CH. KHURELBAATAR: WE WILL FOCUS ON IMPROVING MONGOLIA’S CREDIT RATING AND BUSINESS ENVIRONMENT

The Mongolian Mining Journal /Jan.2024/

Interview with Ch. Khurelbaatar, Mongolian Deputy Prime Minister and Minister of Economy and Development, on projects under the New Revival Policy aimed at accelerating Mongolia’s long-term and medium-term economic development and the state of the economy in 2024. 

B. Ariunaa

THE NEW REVIVAL POLICY CONTAINS ALL MEASURES TO DEVELOP THE ECONOMY IN THE MEDIUM TERM 

Could you clarify the progress and results of the projects and programs included in the New Revival Policy, which is one of the main pillars of Mongolia’s economic development?
Due to the global pandemic and the situation between Russia and Ukraine, Mongolia’s economy went  through difficult times in recent years. But measures taken by the Mongolian government under the New Revival Policy are now yielding some results. For example, the economy has grown steadily for the past 6 consecutive quarters, reaching 6.9% in Q3 2023. Since inflation’s peak of  16.9% in June 2022, it has been steadily declining, falling to 8.6% last November.

In addition, budget revenues increased due to higher exports and the fiscal balance showed a profit of 2 trillion MNT as of  November 2023. Foreign exchange reserves fell to $2.7 billion last August, but by the end of November 2023, they reached $4.3 billion, and the exchange rate stabilized.

Due to the successful implementation of the New Revival Policy, the capacity of border crossings has tripled, and the volume of exported products doubled. Power generation capacity has increased by 2.5 times, and basic conditions have been created for  implementing  megaprojects.

416 km of auto roads and 897 km of export railroads have been constructed as part of the Port Revitalization Program under the New Revival Policy. The construction and trade sectors accounted for 1% of real economic growth. To further increase foreign exchange reserves, we are working to gradually increase mining exports, expand the capacity of border crossings, and advance the construction of the Gashuunsukhait - Gantsmod, Khangi - Mandal and Shiveekhuren - Sekhe border rail lines. The Shiveekhuren and Sekhe border points will be connected by rail early next year.

As for the energy sector, we are working to add new sources of energy generation, build new transmission and distribution networks, and expand their capacity, thereby improving the reliability of energy production and supply. In this context, we plan to start construction of the 400 MW Baganuur power plant in 2024, and complete the 50 MW expansion of the Choibalsan TPP, the 116 MW expansion of the Amgalan TPP and the 300 MW construction of the Buuruljuut power plant by 2024. Going forward, we plan to gradually shift the energy sector to an independent financial and economic system and pursue liberalization policies.

The New Revival Policy includes all measures to develop the economy in the medium term. This does not mean that the government will do it all alone, and private sector involvement with foreign and domestic investment is needed. The main driving force behind Mongolia’s economic development is active cooperation between the public and private sectors.

LIBERATING PRICES AND ADOPTING EFFICIENT MARKET PRINCIPLES IS THE RIGHT STEP

Mongolia’s economy remains directly dependent on the mining sector. What policies will be put in place to ensure inclusive multilateral participation?
The revenues generated from mineral exports ensure economic growth. Thus, by developing numerous sectors such as tourism, agriculture, transportation and manufacturing, our economy will not depend on one sector.

The government has announced and is implementing a policy to increase the processing level of products in each industry by one notch.

In this regard, the government will gradually implement major projects to develop steel production, copper concentrate processing, coal beneficiation, production of construction materials and agricultural raw material processing. 

For example, the coal preparation plant being built by Erdenes Tavantolgoi JSC will be commissioned in May 2024. 
In general, the government will support private sector participation in downstream projects such as copper concentrate processing plant, coal processing plant, steel plant, uranium mining, ore concentrate processing, and work to create an investment-friendly environment.

We will intensify geological exploration, which has been stagnant in the mining sector, find new deposits, increase the issuance of special permits for exploration and ensure the exploitation of deposits. At the same time, the government plans to move to a system where we will conduct aerial geophysical surveys using airplanes and drones and auction off areas with identified mineral reserves to private investors. This will increase transparency and further eliminate monopolies.

