IN ORDER TO ESCAPE ECONOMIC CRISIS MONGOLIA SHOULD BOOST IMPROVEMENT OF BUSINESS CLIMATE, DEVELOP MAJOR DEPOSITS, ATTRACT FDI, SUPPORT MINING EXPORTS AND DOMESTIC INVESTMENT, FORMER SENIOR DEVELOPMENT OFFICIAL SAYS Tuesday, August 6,2013 Excerpts from an interview to major Mongolian news portal news.mn today by ex-Chairman of predecessor of the Ministry of Economic Development, National Development and Innovation Committee(NDIC), currently Professor of School of Economics of National University of Mongolia, Dr.Ch.Khashchuluun: ON ACHIEVEMENTS OF NDIC AND PREVIOUS GOVERNMENT For the first time medium term 2012-2016 development policy and investment plan were approved by the Government, own development policy of Mongolia was developed by Mongolians themselves Brand new institution for development financing – current Development Bank of Mongolia was established Concession system for Public and Private Partnership(PPP) established economic crisis of 2008-2009 was overcome within one year growth increased by - 1.6 % to 6.4% in 2010 and then reached world leading 17.5% and 4 billion USD of FDI was attracted, exports increased twice, foundation for boost in growth of Mongolian economy was laid CURRENT PRESSING ISSUES state participation and regulation proper for market economy is needed now more than ever. Mongolian private sector rapidly grew, started making investments worth several hundred million dollars such as urban planning, infrastructure, industrial and power projects. The issue now is not some state inspector pressuring a some vendor in the marketplace but how properly state is able to regulate major projects of national development significance being implemented by private sector Old style bureaucracy, state pressure, decisions with political features without any backing of research and foundation have caused dangers of large time and monetary losses to domestic and foreign investors, stop their work and punish their initiatives For example, project that were being implemented by private sector such as Power Plant No 5 and TT rail road have been changed and brought under state control to be paid with taxpayers money. Only these two projects have closed off inflows of 2 billion USD for productive development that were ready to come in into the economy. Secondly, it is required for state to support more private sector, guarantee it and reduce risk for major investment with industrial and infrastructure significance Since our financial market is small, any major productive development is directly connected with world financial market. If decisions of previous Government are changed everytime Government changes, private investment will stop coming in. Only in 2012 80 per cent of all investment done in Mongolia was financed by private sector including 66 per cent financed by FDI. If business environment deteriorates and domestic and foreign investors are pushed away we will be left only with 16 per cent of total investment financed by budget. Therefore, business environment is indeed not a small issue Question comes down to will Mongolia develop or not. If state policy is efficient, state and private partnership is flowing properly, private investment in national productive development will increase, thousands of jobs will be established, poverty will be reduced, budget funds will be saved and country’s development boosted. Alternately, current feature of Mongolia is that the country cannot develop by only state money and state decisions. CHINGGHIS BONDS Bonds have an advantage of completely different conditions of financing, relatively free from political interference, more speedy, flexible mechanism of development financing compared to prolonged, excessively politicized budget financing. When bonds are issued through DBM there is supervision and management of professional investment team. Chingghis bonds are positive work, time for those has come as Mongolia left development aid and started developing according to its own policy. However, there are negative sides to the implementation. Since productive development starts in spring in Mongolia borrowing money in fall is somewhat inefficient. It would have been more efficient if monies were raised in spring when projects are thoroughly prepared with policy, strategy and business plans prepared. When presented with development options, country has a options of budget financing(most cheap), public and private partnership, DBM or sovereign bonds(most expensive), or private investment supported by policy. It is viewed that budget financing is proper for project with low profit yield, DBM financing for projects with average profit yield and most profitable projects to be financed with PPP or foreign and domestic private investment. Currently because of timing considerations it appears that speediness of bonds financing is relied upon mostly. However, in principle, it was correct to issue bonds for a rapidly developing country as Mongolia. For industrial park projects such as Sainshand and Darkhan, Baganuur it is more efficient for state to build infrastructure for the parks and let private sector to implement commercial industrial projects. Regarding rail, I think it is inefficient decision to not let private sector to continue its work and without any need for state to stop , take it over and spend 400 billion tugrug. It would have been possible for those funds support metallurgical projects, crude processing, copper smelting value-added industrial projects. Decline in FDI is directly related to SEFIL. Capacity of Mongolian economy is small and FDI primarily goes into minerals sector which produces mineral products such as coal, copper, iron ore and gold. 85 per cent of FDI goes into this sector. Yet opportunity to invest into minerals sector was substantially limited, on top ,stability agreements of major projects established previously were criticized in whole in populist manner. As a result, FDI flows that were reaching 3-4 billions USD in 2011-2012 have declined by about 60 per cent in a matter of months. On top of already unfavorable conditions forming in the world market, foreign investment environment in our country dramatically deteriorated and not only foreign but even domestic investors had to stop their operations. MONGOLIAN