Magazine issues » September 2016

INSIDE VIEW: A protest vote the world should cheer

MongolOn June 29, Mongolia voted overwhelmingly to return the People’s Party to power, an election that could bring a revival in foreign investment in the mining sector, says Lee Cashell of Asia Pacific Investment Partners. Amid the chaos unfurled by Brexit, one country’s mass protest vote was greeted with relief by investors. Three million Mongolians resoundingly opted to end an era of policies that contributed to plummeting foreign direct investment and economic growth. After clinching a landslide 85% majority in the election on June 29, the Mongolian People’s Party hoped to reinvigorate the economy through a more permissive operating environment and friendlier attitudes toward investors. Landlocked between Russia and China, Mongolia’s vast natural resources have stood neglected in recent years as disputes halted Rio Tinto’s $5 billion investment plans for the Oyu Tolgoi mine, one of the world’s largest copper reserves. With little to buffer this commodity-dependent nation, a people who only a few years ago sat atop the fastest-growing economy watched their livelihoods go off a cliff. DAMAGE LIMITATION
In the run-up to the election, outgoing prime minister Chimed Saikhanbileg attempted to repair the damage, restarting Rio Tinto’s mining concession along with Tavan Tolgoi, one of the largest untapped coking and thermal coal deposits. Then, weeks before voters took to the polls, the government made a last-minute deal to pay Canada’s Khan Resources $70 million in compensation for its revoked uranium licence. But it was too late for the Democratic Party. The combination of the commodities downturn and perceived hostility toward foreign investors has resulted in economic growth shrinking from 17.3% five years ago to 2.3%. The dearth of opportunity has triggered unemployment, inflation and currency devaluation. The investment world’s darling a few years ago had became a punchline for bankers who once jetted in from Hong Kong, Singapore and London to compete for project finance deals. But since the election, there’s a palpable sense of optimism on the streets of the capital, Ulaanbaatar. A proud nation with a heritage dating to the times of Ghenghis Khan and the Mongol Empire, most here understand the need for technical know-how from the thousands of expats that foreign companies send to manage mines, which are the principle drivers of the Mongolian economy. The people’s desperation for change underpinned a 72% voter turnout, no mean feat for this nation of traditionally rugged, individualist nomads. One herder reportedly trekked for seven days to reach his nearest polling station in the Gobi desert, accompanied by 2,000 sheep, goats and horses. As a nation, voters handed a stunning 65 out of 76 seats to the Mongolian People’s Party (including 13 new female MPs). This absolute majority sets the stage for fast action in parliament. EXPERIENCED BENCH
While the Democratic Party was genuinely thought of as well meaning, it lacked the experience of running a country. The People’s Party, which has governed outright or through coalitions from 2000 to 2012, has no such problem.  Among its top ranks, chairman Miyegombyn Enkhbold – a former prime minister with a Master’s degree in economics – has been appointed speaker of the State Great Khural, Mongolia’s parliament. Potential candidates for prime minister include J Erdenebat, a former finance minister, and former deputy prime minister U Khurelsukh. The rule of the People’s Party won’t be without its challenges – foremost of which will be a perceived lack of transparency. Possessing an overwhelming parliamentary majority, the party will be in a position to pass legislation without meaningful opposition or public discussion. This opacity could spell trouble down the road for a ruling party in a country whose population is weary from tales of government corruption and mismanagement. GOLD LINING
But for now, the mood is buoyant. Shares of Turqoise Hill Resources, the Rio Tinto unit handling the Oyu Tolgoi project, climbed 4% on the Toronto Stock Exchange in the week after the election. The copper mine is expected to contribute more than 30% of Mongolia’s GDP once fully operational in 2019. While copper is Mongolia’s biggest export, it was overtaken between 2010 and 2013 by coking coal. Additionally, a total $1 billion comes from zinc concentrates, crude retail oils and, most significantly, gold. And there is another commodity that could prove precious. Although most metals prices, particularly copper, have remained in the doldrums, the Brexit referendum has delivered Mongolia something of a silver – or gold – lining.  Bullion prices have rocketed since Britain’s June 23 vote to leave the European Union, extending the best two-quarter gain since 2007, with a 26% rally in the first half of this year. Even before this latest surge, export revenue from gold products more than tripled in three years to $420 million in 2015. Along with over 37 million tonnes (81 billion pounds) of copper, the Oyu Tolgoi mine in the southern Gobi desert is estimated to contain more than 1,431 tonnes (46 million ounces) of gold.  There may be much more that is yet to be found. Only 30% of the country’s surface area so far has been explored. Gold is another reason for optimism that the bad times are behind us – at least in Mongolia. Lee Cashell is the founder and chief executive of Asia Pacific Investment Partners, an investment company based in Mongolia ©2016 funds global asia

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