sales of 30 – 40 million t by 2014 as
predicted, Mongolia will be lucky to
repeat last year’s volume of
18.3 million t. Coal, the country’s main
revenue earner, contributed just
US$ 1.1 billion in export earnings last
year, down from US$ 1.9 billion in 2012.
In its latest annual assessment issued
in March 2014, the International
Monetary Fund (IMF) blamed the
government for dampening Mongolia’s
once-bright outlook. The fund also
sharply reduced its forecast for the
country’s economic growth over the
next five years, warning that the
country is at “serious risk” of suffering
a balance of payment crisis, due to the
sharp decline in foreign direct
investment.
“External shocks and the
continuation of current policies could
expose vulnerabilities in the banking
system, exacerbating a negative shock
to growth and financial stability,” the
IMF said.
It was just four years ago that the
IMF issued the following glowing
assessment: “Mongolia has a bright
economic future. Its vast mineral
deposits offer the potential to create
strong and sustained growth, lasting
economic prosperity, and a substantial
reduction in poverty.”
The World Bank was just as hopeful
when it upgraded Mongolia’s status
from a poor economy with a GDP per
capita of US$ 528 in 2001 to that of a
lower middle-earner with an income of
US$ 2508 in 2011. Among investment
bankers and traders, there was
widespread talk of the Mongolian
economy growing at rates of 20%/year.
Mongolia’s downfall
Mongolia’s downfall began shortly after
its economy grew by a record 17.5% in
2011. This was Mongolia’s brief golden
moment, as coal prices soared on the
world markets, its exports boomed and
foreign bankers fought each other to
lend money and expertise to Asia’s next
tiger economy.
With so much power and money at
stake, the simmering tensions between
the country’s competing political
factions burst into open fights in 2012,
leading the government to take two
unprecedented actions that have
seriously damaged the country’s
business environment.
In April 2012, Tsakhia Elbegdorj, the
current president, ordered the arrest
and trial of his predecessor and
opposition leader, Nambaryn Enkhbayar.
To no one’s surprise, he was quickly
found guilty of corruption and abuse of
power and sentenced to four years
imprisonment.
Foreign investors barely had time to
react to this political bombshell when
the government intervened to stop
Chinese state-owned aluminium giant,
Chalco, acquiring the majority stake in
one of the country’s major coal mining
firms for US$ 926 million. According to
SouthGobi Resources Ltd, the
Mineral Resources Authority of
Mongolia also suspended its licences to
explore and mine the Ovoot Tolgoi
mine, which holds an estimated
175.7 million t of coal reserves, mostly
for export to China.
The decisions were likely connected,
as Enkhbayar had strong ties with
China and played a key role in opening
up the economy to the foreign
investment that helped launched
Mongolia’s economy. Chinese leaders
frequently praised him for boosting
bilateral ties when he served as
Mongolia’s prime minister between
2000 – 2004, the speaker of the
parliament in 2004 – 2005 and president
from 2005 – 2009.
SouthGobi Resources, which
championed Mongolia as a reliable and
investor-friendly supplier of coal and
other minerals to the world, cited
government security concerns for the
intervention after main shareholder
Ivanhoe Mines (renamed
Tourquoise Hills) announced it wanted
to sell its 57.6% stake to Chalco.
Another Chinese state firm, the
sovereign wealth fund CIC, held a
13.8% stake, potentially giving Beijing a
70.4% controlling ownership in
SouthGobi Resources, if the deal had
been allowed to go through.
The Mongolian Government’s
decision to openly block the sale not
only damaged political and trade ties
with China, its biggest customer and
powerful neighbour, it also scared off
other international investors. Most were
shocked by the speed and force of the
government’s intervention in what was
largely a friendly private takeover of
SouthGobi, a company listed on the
stock exchanges of Toronto and
Hong Kong.
Rather than seek a role for
Mongolian interest to counter Chinese
control of the company, the government
killed off the deal and, in the process,
hurt Canada’s Tourquoise Hills, which
had largely played by the rules in
building up SouthGobi’s value. The
share price of once high-flying
SouthGobi crashed from the agreed sale
price of C$ 8.48/share on 1 April 2012
to around C$ 0.60 in August 2014.
The government ensured there was
no way back for itself when it rushed
through nationalistic legislation in
May 2012 to protect strategic assets
from foreign ownership and control,
effectively telling the world that
Mongolia was no longer open for
business.
The impact of the Strategic Entities
Foreign Investment Law (SEFIL) on the
Mongolian economy was swift and
devastating. After reaching a record
US$ 4.78 billion in 2011, foreign direct
investments (FDI) into the country
slipped to US$ 4.4 billion the following
year before plunging 48% to
US$ 2.29 billion in 2013, according to
the Bank of Mongolia. It is expected to
fall further over the next few years
amid investors’ fears about the
country’s worsening corruption,
bureaucratic interference and rising
political infighting.
The SouthGobi debacle contributed
to investors and international banks
losing interest in the oft-delayed listing
of state-owned Erdenes Tavan Tolgoi
(ETT), which has the licence to develop
and mine large coal deposits in
southern Mongolia. The proposed sale
Table 1. Mongolian metallurgical coal exports (million t)
2007
2008
2009
2010
2011
2012
2013
Coal
3.2
4.2
7.1
16.8
21.1
20.9
18.3
Sources: National Statistics Office of Mongolia, IMF.
14
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World Coal
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September 2014
