We look into what you need to know about Mongolia in terms of major trends in political, economic and investment climate and what you should expect in coming months. (This is excerpt on Mongolia from Indo Pacific Forecast H2 2022 by BowerGroupAsia).
What You Need To Know
Mongolia has yet to benefit from higher-than-average commodities prices. The country is still unable to ship commodities in large volumes due to COVID-19 border restrictions in China.
Government spending is shifting from COVID assistance to austerity measures. Several state enterprises are expected to be privatized.
Soaring inflation has led to a downshift in Mongolia’s growth prospects and has prompted a wave of anti-inflation and anti-corruption protests in Ulaanbaatar.
Almost all the pandemic restrictions that had been in place since 2020 have been removed. New restrictions and lockdowns are unlikely even if infections surge during colder months.
The economic impacts of COVID have abated and borders have opened, but the war in Ukraine continues to hamper Mongolia’s economic recovery.
The government has avoided taking sides in the Ukraine war and is more concerned about keeping its economy stable due to its dependency on Russian energy, food and medicine imports.
On The Horizon
General elections are not expected until mid-2024. The ruling party maintains a supermajority in Parliament.
Mongolia’s political stability has afforded the prime minister more opportunities to follow through on his liberalization and privatization agendas. Looming economic and financial hardships have made it necessary to introduce painful structural reforms, but nationalist and conservative politicians have challenged this.
Private banks and state utility and telecommunications companies are expected to be offered publicly on the stock exchange by late 2022 or early 2023.
A significant commodity export boom is expected in late 2022 or early 2023 with new coal rail networks to China coming online and increased copper production from Rio Tinto’s underground mine in southern Mongolia.
Political Climate
Youth Protest Amid High Inflation and Corruption Scandal
Youth and student protests against inflation in Ulaanbaatar this April have pressed the government to curb surging prices.
Peaceful protesters have also demanded accountability for high-ranking politicians who have been implicated in the state bank’s corrupt lending practices over the past decade.
Prime Minster Oyun-Erdene Luvsannamsrai has responded quickly by introducing austerity measures and cutting administrative expenses. The government has struck a deal with key food producers and fuel importers to temporarily cap prices in exchange for subsidies and tariff relief.
Combatting corruption and inflation has become a key test for Oyun-Erdene's government while the risk of social unrest still exists in the country. A corruption investigation has ensnared several lawmakers and former senior officials who oversaw the state bank, and a chairman and shareholder of the major commercial bank has been arrested.
Opposition Attempts To Rally Behind Ex-President
The main opposition Democratic Party selected ex-President Khaltmaagiin Battulga as its new chairman. A centrist wing in his party, led by former President Elbegdorj Tsakhia, has challenged Battulga’s election, and his official filing with the Supreme Court has been stalled.
Although he was barred from running again in the 2021 presidential elections, conservative Battulga is one of the most popular figures in the country. Deeply divided internally, the Democratic Party has been unable to challenge the left-leaning, ruling Mongolian People’s Party (MPP).
MPP Eyes Political Reforms
The MPP, which controls a supermajority in Parliament, is considering expanding Parliament from 76 to 100 members to allow more lawmakers to serve in the Cabinet. The number was capped at four in 2019 through constitutional amendments.
The new constitutional changes will require a wider national political consensus. MPP may yield to the opposition’s demand to replace the current winner-takes-all electoral system with a proportional-representation system. If approved, the new electoral rules could help the opposition and smaller parties enter Parliament after the 2024 elections. A campaign finance rule that would make donations more open is also on the agenda.
Macroeconomic Climate
Inflation Skyrockets and Tugrik Drops
Inflation has skyrocketed to 14 percent per year, and foreign currency reserves have dropped to $3.6 billion. The tugrik, Mongolia’s national currency, has dropped by almost 10 percent and will likely continue to weaken as the U.S. dollar strengthens. Capital flight from the tugrik to dollars has intensified amid the Ukraine war.
The central bank has hiked interest rates from 6 to 9 percent, restricted foreign currency exchanges and limited foreign cash exports. The bank hopes the tugrik will recover once coal and copper shipments to China resume, generating much-needed, dollar-denominated sales later in the year.
The government almost halved its growth forecast in its revised 2022 budget in May.
New Rail Link To Boost Commodity Exports While Ukraine War Disrupts Economy
After more than two years of border disruptions with China, Mongolian raw commodity exports are seeing some signs of recovery. Imports from and through China have been delayed and shipping costs have skyrocketed, adding inflationary pressure.
The construction of the new railway networks linking coal mines in southern Mongolia with northern China is expected to be completed in the second half of 2022.
Switching commodity shipments from trucks to trains will boost Mongolia’s commodity exports while addressing Chinese border officials’ concerns about COVID infections from physical contact.
Upgrading roads and rail and integrating them with China will help Mongolia lower the cost of cargo shipments transiting China and reduce spending on imported goods. However, key economic risks remain if border restrictions with China persist throughout the year. For example, coal exports dropped by 40 percent earlier this year.
The Ukraine war has disrupted Mongolia’s import-dependent economy.
Food, drug and fuel imports from Russia and other European countries have been delayed and prices have increased. Direct flights to Germany that fly over Russia have been rerouted through Central Asia and Turkey, adding costs.
Investment Environment
Mining Production To Boost
Rio Tinto reached an agreement with the government in January to move the joint Oyu Tolgoi copper and gold project forward and resolve outstanding issues. The agreement is key for Mongolia to significantly increase its copper exports to China in 2023 and attract more investment.
Long-awaited revisions of the mineral law and an end to restrictions on new exploration licenses are expected by the end of 2022. The government is considering open and competitive tenders for exploration licenses.
State Companies To Be Partially Privatized
Oyun-Erdene reinstated Mongolia’s foreign investment promotion agency and proposed bold measures to liberalize electricity tariffs and privatize 34 percent of stakes in state assets in aviation (MIAT Mongolian Airlines), telecommunications and financial services (Mongolian Stock Exchange).
A new free trade zone at the new international airport 30 miles south of Ulaanbaatar is looking to attract casinos and technology innovation.
Shares of Mongolia’s five largest domestic banks are to be offered to the public for the first time on the soon-to-be partially privatized Mongolian Stock Exchange.
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