Investors, speculators and businesses world-wide are trying to decipher all of the mixed signals and the sometimes seemingly irrational actions of Mongolia’s elected leader to help them to decide whether they should get into Mongolia, stay in Mongolia or get the heck out of Mongolia. It’s a tough call for sure. So for all of you, including me, who are seeking more than a reading of tea leaves or camel dung to give them insight into the land of Genghis’s Khan, I thought you might be interested in what the Mongolian Investment Banking Group LLC had to say in its report to the public dated March 18, 2013. (
http://www.mibg.mn
).
The report is entitled “Market Analysis. Weekly Mining and Political Analysis from MIBG in Ulaanbaatar”. The first section of this report, “Markets – Mongolia Country Update Q2’13 (Overview). It Among other things this “Country Update” reports:
Mongolia is getting some bad press, and rightfully so. On their own, the perceived political and legislative environments could deter the most seasoned investor. But together they have created a mass grave for projects that are in desperate need of foreign capital. Mongolia is cash poor, assets are for sale, foreigners are fleeting, and the perceived business environment continues to weaken. Naturally, this has shaped a negative outlook for coming quarters and has continued to depress Mongolian stocks. These perceptions have largely been driven by loose-lipped commentary, a lack of critical journalism, and compounding rhetoric that is designed to attract the protectionist vote in the run up to the election.
The next three months will be relatively similar to the past year. There will be a mix of negative and positive developments before June and we fully anticipate an array of colorful commentary coming from international sources. Key contractual, legislative, and market factors will determine short-term sentiment while those investors taking a longer view likely read the situation with less angst. Most committed investors that we have spoken to share our view that H2’13 will experience a powerful shift towards the pro-business agenda that has characterized the Democratic Party (DP) in the past. But there is still another quarter to get through before we can say that the situation has changed.
The list of developments that we are monitoring is long, their potential implications are numerous, and the challenge of understanding each move on the proverbial chessboard is not for the faint of heart. Oyu Tolgoi, the Strategic Foreign Investment Law (SFIL), and the Draft Minerals Law will remain on center stage. Full conclusion on the discussions between Rio and the GOM are unlikely unless the Government can position the outcome as a favorable political development. Similarly, the Draft Minerals Law that has already been postponed past June would not have provided any balanced incentive to pursue in the spring session. However, SFIL may prove different. We are expecting that the Strategic Foreign Investment Law will be changed and that it will only regulate foreign state owned companies. This will easily be the best news to come out of Mongolia to date in 2013 and it will re-open the doors for foreign investors hoping to get involved in the mining sector.
In the past, foreign media has overlooked many of the positive developments in Mongolia only to push damaging stories that are often inaccurate. We strongly believe that a shift in sentiment is around the corner, hinged on the progression of key catalysts and recognition of market developments. Developments that we believe have yet to be recognized include the GOM’s acknowledgement of the adverse effects caused by current legislative discussions, the strengthening battle against corruption that has reinforced the business environment, and the transparent approach that the President and Parliament have employed to introduce new legislation.
With a long list of potential catalysts, pending changes to SFIL, continuation of the discussions between Rio and the GOM this week, and a host of international events supporting Mongolia’s investment climate we are finally asking ourselves if Mongolia has reached the bottom. While negative and positive events remain on the horizon the extent to which they will move sentiment in either direction is uncertain. What can be said is that we are seeing supportive shifts within the political, economic, and legislative environments. Combine this view with a weakened economy, growing acknowledgement of the importance that foreign investment plays in the country, and a nearing exit from the two year election cycle in June and you will have a basic understanding of our rationale. Needless to say, we are confident that the forward trajectory is upward and that Mongolia has started to regain some of its lost attractiveness.
Regarding whether we have hit bottom, MIBG will be releasing our full Mongolia Country Update Q2’13 including detailed discussions and analysis on March 22nd. This will include our convictions on Mongolian equities, domestic and foreign listed, as well as a full explanation of where we believe the market sits. If any of our readers would like to discuss the possibility of accessing our research please contact the MIBG research team at research@mibg.mn .”
Another section of this Update captioned, “Legal – SFIL to Only Regulate State Owned Enterprises.” Reports:
“Bravo, Government of Mongolia” – one of the headlines in Ulaanbaatar’s daily newspapers this morning.
Over the weekend the Prime Minister of Mongolia, Mr. Altankhuyag, announced that the GOM has prepared an amendment to the Strategic Foreign Investment Law that regulates foreign investment into strategic sectors. According to the Prime Ministers announcement the proposed foreign investment restrictions will no longer affect private sector entities and will only regulate foreign state owned enterprises. As it was reported, foreign state owned enterprises will need to obtain parliamentary approval if it intends to acquire more than 49% of an entity that operates in Mongolia’s strategically important sectors. The current law defines the strategically important sectors as: Mining, Finance, and Communications.
The Bank of Mongolia recently reported that YoY foreign direct investment has dropped 41%. This decline has been largely blamed on the introduction of the new law which was approved in May of 2012. The introduction was a knee-jerk reaction to the bid by state owned Aluminum Corporation of China Limited (Chalco) to acquire a controlling stake in SouthGobi Resources.
The pending changes will be welcomed news for investors and should reinvigorate foreign capital into the market. While the Draft Minerals Law is still an obvious concern we believe that this announcement should be seen as a strengthening commitment to foreign investors from the Government.”
So foreign investors take heart, and don’t give up on Mongolia yet. While some of the color has gone out of Mongolia’s bloom, the coming months may see a new crop of seedlings grow and prosper for those who have been intrepid enough to plant and nurture new seeds in Mongolia’s fertile soil.
Hawkeye in China
– Lex Smith