We will undertake comprehensive policy reforms in the agricultural sector, increase private sector participation and support the process of establishing a market system. In other words, there will be a policy to develop a combination of pastoralism and intensive livestock production. In this regard, all types of inefficient subsidies provided by the government to the food and agriculture sector will be discontinued.

We will reduce government involvement in price control. It has been 10 years since the establishment of the agricultural commodity exchange in our country, but its activity is still unclear. 
Agricultural products should be in economic circulation. The government has decided to establish an agricultural commodity exchange on the basis of the Mongolian Stock Exchange. I hope we will see  results very soon. If the foundation is laid correctly, the opportunity for further diversification and expansion of the commodity exchange will naturally arise.

The government’s policy in the energy sector should be clear. In the past, Mongolian society could not reach a consensus on energy policy, could it?
Mongolia’s developments are mainly hindered by the energy and transportation sectors. The energy sector has many challenges to overcome. But first, it is necessary to fully liberalize it, attract private sector investment and strengthen capacity.

The Ministry of Road and Transport Development is actively pursuing liberalization of the transport sector and we are already seeing some results. We will continue liberalization, work to make state-owned railway, air transport and road transport companies transparent, and remove barriers and restrictions to market entry for foreign and domestic businesses.

The government will also promote competition in the industry by liberalizing prices and setting fair and efficient tariffs in accordance with market principles. As for the immediate development plans, we are implementing the tasks outlined in the medium- and long-term development documents. It is planned to create an integrated cargo logistics center. 

In addition, the tourism industry may become one of the leading sectors of the economy in the future. For example, there are plans to increase the network of tourist roads, build rest areas (rest stops) every 200 km, bring airports in line with international standards and expand basic infrastructure. In addition, a free tourism zone can be established based on history, culture, natural beauty, archaeological and paleontological resources.

The entry of foreign banks into the domestic financial market will increase competition in the financial sector. Thus, the interest rate on loans will decrease and the availability will expand. It is necessary to limit the government policy of price control and manage all sectors of the economy based on market principles. Although the private sector has only existed for 30 years, it already produces 78% of the gross domestic product, which is an amazing figure.

Government involvement appears high due to state-owned mining companies such as Erdenet Corporation, Oyu Tolgoi and Erdenes Tavantolgoi. The government is actively involved in the energy and transportation sectors. However, since government involvement is high, it limits the development of these sectors. Therefore, to increase efficiency, it is desirable to create a clearer legislative framework to improve the business environment, support the private sector, and  develop clearly defined sectoral policies.

ECONOMIC DIVERSIFICATION ENSURES GROWTH AND REDUCES THE IMPACT OF EXTERNAL FACTORS

You said that the entry of foreign banks into the financial market will increase competition in this sector. Creating a favorable investment environment is one of the ways to revive the economy. The mining sector accounts for most of the investment coming into Mongolia.  What are other areas for investment diversification?
From 1990 to 2023, Mongolia received a total of $41.7 billion in foreign investment. Of this, 73% was invested in mining, 11% in trade and services, and the remaining sectors accounted for 16%, indicating that foreign investment is not diversified and  concentrated on  one sector.

Economic diversification is critical to a country’s development, providing stability and growth and reducing vulnerability to external factors. It is therefore important to diversify investments in sectors other than mining. Our country has abundant resources of renewable energy and agricultural raw materials, and there is full potential for investment in these sectors, as well as in infrastructure, tourism, and free zones. We will diversify the economy by increasing investment in these sectors.

For example, the government has initiated discussions on an economic partnership agreement with the Republic of Korea and an agreement with the Russian Federation on tax exemptions for certain goods to open trade opportunities for the private sector in foreign markets and increase exports. If these agreements are successfully concluded, it is expected that the incomes and exports of Mongolian citizens and business entities will increase, and this will be a major stimulus for economic diversification.

The government is working in several directions to improve the investment climate.   First, to improve the Investment Law and the legal framework, a revised draft of the Investment Law was  submitted to the Parliament on June 23 this year. 

