Mongolia at a crossroad as boom brings challenges

Mongolia at a crossroad as boom brings challenges

Workers covered from head to toe check in early at the construction sites in downtown Ulan Bator, just a few blocks away from Mongolia’s parliament. Cranes still work unceasingly all day long as construction companies make the most out of unexpectedly “mild” winter weeks — temperatures have rarely fallen below -20 degrees Celsius so far.

Dozens of office buildings are being erected at quick pace, while residential developments featuring fancy colours and rococo terraces are rising just across the road.

Ulan Bator’s construction boom is adding new momentum to the country’s economic growth. The government is flooding the economy with cheap mortgages to weather a slowdown in the mining sector, and construction entrepreneurs are rubbing their hands with glee.

But Mongolia’s winter will finally kick in for real and temperatures drop below -30C — enough to put on hold any further development till spring comes. When the last gate is locked, eyes will turn to Mongolia’s economic gem, the mining industry, looking for answers.

Mongolia’s vast, largely untapped deposits of gold, copper, coal and uranium might be worth as much as US$1.3 trillion. In a country of only 2.8 million people, that represents a huge opportunity.

“By 2030, Mongolia will become one of the three richest countries in Asia by GDP per capita after Singapore and Japan,” Alisher Ali, founder of the investment group Silk Road Finance, said earlier this year in an interview.

Piggybacking the rapid development of the mining industry in the last decade, the economy has already leapt forward, standing out as the world’s fastest-growing economy in 2011. But after a few years of solid growth, the country has come to a crossroad. Investments for almost $7-billion Oyu Tolgoi (OT) copper and gold mine, the country’s largest mining project, hang in the balance for an ongoing dispute between Rio Tinto and the government, which has a 34% stake in the mine, over the costs of a planned expansion.

“When it comes to OT, Rio Tinto and the government are sitting in the same boat,” said Lakshmi Boojoo, director of the Economic Policy and Competitiveness Research Centre. “Each side is now trying to strike the best deal, but eventually they will find an agreement.”

Most of the observers share her optimism. But it will likely take months before the expansion project gets back on track as Rio Tinto is focusing on a global cost-cutting programme, and bleak global commodity market conditions add in another potential cause of delay. For an economy worth just over $10 billion and largely dependent on foreign investments, the current impasse on OT weights down the whole economy.

Beyond the uncertainties with OT, investor sentiment has been flagging lately due to restrictions rushed in by the previous government in May 2012 and only recently amended.

“That law froze many deals,” said Sereeter Javkhlanbaatar, the head of the Invest Mongolia Agency.

The new investment rules approved in October 2013 gave rise to new optimism in the Ulan Bator business community, but it will take time before any big deals enter the pipeline; foreign investment inflows were down 46.8% from January to August this year.

The cheap credit made available by the government is keeping the economy afloat, with a 2013 growth rate estimated at around 11%. Still, the policy is raising a few eyebrows.

“The rapid credit growth observed in recent months is not sustainable and, unless reined in, risks leading to sustained pressures on macro stability,” the IMF warned in its latest country assessment.

The IMF is now expecting the economy to keep growing at double-digit pace in 2014, but then it sees growth slowing down to 5.8% in 2015 and 3.6% in 2016 — well below the government’s official forecasts.

As authorities battle to get the economy back on track, they also face the increasing challenges brought on by the quick economic development of recent years.

The capital Ulan Bator is growing increasingly dysfunctional. Over the last decade, thousands of people flocked to the city looking for job opportunities and the population doubled to around 1.5 million people. Such a steep increase has posed infrastructure challenges.

Half of Ulan Bator’s citizens live in gers (Mongolian traditional tents) or shacks, lacking access to any basic service. Commuters get stuck in never-ending traffic jams, decade-old power plants and district heating networks struggle to catch up with the city’s growing needs, and pollution is running out of control. In a country where people used to worship its limitless blue sky, Ulan Bator today is the world’s second most polluted city.

Corruption is mounting too. “A few years ago we had the problem that there was no money. Now there is too much money, and everybody wants a share of it,” said one citizen.

The current government has committed to seriously tackling corruption and recent analyses have tracked some improvement, although politics itself features as a major catalyst for corruption.

Cheap credit will not be able to fix all that. Not will OT or any other silver bullet. Ultimately, bad or good governance will determine whether all that wealth lying beneath the ground is a blessing or a curse.

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