‘Crawling depreciation’ and ‘Expansionary policy’

By L.Bolormaa

Two new terms were introduced into the Mongolian economic discourse this year: ‘Crawling depreciation’ and ‘Expansionary policy’. The first was used to define the economic trend and the second to describe the nature of our monetary policy.

When the weakening MNT finally fell under MNT1700 against $1, the Mongol Bank issued a statement of reassurance, saying there was no need to panic, as the MNT’s fall had been very gradual and actually it had fallen no more than 20 per cent since the beginning of this year. This, the central bank said, was ‘crawling depreciation’. With the economy crawling, how else could we expect the national currency to move?

The Mongol Bank also explained that it had adopted an ‘expansionary policy’ to make sure the crawl did not stumble into paralysis. The central bank released MNT 3 trillion into the market in 2013. When the world economy was fumbling and China’s boom lost its sheen, the only way for Mongolia to survive was to pour in money to save businesses and jobs. In fiscal terms this was the year of great loans in Mongolia.

So far, 70 per cent of the $1.5 billion of Chinggis Bonds sold has gone into financing projects. Another $300 million will come by the beginning of 2014 from sale of Samurai Bonds. The President of the Mongol Bank and the Minister of Economic Development agree that Mongolia’s economy would have been in worse crisis if all this cash was not there to be injected into the economy. The flip side of this way to stave off crisis is that the country’s debt level now stands at 50 per cent of the GDP, teetering at the border line set by the Fiscal Stability Law.

What will happen in 2014? The government hopes to raise $3.5 billion from the next offer of Chinggis Bonds. $300 million more will come from Samurai Bond and there is talk of issuing another $300 million worth of MIGA bonds by Japanese investors. An agreement was signed during the Mongolian Prime Minister’s visit to China under which $240 million will be transferred from China Development Bank to the Development Bank of Mongolia, to be used in constructing the railway from GashuunSukhait to China’s Gants Mod border port and single port railways in Sukhbaatar and Dornogovi aimags.

It is apparent that 2014 will be another year of ‘great loans’, to be used, among other purposes, to complete several construction projects begun in 2013. So the expansionary policy will continue in 2014.

Loan or debt

A terminological argument rages around these funds in political circles. The ruling Democratic Party calls them a ‘loan’, while the opposition sees it as ‘debt’. According to the Fiscal Stability Law of 2010, Mongolia’s budgetary deficit should not exceed 2 per cent of the GDP and the Government’s external debt should not exceed 50 per cent of the GDP. On both counts Mongolia is right at the red line which means no more loans are allowed.

To circumvent the inconvenient restriction, the Government wants a new law on debt management. The draft is likely to be discussed at the first session of Parliament in the new year. It divides loans into two categories:Government loans, and business loans to companies.

The idea is to delink from State loans the loans to projects from proceeds of bonds. But even when the latter is treated as simple business loans, the external debt of the Government will equal 60 per cent of the GDP, once all the money talked about above comes in.

A common sense response to all this is that whatever way a loan is shown on paper – Government or corporate -- the real test is the Government’s perceived ability to meet its financial liabilities in time.

Year of hope and risk

Loans will be an important part of our economic scene in 2014, but the Government puts great hopes on income from sale of OT’s open pit products. That way, 2014 at the moment is being seen as the ‘year of hope’ by the Government. Indeed, N.Altankhuyag’s Reform Government has high expectations from 2014. Expected income for the year from copper concentrate, coal and iron ore sales have been computed at the highest rate possible under the Budget Law. As you can see from the chart, the Ministry of Finance’s projection of both the volume of export and the income from it is much higher than that of either the World Bank or the Mongol Bank.

OT sales willmake up 71 per cent of the total export of 2014, according to the Government. It also expects coal sales by ErdenesTavanTolgoi will drastically increase up to 6.8 million tons and exceed the sales of Energy Resources LLC. In addition, the Government expects significant amounts of money fromChinggis, Samurai and MIGA bonds, and from the loan from China Development Bank. It believes that the law on debt management will be passed and that there will be new investments following the law passed recently. The Government also hopes that the law on ‘Making gold trade transparent’will be passed, companies will start submitting their gold to the Mongol Bank and that the country will begin seeing the benefits of the funds invested in construction and industries in 2013. It predicts the economy will grow up to 15 per cent.

Considering that Mongolia will be beset with a great amount of trade loans, I would like to conclude that the coming year will be one of risks that will bring either a great fall or a great revival. 


2013 --a year of surprises, some more shocking than others
S. Bold-Erdene

Both those in the Mongolian mining sector and those following developments there began bracing for the unexpected when,during the Parliamentary election campaign last year, every political party promised to change the policy and laws governing the mining industry if it came to power. A surprise, however, cannot be a true surprise unless there is a shock element in it, and as things turned out, 2013 provided many a shock.

The President’s surprise

The first surprise was unveiled shortly after the new year, even before the celebrations had subsided.It came in an envelope marked “From President Ts. Elbegdorj”.Whether or not he had the coming presidential election in mind, President Elbegdorj had decided to make public the revised version of his draft mineral law. That a revision was in the making was well known, but no one had expected it would recommend so many changes to turn the mining industry upside down.