MINING SECTOR Copper, gold and coal are commodities which are not only found in Mongolia but plenty of countries are ready to supply it to the world market. If Mongolia will exit from world commodity market by pushing away foreign investors, Indonesia, Russia and Australia all would be happy to get these monies and start supplying coal and copper. For example, only Russia is boosting rail works to supply products from Elegest major coal deposit in Tuva proposing to transport through Mongolia. Major copper mine Mikheevsky is being commissioned with participation of Komatsu, Atlas Copco, Pettibone, Metso Minerals and Outotec. In Kazakhtsan major copper project Bozshakel is being started in Pavlodar province. Products from all these projects are director competitors of Mongolian products in the world market. Hence if we will keep on pushing away investors and do not form environment to them work profitably, in the end we will be left without investment and a market to export to. In this case, possibility to accumulate budget revenues will decline, it will be impossible to do productive development and pay back monies raised from international market. We love to talk about exporting value-added mineral products but we forget that we need at least initial capital to establish those processing plants. Yet those funds will come in from exports from raw mineral commodities. In the end because of populism there is danger of Mongolia being left without mineral resources market, and without monies to establish those processing plants. Most correct policy is to put major deposits into economic production and based on those revenues develop processing plants and we have only started the initial project – OT and managed to export only 25 million tons of coal which is very little in the world terms. In comparison, Australia exported in 2011 148 million tons of thermal coal and 218 million tons of metallurgical coal in total 366 million tons of coal to China, Japan and Korea receiving revenues of over 40 billion dollars. Indonesia exported 316 million tons while Russia exported 122 million tons of coal. All these suppliers are wary of Mongolian coal exports and would, I guess, prefer Mongolia to be as it is , without infrastructure and rail road. , I view today’s key priority is to place significance on Mongolia’s own interests and own development , not waste time on losing time on things that make little sense such as introducing Russian rail standards, ignore populists and develop according to own policy mineral sector in particular its export infrastructure and boost budget revenues. Otherwise, we will have no other sources to compensate for lost revenues from mining sector. It is necessary to improve business environment to attract investment, cooperate closely with investors, attract them widely, provide guarantees , fulfill previously established agreements and prepare thoroughly for new agreements. First and foremost, there is issue of TT deposit.10 years have passed without any progress at Asgat silver project and other strategic deposits. If those deposits are put into production, Mongolia will have capital for railroads, infrastructure and modern technology. However, if we push away investors at the start of development race, we will come in very late, forget about leading others by development. I am saying that currently, Mongolian mining has only started from starting line. Whether we want it or not, mining is Mongolia’s competitive advantage given its market location, land locked geography, its own resources and skills of its human resources. Mining is inevitable development gate for the county. Mining produces 90 per cent or 3 billion USD of exports. If those exports are stopped, we have no capacity of supplying world market with 3 billion dollar worth of meat, dairy, wool and cashmere and there is no such market to absorb those exports. Even if we develop industry in the beginning it will based on mineral products again. There is no other sector in our country in coming few years that can accumulate funds for the country as mining. Developing mining and using revenues from fund infrastructure, industry and new sectors is the only development road for the moment. MONGOLIAN COAL Besides copper, coal is the only real opportunity for Mongolia to increase exports and increase value-added. Competitiveness of Mongolian coal becomes critically important. Mongolia is occupying only 1.5 per cent of world coal market while countries such as Australia, Russia and Indonesia occupy together 63 per cent of the market with exports of 766 million tons. Mongolia should strive to increase its share to for example at least 5 per cent while obviously competitors will not be waiting. Low cost transportation route and exit to market to supply Mongolian coal is critically important. Meanwhile, Russia is preparing to invest 6 billion USD to build 410 km railroad from Elegest mine with 14.2 billion tons of reserves to supply the coal to Chinese market. Perhaps Russian major investors such as Baisarov and Mechel who invested in this Tuva coal project, would be would be happy to take over Mongolian share in the market. Yet largest Mongolian coal mine which is only 280 km away from the market is losing its market share every single day. Since we have not built a railroad and coal transportation expenses have ever increased, coal exports from TT have stalled and unable to reach past year’s level forget about increasing. Recently it has been acknowledged that it is impossible to transport TT coal by large trucks. Yet how else coal can be transported when railroad is not built? . Government way back in 2008 has understood important of export railroad and made decision to have TT coal export railroad with 30Mtpa capacity to be built by private investment without any state funding. Yet this decision has been changed. The railroad has not been built even today, substantial time and budget revenues have been lost.If works on this railroad would have not been disrupted, by 2011 Mongolia would have had export railroad and exported not 25 million tons but 50-60 million tons of coal with planned budget revenues of 1.4 trillion tugrug, perhaps more than 1.5 billion USD proceeds from Chinggis bonds. Coal price on world market