We expect that  adoption  will create a favorable investment environment, attract foreign direct investment, revitalize investment activities, increase capital inflows, create conditions for sustainable economic growth, increase the number of jobs and improve Mongolia’s competitiveness. 

Second, the Ministry of Economy and Development pays special attention to protecting the legitimate interests of investors by regularly discussing investor complaints at Cabinet meetings and monitoring how they are handled. As part of this work, complaints filed by 32 foreign-invested enterprises operating in renewable energy, mining and other sectors and complaints filed by 11 foreign-invested enterprises operating in mining, oil, food, tourism, civil aviation, and construction were investigated and relevant organizations and officials were instructed to resolve them in accordance with Government Resolution No. 413 of 2022 and Resolutions No. 160 and 413 of 2023.

Third, the Department of Investment and Trade was established under the Ministry of Economy and Development. In order to support investors’ activities, the agency performs the following functions: promoting a favorable investment environment, attracting investment in regions, economic sectors and priority areas, protecting and supporting the rights and legitimate interests of investors, improving trade turnover, deepening economic diversification, facilitating trade, providing digital services on “one-stop-shop” basis, creating a unified database, and conducting analysis.

Please explain the main changes are in the revised draft Investment Law.  It is necessary to improve Mongolia’s investment climate, provide investors with market research and information, improve the procedure for registering and obtaining special licenses for new investments, protect the legitimate rights and interests of investors, and establish a dispute resolution system. 

As part of the work to create the necessary legal framework to fully address these issues, a revised draft of the Investment Law has been developed and submitted to Parliament. The draft law aims to protect the legitimate rights and interests of investors and to improve and simplify government services for investors.

The draft law contains fundamental changes, such as the abolition of several regulations prohibiting or restricting investments, bringing investor guarantees in line with international best practices, and a guarantee of the right to resolve disputes between investors and the government through international arbitration.

This makes it easier to make new investments, creates a clear and simple mechanism for preventing direct or indirect confiscation of investments by the state, and for jointly solving problems that arise. 

In addition, the government has obliged all government agencies to protect and support investments and eliminate duplication. In addition, the government will provide digital services and issue tax stabilization certificates to investors. Issues related to tax incentives will be regulated by tax legislation in accordance with the recommendations of international organizations.

THE 2024 BUDGET AIMS TO INCREASE EXPORTS AND INVESTMENT

In addition to the spending increases, the draft amendments to the budget framework statement will increase the government’s total debt by 5.1 trillion MNT to 44 trillion MNT. When the government presents the 2024 budget proposal to Parliament, it starts by amending the budget framework statement. Economic experts believe that there is a risk that the government will use the budget to achieve short-term goals such as increasing spending, funding political commitments and laying the groundwork for new construction projects. Do you agree with this?
To ensure coordination and compatibility between planning and budgeting, the Ministry of Economy and Development develops long-term, medium-term, and short-term policies and plans to be implemented at the national level. On the other hand, the Ministry of Finance is responsible for financing this policy through the current year’s budget within budgetary constraints. The 2023 budget did not provide for new investments at all, but instead focused on repaying external debt and completing previous projects.

Mongolia’s annual development plan is approved in the first half of the year. The budget for this plan is drafted in the last half of the year and approved in November. We view Mongolia’s 2024 budget as a budget aimed at increasing exports and investment in line with Mongolia’s 2024 development plan.

In addition, according to the amendments made to the Budget Law in July this year, the responsibility for the development of the medium-term budget framework statement was transferred to the Ministry of Economy and Development.

It is therefore planned to define a medium-term budget policy in the development of the next medium-term budget framework statement, which will ensure coordination between policy and budgeting and improve the efficiency of budgetary allocations. In the future, depending on budget planning, the principle of not repeatedly modifying the approved budgetary framework will be respected.

The explanation for the statement on the need to change the budget framework states that “the physical volume of coal to be exported in 2024 could reach 60 million tons.” How reasonable is this explanation?
I will first say that as of December 20 last  year, coal exports had reached 67 million tons and would have increased further by year-end. At the end of August, when the budget was being drafted, many people criticized that it was impossible to export 60 million tons of coal and that it was too optimistic.