The main feature of the draft was to proclaim the rights of local citizens, the government and domestic companies to own Mongolian natural resources. Provisions such as ‘a contract should be made with the local government’, ‘the local residents will vote…’, ‘the state will take the deposit back’, ‘a licence will be granted to only Mongolian owned companies’ hit investors like a sledgehammer. Even as it theoretically favoured the main underlying principles of the draft, the private sector felt such drastic ideas on the ground were premature for Mongolia. It was imposing the standards of countries with highly developed mining industries, boasting of long standing legal environments and strong local governments on a country ill equipped to follow them. The President wanted several thorough public debates before presenting the draft to Parliament -- the first time such a thing was being tried in Mongolia – and lost no time in retracting the draft once he realised the extent of dissatisfaction with it, in general as well specifically in the mining sector.  
It thus never did feature as part of the election show.

After a few quiet summer months the mining sector would receive another surprise: the government’s draft policy document for it.  It had been presented to Parliament at the Spring session without attracting much notice, until discussion at unscheduled meetings gave it a surprise value. It looked set to be passed by Parliament easily but, in another surprise, MPs have managed to change or modify over 60 provisions. To many in its present form it is no longer recognisable as the original draft, but the Ministry of Minerals, which prepared it, boldly claims that all its major underlying principles have survived intact.The gest popular interest has been how strategic deposits would be defined and exploited. It seems the use of the term would be discontinued and no new deposit will be included in the present list of 15. This would remove a major worry of investors.


The surprise from the People’s Party

Interest in the draft policy was overshadowed by speculation on the fate of amendments to the ‘Long Named Law’, and the transparency law regarding gold.These bills were submitted at the special parliament session at the same time as the draft policy but are still stalled. The Democratic Party wants the Long Named Law implemented without the government having to pay impossibly high amounts of compensation to legitimate claimants and to pay no compensation at all to those who destroyed the environment and also those whose prospecting work had not been successful. The debate continues to be marked by political grandstanding and not by hardheaded economic sense or by devotion to principles.   

Another case that has become a game for politicians is the amendment to the Transparency Law on Gold, meant to put a stop to the underground gold market that has been flourishing since adoption of the present law, which has also put businesses under too much pressure and depleted foreign currency reserves of the State.

The Mongolian People’s Party is strongly opposed to amending both these gold industry-related laws. Its logic is simple, going like this. If the amendments are passed, gold mining will increase rapidly, perhaps eventually reaching 50 tons a year, worth, say, $2.5 billion. In five years, Mongolia’s foreign currency reserves will reach almost $10 billion. The MNT will be strong, meaning inflation would drop, and domestic prices stabilise.

This would give Mongol Bank and the Government relief and much more freedom to act. N. Zoljargal, President of Mongol Bank, has long had plans to release more than MNT3 trillion into the economy to revitalise the construction and industrial sectors. Rather than depending on the uncertainties of Foreign Direct Investment, Mongolia will be able to use its own gold.

Such a scenario will make the DP popular, a thought that is anathema to the Mongolian People’s Party. It will oppose the amendments with all its might, so that State coffers do not fill up.  This is what the party did earlier when, by opposing the amendment to the fiscal stability law, they were able to block the government’s plan to sell more bonds to raise money. With the Government unable to act purposefully because of lack of adequate funds, economic dissatisfaction will grow, giving the MPP more chance in the next election.
Thus things stand at the moment, and it is unclear where and how this political game will end.

The Tavan Tolgoi surprise

The two hills that would feed Mongolians for many years to come have caused quite a stir this year.  Ya. Batsuuri, executive director of Erdenes Tavan Tolgoi, decided to defy the long-term agreement with Chalco immediately after taking up his job and stopped the coal sale. After many months of frequent trips to Beijing, Batsuuri claimed that he had succeeded in changing the terms of the contract, making it more profitable for Mongolia, but he didn’t specify which conditions had been changed and what form the profit would take.  In September Erdenes Tavan Tolgoi resumed exports halted at the beginning of the year.  Clearing the debt to Chalco, due this summer, has been postponed until the first quarter of the next year.  Meanwhile, the Baruun Tsankhi mine removed topsoil and produced about two million tons of coal, helping improve the company’s financial health.  Batsuuri has said that $100 million will be made from the coal already mined from Baruun Tsankhi and from next year, after clearing off its debts, Erdenes Tavan Tolgoi will start making a profit.

The company has made remarkable progress this year.  The power plant project is on track and will soon be able to choose the strategic investor for it. The public has formed a high opinion of M. Enkhsaikhan who is in charge of the project. 

Preliminary work on the Tavan Tolgoi-Gashuunsukhait railroad is progressing fast, but many issues about it still remain unclear. Doubts have been expressed about the suitability of the choice of the executing company to lay the tracks, while the gauge issue is yet to be finally decided. All the present work is on tracks going south, but the future of the 1800 km of tracks to be laid east is bleak. 

