“It is everybody’s silence that is making  the situation worse and worse” 

The Mongolian Mining Journal /Oct.2019/

B. Ulziibayar, Chairman of the Board of Directors of the Mongolian Association of Securities Dealers (MASD), answers questions from MMJ on Mongolia’s current economic situation, investment environment, future of the mining sector, the stock market, and other issues. 

How do you see the current economic situation?
Mongolia is not a rich country. We are a market economy and the demand for money being more than its supply, bank interest rates are high here. The demand can be met if money is poured into the economy, in the form of, say, loans and public funding. Receiving foreign investment also supports the economy in this. If we compare our economy with the human body, mining is the heart, the market economy is the veins, and money is the blood.  In that sense, the economy is “ill” today as there is not enough blood to allow different parts of the body to function normally. 

Why is there the gap between demand for and availability of money? 
Go back a little time in time and think of 2010. Mongolia has “come into fashion”and mining investment pours in from highly developed western countries. It is a time when enough offices for rent are not to be found in Ulaanbaatar. Global banks, big investors and transnational mining corporations are in the race to get a finger in the Tavan Tolgoi pie, and the exploration sector has attracted numerous foreign hopefuls. More than 40 companies intending to work in Mongolia, such as MMC, Hunnu Coal, Aspire Mining, Voyager and Wolf Petroleum, issue their IPO at several stock exchanges. Making history, a company with Mongolian management, issues its IPO at Hong Kong Stock Exchange and raises HKD750 million. 

All this money came into the Mongolian economy. The number of Mongolia-related stocks grew at international stock exchanges, but the Mongolian stock exchange was also thriving, with the price of Sharyn Gol shares reaching MNT36000, of Mogoin Gol  MNT57000, and of Baganuur MNT42000. This also demonstrated the relationship between the mining sector and the stock market.  

Stock price
                                   2010                 2011         2012         Quarter I 
                                                                                               of 2019 

Sharyn Gol                     14,000       36,000        10,600          1,550
Shivee Ovoo                  14,900       29,500        15,000          2,100
Mogoin Gol                    12,000       57,800        32,500          6,600
Tavantolgoi                      6,800       13,000        10,500          7,385
Baganuur                       16,600      42,000         11,000          1,040
Aduun Chuluu                 8,000       32,000           6,000         1,690
Oyu Tolgoi (USD)             29.2           26.7              18.2           0.44
Energy Resources (HKD)      8.8          10.6                8.1              0.9

Mongolia’s GDP growth reached 17.3 percent, surprising the world, and the amount of foreign investment that came in was the most ever in the history of Mongolia. The most important thing was that the exchange rate stayed stable during this peak time, as shown in the table below.
 
Please note that the USD rose by only about MNT20 from 2011 to 2012. In other words, the togrog was not devalued. 
This was also when Mongolia adopted a law which limited foreign investment, licences were revoked in bulk, a dispute with a foreign company went to international arbitration and the Government of Mongolia paid as compensation USD140 million with taxpayers’ money. Then, four years ago, foreign direct investment became minus, and until today, things have been the same.  

This is because foreign investors have lost faith in Mongolia. Government policies only cause harm to the country.  It is unfortunate that the original mistake that led foreign investors to lose faith has been repeated again and again, showing that no lesson has been learnt.  In the past few, the togrog has taken a dive, losing its value by 30% to 40%.   It is true that we have built an airport, roads, bridges and factories, with loans from foreign countries and at times with our own money, but much of the money spent has flown to foreign countries as we had to import building material, equipment and machinery for the construction. 
Foreign investors have been chased away and now domestic investors also are under attack. Mongolia’s economy, investment environment, state policies and government decisions, and even citizens’ relations and behaviour remind one of the game of “the brainsick mouse.” 

What should be done now to attract foreign investment? 
Mongolia has the potential to attract foreign investment, and investors still have interest, waiting for things and mindsets to change in the country. The most important thing is to show the world that there is a clear and transparent state policy to encourage a stable and favourable investment environment. I blame our lack of accountability for persisting with flawed state policies and failure to ensure sustainable development. There should be clear information on companies which caused degradation of the environment, did not conduct reclamation and did not pay taxes. Unortunately today people, and particularly those in power, easily get away even after showing blatant disregard for laws. 