Important measures implemented by the government in 2023 included improving coal transportation for export, appointing full government representatives to state-owned companies, and improving the management and operational efficiency of companies.

These measures have paid off. Mineral exports are at a high level due to improved export and transportation organization, special regime for state-owned enterprises, and reform of company operations and structures.

Organizational arrangements for mining, transportation and border operations have been completed for the export of 60 million tons of coal. 

As for coal demand, China’s economic growth in the third quarter amounted to 5.2%. This was  above the expectations and forecasts of international experts. In particular, economic growth in northern China in the first quarter of 2023 exceeded the average growth rate for the country, which significantly supports coal demand.

Construction of the cross-border railroads is well underway. When these railroads are fully operational, Mongolia’s exports can be doubled.

The good news is that demand for steel in the Chinese market is growing and iron prices remain high. This improves the demand outlook for iron ore and coking coal in our country.

To further increase exports, we need to accelerate the construction of the cross-border railroad, put “smart” gateway facilities into operation and connect them with paved roads, transport coal traded at the mineral commodity exchange through a special gateway, and expand the mineral commodity exchange system. We are already working on this.

How do you assess the performance of the 2023 budget? What will be the features of revenues and expenditures of the 2024 budget?
As of last November, budget execution had reached 21.6 trillion MNT and 99% of the annual plan had been met. The fiscal balance improved due to good revenue collection. At the end of 2022, the budget had a deficit of 1 trillion MNT but AT November 2023 , the budget profit was 1.9 trillion MNT.

Budget revenues increased due to improved control and transparency of all activities from extraction to export of mining products, including transparency of contracts for extraction, processing, and transportation of minerals, as well as transfer of trade to a mineral commodity exchange. For example, mineral royalties increased by 1.5 trillion MNT and corporate income tax increased by 1.6 trillion MNT.

GDP grew 6.9% in the first 3 quarters of 2023. What was the main driver of growth?
The country’s economy has been growing steadily in recent quarters. As a result of comprehensive measures to increase exports taken since the end of last year, coal production and exports have reached historic highs. In addition, the growth of the Chinese economy has exceeded  expectations  and increased economic demand from abroad with  positive impact on our growth rate.

Domestic economic activity is also at a good level. Real household income deteriorated by 3.9% at the beginning of last  year due to rising prices but improved in the second half and increased by 12% in the third quarter. This supported domestic consumption and had a positive impact on economic growth.

In addition, mineral production and exports are increasing, and economic growth is mainly supported by the mining sector. This is due to rapid growth in coal production and increased production of copper concentrate due to the opening of the Oyu Tolgoi underground mine in March 2023. Besides that, the transportation of mining products for export has increased compared to last year, which has had a positive impact on the transportation sector.

This  winter is severe due to poor summer conditions last year, resulting in livestock deaths to an extent not seen in the last 14 years and a decline in agricultural sector output.

Except for the mining and construction sectors, all sectors reached pre-pandemic levels. For example, manufacturing, agriculture, transportation, trade, and services exceeded pre-pandemic levels. Although coal production reached an all-time high, production in the mining sector declined by 8% compared to pre-epidemic levels. This is mainly due to gold production being 1.4% below pre-pandemic levels, iron ore production being 37% below, and oil production being 28% below pre-pandemic levels.
As for the construction sector, it is 27% below 2019 levels. The global pandemic and turbulent geopolitical situation caused transportation and logistics delays and disrupted the supply of construction materials. As a result, high prices persisted for a long time, weakening the industry.

Elections will be held this year. Usually, inflation rises after the election. Will this happen again in 2024? What is the policy of the Ministry of Economy and Development in this regard? 
I expect inflation to be at 8.6% this year. Next year, if natural and climatic conditions are favorable and geopolitical difficulties and tensions between countries subside, inflation may remain in the target interval of Mongolbank.

The government will continue to support the supply of goods and products and help reduce the operating costs of businesses. For example, the government will establish an online system to issue special permits electronically, sell livestock and meat directly to end users through agricultural commodity exchanges, improve the quality, supply and control of drugs and medical devices, and expand supply channels.

