces of legislation is critical to the development of 

the market. However, the latter two are of a particular significance. 

The issuance of new exploration licenses has been banned since 

2010, causing widespread doubt among investors regarding the 

Government of Mongolia's commitment towards the minerals 

industry. Similarly, the Law on Government stands out as a key 

initiative as it would stop the appointment of parliamentarians to 

ministerial positions, which will increase stability and professionalism 

within cabinet. 

REVIEW OF THE PAST YEAR: 2013 

2013 was the year of “Government Spending.” The Government of 

Mongolia successfully raised US$1.5 billion through the “Chinggis 

Bond” offering from the international capital markets. In doing so, the 

Government of Mongolia set forth an ambitious plan to connect every 

province center by paved road to the capital city, Ulaanbaatar and 

promised to keep the petroleum price as well as various 

consumables prices stable. 

Political Landscape: Restart of the new election cycle 

As is the case in any functioning democracy, election years always 

bring economic uncertainty and Mongolia had just gone through the 

Parliamentary election in 2012. With the Presidential elections taking 

place in 2013, the Democratic Party (“DP”) clinched its control having 

won both elections. Their run was heavily contested by the 

Mongolian People’s Party (“MPP”) and the newly created Mongolian 

People’s Revolutionary Party (“MPRP”). Distribution of the country’s 

minerals wealth was the main issue between politicians. As history 

has a tendency to repeat itself the most favorable years to be doing 

business in Mongolia, from the standpoint of political risk, are the 2 nd 

and 3 rd years of the parliamentary session. That said, in spite of the 

political cycles, Mongolia’s economy continues to maintain an 

impressive growth trajectory. 







Fiscal and Monetary Policy: Keeping the growth in double digits 

We believe that Government Spending alone was responsible for 

real economic growth of 11.7% last year. With FDI falling by 50% 

and the largest mining project ever undertaken in the country laying 

off 1,800 employees and halting underground development, little else 

remains to claim responsibility. 

In 2013, budgetary spending increased by 3% to approximately US 

$3.53 billion. However, budget deficits decreased to approximately 

US $169 million. Increased government spending was coupled with 

an expansionary monetary policy from the Central Bank (“Mongol 

Bank”) to provide 25% higher liquidity (approx US $5 billion in 2013), 

this was the main driver of double digit growth. In its bid to counter a 

slowdown in the commodities sector, the Mongol Bank had on 

multiple occasions lowered its policy rate, at the end of 2013 the 

Central Bank’s policy rate was at 10.5%. 

Mongolia’s GDP in 2013 was US $10.6billion. In terms of growth 

composition the construction sector and industrial agricultural sector 

experienced the most significant levels of growth with 19.2% and 

16.3% respectively. Mining and extractive industry experienced 

slowdowns due to a fall in coking coal prices in China, coupled with 

increasing transportation costs associated with a lack of rail capacity 

for bulk commodities. 

In order to boost Government spending and implement the proposed 

infrastructure projects the Government of Mongolia issued an 

additional US $300 million. This was done through the country’s first 

Samurai bond, offered exclusively to the Japanese markets during 

the latter half of 2013. At the end of 2013, Government debt reached 

US $2.8 billion, increasing by 23% YoY, equaling 26.4% of the 

current GDP. 

Financial Sector: Expanding money markets, lagging equity 

markets 

Mongolia’s financial services sector continues to expand as total 

savings deposits grew from US $2.81 billion at the end of 2012 to US 

$3.65 billion in 2013, representing 30% in deposits among 

Mongolia’s retail banks. Loans outstanding increased from US $3.99 

billion in 2012 to US $6.15 billion in 2013, with non-performing loans 

moving from 4.20% in 2012 to 5.26% in 2013. A large portion of the 

increased lending can be attributed to injections by the Central Bank 

into the mortgage market, which resulted in the outperformance by 

the construction sector that we have already mentioned. 







One bank became insolvent in 2013. The fifth largest lender, Savings 

Bank, declared its bankruptcy in July of 2013. The catalyst for this 

foreclosure was a loan that was issued to a related party who then 

defaulted on the loan. The GoM, through the State Bank was forced 

to take over the ailing Savings Bank, hence protecting its deposit 

holders and maintaining confidence in the commercial banking 

sector. 

The banking sector continues to thirst for liquidity, as Mongolia’s 

banks compete for limited deposits available within the country. 

Current savings rates are ranging from 5-6% annually on US$ 

denominated accounts and over 10% on MNT denominated 

accounts. 

Capital markets have shrunk for the second year in a row by -7.2% in 

2013, with market capitalization reaching US $954.5 million USD. 

Trading volume, initial and secondary offerings, as well as corporate 

transparency concerns continue to be a challenge for the Mongolian 

Stock Exchange (“MSE”). To combat these concerns the Parliament 

of Mongolia has passed the new Securities Market Law, as well as 

the Investment Funds Law in 2013, which became effective as of 

January 1 st of 2014. 

OUTLOOK FOR 2014 

The economic slowdown that the country has faced for the past 12 

months is beginning to affect the daily lives of ordinary Mongolians. 

Inflation and the depreciation of the Mongolian tugrik are taking their 

toll on everyday consumables and energy costs continue to rise. 

Current cabinet as a whole or, at least the Minister of Mining, 

Economic Development, and Finance will likely face a vote of 

confidence once the Parliamentary spring session begins. 

The Government has acknowledged that it made “mistakes” with 

regards to attracting FDI into the country, largely referring to the 

legislative changes in 2012 that were perceived to be protectionist in 

sentiment. They have since vowed not to repeat those same 

mistakes in a desperate bid to attract FDI. 