The most recent example of this is how licences are being revoked. I have seen documents showing that a company’s licence was being revoked for causing damage to the environment, while in fact it had never even started mining operations. Licence holders are being left to incur losses, but nothing is heard about any action against officials who granted the licence for an area now shown as closed to mining, or against specialized inspectors who never noticed that mining activities were damaging the environment. Should there be no accountability for those who did not do their work? 

The government is not able to regulate how “the ninjas” work. In fact, they are being allowed to do more damage under the guise of working “in relationship with” the local community, informal organizations, executive authorities and specialized inspection organizations. We hear that mines running legal operations are being pressured to allow local “ninjas” to work in parts of their licensed area. The government and politicians have to resolve the issue by following the law and not by being populist. The revocation of licences for no clear reason is clearly a pressure tactics and reeks of malfeasance. We cannot attract foreign investment if such activities continue. 

Given that all are agreed that it is essential to conduct more exploration, how do we attract more investment in the sector? 
Exploration is risky. Generally speaking, only one in ten exploration projects will have positive results. I wonder why the government now says that it will take such risks and do exploration with its own funds. u It will be better for it to collect geological data on mineral resources, spending far less and without risk. The money thus saved can better be utilised to build schools, kindergartens and apartment buildings. 

Our policy and priority should be to get foreign companies back into the exploration sector.  Hunnu Coal, an Australia-listed exploration company, found coal reserves and its share prices went up in the Australian Stock Exchange. I have already said that many companies raised money in the Australian and Toronto Stock Exchanges to invest in exploration in Mongolia.  We need to get something similar going again. Fresh foreign investment in this important sector will put money into the economy and at the same time lay the base for the mining industry’s continued development. 

Do we need foreign banks for this? 
Mongolia is a small economy worth around MNT32 trillion.  During the period of economic boom, several foreign banks wanted to have a full-fledged branch here, and not just a representative office, as they expected to have as their client transnational corporations who would be investing huge amounts in world-class mega projects. They had no interest in Mongolian banks or their relatively small assets. Then, of course, the boom was over.
Today we have only Oyu Tolgoi as a really big foreign company and it alone makes transactions of several billion dollars in a year. Mongolian commercial banks do not have the capacity to bear financial risks of this amount. I spoke to senior executives of several foreign banks when we were discussing the draft law on investment banks, and they all agreed that as long as Mongolia followed unstable state policies, they saw no future here. 

What, then, is Mongolia’s economy going to be like in the coming years? 
If the mining sector is kept on shaky ground, as is being done today, a crisis is inevitable, and we might as well prepare for its coming. That sector alone accounts for almost 25 percent of the national GDP,   much more than any other. It is almost the sole source of our foreign currency income. Trade and agriculture follow the mining sector but the first is intrinsically bound with mining while there is no clear policy on the development of the second and it will take a long time for agriculture to generate any substantial revenue. 

Where, then, will the money come from if mining stumbles? How will the government pay salaries, pensions and the various allowances, which together make up 40 percent of the state budget of 2020, more so as salary and pension is to be raised? In any case, the world economy is heading for bad times, so what happens to us if commodity prices fall, or if coal consumption decreases to an alarming level for us? Price of gold goes up when there is uncertainty in the market, and that is what is happening. Can we stave off a crisis when the external environment is unfavourable and there is internal instability? 

But we must find solutions… 
Maybe, a wide range of independent professionals will come together and demand to be heard. It is everybody’s silence that is making the situation worse and worse. Recent developments show that Mongolia is retreating from the market economy system which supports the private sector. At the beginning of 2000, our private sector produced 90 percent of the GDP, but today it is down to 77 percent. State ownership is increasing, and politicians are doing business under the name of state-owned companies. We Mongolians chose the free market economy based on democracy and the private sector but three decades later, we are going back to the old days. 

