New president clouds Mongolia’s investment climate

The election of Mongolia’s new protectionist president increases corruption and regulatory risks for foreign investment in the Mongolian steppe.

 

Election outcome
Khaltmaa Battulga of the Democratic Party (D.P.) became the president of Mongolia after winning the second round of elections on 8 July. The billionaire president received more than 50 per cent of the vote, securing a win against his rival, Miyeegombyn Enkhbold of the ruling Mongolian People’s Party (MPP). Battulga’s victory followed his lead over Enkhbold and Sainkhuu Ganbaatar of the Mongolian People’s Revolutionary Party in the first round of the presidential election on 26 June.

Between the first and second round of elections, the number of blank ballots grew by five times due to growing frustrations with the D.P. and MPP

Another distinctive feature of this election, according to independent electoral observer Organization for Security and Co-operation in Europe, is that 8 per cent of the population had cast a blank ballot. This was a new option inserted into election laws in 2015 to allow voters to prevent candidates from reaching the minimum requirement of 50 per cent of votes as a way of rejecting all available candidates. Between the first and second round of elections, the number of blank ballots grew by five times due to growing frustrations with the D.P. and MPP.

Provinces, or aimags, that recorded a significant number of blank votes were in the southern Gobi region, including Dundgovi and Umnugovi. This region was at the heart of the country’s 2010-11 mining boom which was badly hit by the country’s economic downturn due to a fall in commodity prices, when a large proportion of its residents, many of whom worked in mines, lost their jobs.

ASSESSMENT

Battulga’s election has raised doubts whether the incremental changes made by the MPP-led government in the past year to improve the overall business climate can be sustained. One of the most significant measures introduced by the previous administration was the acceptance of a USD5.5 billion bailout by the International Monetary Fund (IMF) in exchange for the implementation of a series of highly unpopular austerity cuts. These included cutting civil service salaries by up to 60 per cent, trimming social service payments and increasing taxes on tobacco, petrol, and alcohol.

Since 2013 the resource-rich country has experienced persistent economic weakness amid a global slump in commodity prices. Such macroeconomic trends, coupled with the government’s nationalist resource sentiment, weak institutional framework and endemic corruption, contributed to a flight of foreign investments from Mongolia. From 2011 to 2016 foreign direct investment declined by 85 per cent, according to the U.S. State Department. Meanwhile, sovereign debt grew to USD23 billion in 2016.

A Battulga presidency is widely viewed as emulating the D.P.-led government… marred by frequent revisions to policies and an emphasis on resource nationalism

To shore up its finances, the government announced in May that it was opening a fifth of its territory for mining exploration, reflecting the fact that the extractives sector comprises about a quarter of its GDP and 80 per cent of exports. It has also acceded to an IMF request to repeal a banking law requiring foreign companies to process their sales revenues from projects in the country through Mongolian banks.

Foreign investors regarded these steps as positive indicators for reforming Mongolia’s legislative and regulatory environment. However, a Battulga presidency is widely viewed as emulating the D.P.-led government between 2012 and 2016, which was marred by frequent revisions to policies and an emphasis on resource nationalism. This had resulted in numerous high-profile disputes with international mining companies, including Anglo-Australian miner Rio Tinto, over the USD5.4 billion Oyu Tolgoi copper-gold mine.

Economic outlook

Differences in policy between the presidency and the legislature increase the probability of political conflict over the coming few years. The discrepancies are likely to focus on legislative and judicial issues over the mining sector and foreign policy, creating an environment of political uncertainty for investors.

IMF aid was one of the issues which dominated the presidential election. In an interview with Bloomberg news agency, Battulga said that while he is not seeking to renege on the IMF deal, he believes Mongolia no longer needs to abide by its strictures. As a result, he has pledged to reinstate the requirement decreeing foreign companies operating in the country must bank with local financial institutions. The measure was rejected by the IMF in May, which in turn led to a withholding of bailout payments to the country. The D.P. had portrayed this rescindment as the MPP bowing to external pressure.

The new president argued that the country should gain greater control of its natural resources and the mining sector

A2 assesses, however, that even if Battulga were to lobby for the reversal of the banking measure it is unlikely to occur. Mongolia is a parliamentary democracy and the legislature is firmly under the control of the MPP, which strongly supports the IMF package. Nevertheless, the latest election result suggests mounting public frustration towards MPP’s austere policies, a sentiment Battulga capitalised on during his campaign.

The new president argued that the country should gain greater control of its natural resources and the mining sector. His sharpest criticisms were reserved for Turquoise Hill Resources (formerly known as Ivanhoe Mines), majority owned by Rio Tinto. The company controls 66 per cent of the Oyu Tolgoi mine, one of the world’s largest undeveloped copper mines, while the Mongolian government owns the rest of the shares. Both sides were locked in several disputes between 2012 and 2015 ranging from unpaid taxes to a renegotiation of ownership terms.

Battulga’s nationalist sentiments, though not new, continue to be well-received by segments of the population…

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