Sector to Enter: Mining and Exploration 

We believe the best performing sector of 2014 will be mining 

exploration. This is largely based on the opening of exploration 

tenements in Mongolia for the junior market. As 2013 saw record 

highs on the S&P (+29.6%) and Dow (+26.5%) indexes in North 

America, and a devalued yen causing +57% performances on the 

Nikkei in Asia, the higher risk emerging markets and the junior 

mining space did not show any sign of recovery from its lows of 

2012. That said we are anticipating the beginning of the “spill-over” 







effect from mature markets into the riskier junior mining space in 

2014. Even though the money flow will be tighter towards emerging 

markets in 2014, high quality resources on the doorstep of China will 

have better upside potential than most. 

As Oyu Tolgoi’s underground development restarts in 2014, it will 

also act as a significant catalyst, adding further confidence to the 

potential of Mongolia’s mining sector. We also believe gold mining 

and development projects have the most potential to command a 

higher valuation due to the GoM’s bid to increase its gold reserves 

by granting lower royalty taxation on gold mines within the country. 

Even though we remain optimistic on Mongolia’s metals mining and 

exploration, we would still like to caution our readers of coal mining 

and coal exploration projects due to prolonged weakness in China’s 

coal market. 

Chinese economic growth coupled with global commodities prices 

will continue to be a source of uncertainty for Mongolian equities. 

Sector to be careful of: Real Estate and Construction 

The past three years saw Mongolia named one of the fastest 

growing economies in the world. This resulted in luxury residential 

and luxury office space being over built. Hence, we recommend that 

our clients consider an underweight position in both real estate and 

construction sectors for their Mongolian focused portfolios. The 

majority of the money that the Central Bank supplied to the market in 

2013 was directed into the construction sector, the purpose was to 

create a more affordable housing market for the low-end residential 

market. There are over 300,000 families in the capital city of 

Ulaanbaatar that are in dire need of housing. However, current 

pricing is too high for these families, resulting in further Government 

intervention in the sector. 

We believe, at the end of 2013 real estate and housing prices have 

already started to experience a correction, which will likely spread to 

construction materials and equipment. 

LONG TERM OUTLOOK 

MIBG’s long‐term economic outlook for Mongolia remains 

unchanged. Strong economic fundamentals associated with its 

enormous natural resources with two giant markets on both borders. 

Coupled with a strengthening of the country’s legal framework, 

increasing transparency and professionalism, and a demonstrated 

commitment to the fight against corruption all provide the foundation 

for our positive outlook for the future. 







The development of Mongolia’s untapped natural resources will 

require a tremendous investment of foreign capital and operating 

knowledge. While tensions between foreign investment and national 

interests are unlikely to subside in the short to medium term we 

anticipate that the Government will maintain a supportive regime in 

order to assist in the required development. Underlying our long term 

view is the achieved success of Mongolia’s democratic framework. 

Over the past 24 years Mongolia has transitioned into a fully 

functioning democracy that we expect to persist and strengthen over 

time. The success of Mongolia’s democracy is not only impressive in 

comparison to similar former soviet satellites but also on a regional 

basis. We believe that 

Mongolia is one of the only functioning democracies in North Asia as 

well as the rest of the developing world. 

Overall, we fully expect that Mongolia will continue its growth 

trajectory and by taking a holistic view of the international markets it 

is possible to anticipate the key influencers of Mongolia’s future. 

Similarly, the simplicity of Mongolia’s single sector economy makes it 

possible to identify potential threats. While we maintain that the 

democratic system is a key attribute to successful business in the 

country we also feel that an unpredictable and largely uninformed 

rural electorate could cause short term concerns. Political mandates 

can easily shift and legislative tailwinds can quickly change to 

headwinds. Mongolia’s lack of a domestic consumer base is also a 

concern as it forces reliance on their largest trading partner, China. 

While Chinese policy is shifting towards domestic consumption, 

incoming regulation particularly in the housing market is set to 

change the landscape of the construction sector which will impact 

base metals pricing and industrial commodities demand. Additionally, 

China’s continued dependence on European and North American 

consumers will continue to have run on affects for Mongolia as it 

relates to Chinese economic performance. 







MIBG LLC CORPORATE PROFILE 

MIBG LLC is a registered Broker, Dealer, and Underwriter with the 

Financial Regulatory Commission of Mongolia. The firm aims to 

serve the needs of clients, domestic and foreign, individual and 

institutional, in their brokerage and advisory needs. MIBG delivers 

uncompromising value, clear and concise advisory services, and 

transparent business practices that ensure our clients’ interests are 

protected at all times. 

MIBG LLC was established in 2008 as a member of the Financial 

Services Corporation (FSCo LLC), a comprehensive services 

provider engaged in Venture Capital, Insurance and Long Term 

Savings, Securities Trading, and Investment Banking. 

Enquiries regarding this and any research published by MIBG LLC 

should be directed to research@mibg.mn for all other enquiries 

please contact info@mibg.mn. 

IMPORTANT DISCLOSURES 

The opinions and/or views expressed in this research accurately 

reflect the personal views of the responsible analyst(s) and do not 

necessarily represent the official position of MIBG (Mongolian 

Investment Banking Group) LLC. The securities, products, projects, 

or private entities discussed in this document are presented for 

informational purposes only and do not constitute an offer, 

solicitation of an offer to purchase, hold, sell, invest or make any 

other financial decision. In making decisions, investors may rely on 

their own examinations of the parties and risks involved. 

The information contained in this report has been obtained from 

sources that are believed to be accurate and reliable but are not 

guaranteed by us and may be incomplete and subject to change 

without advance notice.

MIBG 2014 Economic Outlook - Feb 17 2014 (2)

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