The railroad policy is being implemented, but railroad engineers have begun to criticise the policy itself, pointing out many flaws in it.  Specialists are suspicious of the quality of the studies that guided the policy and are also unsure whether McKinsey even prepared the technical and economic feasibility study at all. 

The railroad to the south is expected to be ready for use in 2015. When that happens,it will bring down transport costs and time for Tavan Tolgoi coal to reach the buyer.Sales volume will increase and would help in entering into long-term contracts with buyers like Shеnhua, the world’s largest coal company. During his visit to China, Prime Minister N. Altankhuyag signed a memorandum to sell a billion tons of coal over 20 years to it.

This was in answer to the criticism that government does not do much to support mining product exports, no matter that the company to benefit from the memorandum would be the government’s own, Erdenes Tavan Tolgoi. In any case, it is a step that the government is going to take up part of the impossibly heavy export.

That there has been no progress in setting up enrichment plants may not qualify as a surprise.  

The Oyu Tolgoi surprise

This year’s gest news in Mongolian mining was without a doubt the building of Oyu Tolgoi. The world’s largest copper mine began operations this year, and the building of Mongolia’s largest enrichment plant was completed as well.

Earlier, in February, the shareholders of Oyu Tolgoi Ltd met in Ulaanbaatar and managed to put the future of the project on hold. The government demanded an explanation from Rio Tinto on why the initial costs had become $2 billion more than estimated. If the explanation was not satisfactory, the government said, it would not approve the financing necessary for the second stage of the project. Even as we reach the end of the year, no explanation has been given and so no agreement has been reached on further development. 

Oyu Tolgoi started exporting its first concentrate this year after two postponements forced by the Government, which made many doubt if the Government, owner of 34 per cent of the project, really wanted it to succeed.  Shortly afterwards, in August, Rio Tinto surprised everybody by announcing its decision to temporarily stop work on the second stage of development because of the Mongolian Government’s stance on the issue. The Government’s reputation declined, and the worth of Mongolian bonds and stocks fell.

Foreign Direct Investment dried up, and investors began to leave Mongolia, not able to trust a government that could obstruct the very project that it owns in part. Panicking at the loss of investor confidence, a special session of Parliament was called to pass a reassuring law on foreign investment.  

Despite the general perception that the Government was to blame for everything, Rio Tinto had been fine tuning its own strategy while the government was focused on receiving the explanation for the overspending in the initial stage.The Government changed the Executive Director of Erdenes Tavan Tolgoi and appointed three new members to the OT Board of Directors. In October, the Government began fresh talks with Rio Tinto, carrying on from the shareholders’ meeting in spring. It resolved several points of disagreement, but the issue of the second phase of the mine development wasn’t one of them. After a month, Rio Tinto formally informed the government that it could not raise the money to build the underground mine. Following this, Turquoise Hill declared its decision to sell more stock in the market and raise $2.4 billion to pay off its debt to Rio Tinto.

A review of the debate around OT is instructive and interesting. It can be argued that the Government and Erdenes Oyu Tolgoi are merely trying to correct an earlier mistake. The OT Board had approved without demur the company’s budget in 2011 and 2012 but now suddenly the Mongolian representatives discover the excessive overspending in the first phase and refuse to approve the budget in 2013. Did they not realise that the first two years’ budget did not tally with the estimates in the Technical and Economic Feasibility report, or did they deliberately overlook the discrepancy? It is strange that they approve without question $4 billion in expenses, and then refuse to pass the last $2 billion. If anyone is to blame for allowing the excessive spending it is those who were on the Board of Oyu Tolgoi and Erdenes Tavan Tolgoi.

Unnoticed in all this were the moves of Rio Tinto in its parallel game to push Turquoisе Hill Resources out of the scene. Rio Tinto wants to own the Oyu Tolgoi project together with the Mongolian Government, and once it increases its shareholding in Turquoise Hill, we may suddenly find that the problem with the government on funding the underground mine is not much of a problem, after all. But that would be next year’s surprise.

D.Gankhuyag’s surprise

Parliament is presently discussing the draft policy on the mineral sector, and will follow this upwith a debate on subsidiary and separate programmes on gold, copper, coal, iron and fluorspar that are under preparation. The gest surprise from the Minister of Mining was his acceptance of the demand from miners in these individual fields to involve their representative bodies in formulating policies and programmes for the respective mineral. Last fall, the main professional bodies such as Mining Association, Coal Association, Gold Industries Association, and Metal Industries Association signed a Partnership Memorandum with the Mining Ministry. The result has been that those speaking for individual minerals and no for mining in general now find a place in working groups tasked with developing policies and programmes.

Before this development, there was always criticism that the voice of specialised associations in the private sector was never allowed to be heard. Indeed, laws such as that on the 68 percent tax and the long named law were passed without any consultation with thosе to be most affected by them. Interestingly, these are the laws found to be most difficult to implement.  And when they are enforced, they usually cause severe disruption. It seems the Minister is not repeating the earlier mistake. It is everybody’s hope that the contribution from the sub-associations and the private sector will lead to better and more implementable laws.

It is unlikely that the remaining days of the year will yield any major surprise like those listed above. But not to worry, a new year will soon be upon us.