It is wrong for the private sector to remain silent. Each sector has its representative association and there is the Mongolian National Chamber of Commerce and Industry (MNCCI) which stands for the entire private sector. Every individual citizen has the right to have their views heard by the government, which has been elected to work for their interests. That is what a democratic system is all about. We Mongolians have to stop seeing the Government as a manager doing us a favour, and understand that under the Constitution, it is an institution obliged to serve our interest. Right from the heads of agencies, all public servants get a salary for delivering government services to citizens  fairly, transparently, and promptly.  

Citizens feel they have benefited little from the mining sector. In a move to counter this antipathy, the government has given to every citizen 1,072 shares of the Tavantolgoi deposit. What do you think about this?  
It is true that in their life citizens hardly see any direct benefit from mining, although it can be said with some justification that much of what has been done could be done only with the considerable revenue from mining. There is unemployment, and many with a job have seen no rise in their income. The stock market is the mechanism to enable and ensure actual wealth distribution. Some people may feel that they were given the 1,072 shares as an act of generosity by the government but actually every citizen has the unqualified right to own shares in Tavantolgoi, a right granted by the Constitution which clearly states that the underground wealth is public property. However, ownership of shares is incomplete until the holder is able to trade them openly and this is yet to be permitted with the 1,072 shares. We must not also forget that state-owned companies have done nothing about implementing the Minerals Law provision that ten percent of the shares of a strategic deposit would be offered to citizens at the domestic stock exchange. 

It is true that a small amount received as dividend from their Tavantolgoi shares would not make any significant difference to the life of the citizens, but it would have a symbolic value. What do you think?  
As you say, it does not matter for citizens if the dividend is a big sum or small. What is important is that it would give them a feeling of actual ownership. Since Erdenes Tavan Tolgoi earned a profit last year, it has to pay dividends. Similarly, only when citizens are allowed to actually sell their shares to others for money or buy others’ shares to increase their holding, would they be free to commercially utilize their ownership of the 1,072 shares.  The citizens of Umnugovi aimag understand this well as those among them who own shares of the local Tavantolgoi Joint Stock Company receive annual dividends. As of today, the price per share of the company is MNT6500, and the company pays out almost 80 percent of its net profit as dividend. 

Another good example is that of Erdene  Resource Development, which is registered at both the Toronto and the Mongolian stock exchanges and has allotted shares to citizens of the local community where its project is. Dividends will come only when extraction and sales begin, and the operation turns out to be profitable. As shareholders, people would have a say in how operations are to be run if they do not receive dividends. This is how people will know how mining works, and not through dry statistical data. 

Are new companies getting listed at Mongolia’s stock exchange?       
Some mining companies are getting ready for their IPO at the domestic stock exchange. It will be good in many ways when the average citizen owns shares of mining companies. First, the citizens’ attitude to mining will change. They will become supporters, not protesters. As shareholders, they will feel that they really own what they have been told is their property. Any irresponsible statement from a politician will make share prices fall, so citizens, as shareholders, will demand accountability from the politician to protect their asset.  They will also learn how to watch the conduct of politicians.  

Second, the activities of the companies will become transparent. All major financial transactions of listed companies have to be available in the public domain and so acting unlawfully will be difficult.  Third, the money people pay to buy the shares will enter the legal economy, and not be used in the shadow one. This is true of a company’s operations also, as the stock market rules insist on transparency and regulated financial conduct. 
The Mongolian Stock Exchange is not yet fully developed but it is getting ready to make new products and offer a wider range of services. It needs to earn more, and this will come when there is more trading of shares.         

Will the sovereign wealth fund help develop the stock market? 
So far it seems the wealth fund will not be managed by a government agency or ministry. A professional and independent management team, not politicians, will make its investment decisions and will work to multiply its capital. Its method of working will be transparent and open to public scrutiny. Many of its investments will be in products of the stock market and thus help it develop. Indeed, when the fund begins working, maybe in 2020, it will be a big boost for the Mongolian stock exchange.