constantly fluctuate therefore when prices are depressed only products that have low transportation cost and competitive prices are sold in the market. At the moment, on the opposite, Mongolian coal has become more expensive and is being pushed away from the market. As long as ETT has no infrastructure to export products such as railroad it is problematic to normally operate forget about making profits. Profitability of this project can be discussed after infrastructure issue and coal processing plant issue are resolved. As for Chalco contract, the key is that the funds raised were spent not on company and infrastructure development but on social measures. CURRENT ECONOMIC CONDITION Biggest mistake of previous Government was perhaps not having TT export railroad built on schedule. However, if Coalition Government has not established Oyu Tolgoi Investment Agreement today there would no real conditions for increase in copper and gold exports. OT productive development and expected substantial increase in copper exports in 2nd half of this year are the only positive news in the current economy. In a classic sense, our economy is not in crisis with growth likely to be 7.2% in first quarter and about 12 per cent in first half of the year. Those are not bad indicators. The difficulty is not in the real economy but in business environment and current condition of world market. In 2008-2012 budget revenues and expenditures increased twice, money supplied 2. 5 times, official foreign exchange reserves increased three times, credit increased 2.7 times, GDP increased twice. Economy rapidly expanded following growth in mineral sector, FDI and financial capacity of the budget. However, all this substantial growth was financed by large investment. In the past years ratio of investment/GDP was among 55-64% and Mongolia was one of the best countries in the world by this ratio. Only in 2013 total investment in Mongolia increased from 2.1 trillion tugrug to 8.5 trillion tugrug and increased 4 times from 2009 and 7 times from 2007. In comparison, this year because of business instability, FDI and PPP domestic investment declined, budget revenues from export fell short and the deficit is being compensated by DBM and sovereign bonds. However, as this source has its own limitations, growth of this source( in another words, issuing additional bonds) is unlikely to compensate for decline of other sources. It is needed to increase investment, otherwise even though there will economic growth this year, in the future source of growth will become scarce, investment will stall and in danger of declining, economic growth will slow down, real economic expansion will stop and therefore it is will be impossible for Mongolia to boost development and improve living standards of its people in real terms. In this case, there will be no other choice but to tighten monetary policy by reducing money supply, increase policy rate, reduce budget expenditures and budget deficit. That would mean that even though real economy will grow, conditions will form similar to crisis of 2008-2009. In order to escape this scenario, as a priority, measures should be organized such as investment and business environment should improved, development of major deposits should be boosted, program to support exports urgently implemented, favorable conditions for investment formed, mining, main taxpayer and export revenues source, supported, foreign investment attracted and domestic investment supported. Therefore in order to get out of financial economic difficulty which is to emerge, Government should boost efforts in the 2nd half of this year. INFLATION Current inflation is 8.8% and real growth of 12% is not bad but real peak of inflation in our cyclical economy is towards the year end. In another words, although food prices stop growing in current summer and fall season, from fall tuition, power and electricity increase, further new year buying starts as well as volatility of exchange rate because of payment of stock dividends. In this case, there is potential for oversupply of tugrug and policy weakness to display itself through exchange rate depression and rise in real estate prices.In this case, adjusting monetary policy can be done such as increasing policy rate and for Government to issue tugrug bonds to pull tugrug from the market and reduce policy financing to enterprises. OT EXPANSION FINANCING I don’t think that OT exports can yet compensate for insufficient investment and declined export revenues. Just as Erdenet carried Mongolian economy for past 40 years, it is estimated that OT will carry it for coming 40 years. Not only one of the largest mine and plant complexes in the world is built at OT but the project will form 20 per cent of Mongolian economy on its own and during project’s duration revenues larger 2 times of our GDP or 34 billion USD are estimated with great economic impact. 80 percent of OT project value are underground and both underground and open pit mine are necessary to give total yield from the project. Underground mine requires very advanced technology and substantial expenses and for initial start 4 billion USD is required. Therefore, this large investment is to be done at critical time for our economy. This is not only thinking about our future revenues but 4 billion foreign investment at times of substantial decline of foreign investment will be a vote of confidence from world market in our economy. This is opportunity of great significance when the country is losing considerable confidence of investors to attract back major investment, direct inflows of dollars, reverse depreciation of tugrug. Therefore it is important to not waste time with empty politicization, make the investment and make the decision to expand the mine and make a step forward. EXCHANGE RATE It appears that currently short term measure such as exchange rate interventions are being done . However, in order to resolve fundamental issue it is necessary to implement medium term measures such as increase exports and attract FDI while implementing macroeconomic stability programs, improving balance of payments and reducing budget expenditures and deficit.
Posted on: Tue, 06 Aug 2013 16:45:22 +0000
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