In addition, the process of environmental appraisals has been simplified, and there is no longer a need to assess certain types of economic activities. As a result of full implementation of these tasks within the framework of macroeconomic stabilization, inflation of domestic goods and services is expected to decrease in 2024.

We will also continue to pursue a policy of increasing foreign exchange reserves. Last June, 55% of inflation was caused by imports. However, thanks to the increase in foreign exchange reserves, stabilization of the exchange rate and the market, this figure has fallen to 36.1%.

In the future, we will focus on enhancing market competition and expanding the supply of goods and services by increasing export revenues, ensuring exchange rate stability, improving the accessibility and capacity of transportation and logistics, reducing transportation costs and simplifying government regulation. I think the Mongol Bank will continue a tight monetary policy in line with the macroeconomic situation. 

On October 5, 2022, Government Resolution No. 362 “On Certain Measures to Increase State Foreign Exchange Reserves” was approved. How is the implementation of this resolution?
Last year, the Government of Mongolia approved Resolution No. 362 in response to the sharp depreciation of the national currency and a balance of payments deficit of $1.5 billion. As part of the implementation of this resolution, a system for trading mining products through a commodity exchange was established.

Currently, under the Law on Mineral Commodity Exchange, commodities such as coal, iron ore and fluorspar sold by legal entities owned by or involving state or local ownership will only be traded through a commodity exchange. In other words, it can be said that minerals illegally bought and sold outside the commodity exchange by legal entities are not eligible for export, but products openly traded on the commodity exchange in accordance with the law can be exported.

As of the first 11 months of 2023, 11.5 million tons of coal, 552,000 tons of iron ore and concentrate were traded on the mineral exchange.

Also, as part of the implementation of the resolution, an automated system for the collection of customs and tax payments was introduced. According to the new rules, if a contract for the purchase and sale of minerals is registered in this system from 2023, the minerals can be exported. In this way, transparency of extraction activities and sales is ensured.

In addition, from 2024, a provision will come into force according to which the export of minerals is possible only after contracts for their transportation are registered in the system. This will ensure full transparency in the transportation of minerals and eliminate the repetition of problems related to coal.

As a result of the implementation of this resolution, the state foreign exchange reserves, which decreased in August-September last year to $2.4 billion, increased to $4.3 billion as of November this year. This had a positive impact on stabilizing the exchange rate and reducing inflation.

In the future, to improve the organization of exports and increase foreign exchange earnings, we will expand the activities of the mineral commodity exchange, export products traded at the exchange through special border crossings, install “smart” gateways, testing equipment, laboratories and X-ray equipment at border crossings, and fully automate customs and tax accounting systems.

How do you assess Mongolia’s economic prospects for the next year?
We will support the private sector, ensuring economic development with stable macroeconomic growth, stable prices and exchange rates, and sound foreign trade and investment policies.

In general, unstable macroeconomic growth and high volatility lead to instability in fiscal and monetary policy, which in turn causes fluctuations in exchange rates and prices. Some years we have 17% growth, some years we have 0% growth, and sometimes we go negative. When economic growth fluctuates like this, budget revenues, expenditures and interest rates become unstable.

As a result, price volatility is very high. Economic instability mainly generates political instability in Mongolia. Therefore, in order to ensure stable economic growth, the government’s policy is to have Mongolia’s economy grow at a rate of more than 6% for about 10 years.

In addition, we will pursue policies to increase Mongolia’s foreign exchange reserves to $10 billion and reduce exchange rate fluctuations. Foreign exchange reserves rose from $2.1 billion in 2017 to $5 billion in 2021. They then fell to $2.4 billion during the two years of the pandemic but have now increased to $4.3 billion as of the end of November. 

In the future, if foreign exchange reserves are not maintained at a stable and sufficient level, sharp fluctuations in the exchange rate will lead to instability in the economy. If we take consistent and correct measures, we will be able to reach $10 billion. This will ensure the stability of the MNT exchange rate.

Special attention is being paid to improving Mongolia’s credit rating and the business environment in the private sector. Budget revenues this year will be higher than projected. Losses will be significantly reduced. By continuing this policy, budget profits and losses will be kept within 2% of gross domestic product.

How will the global geopolitical situation and market demand for minerals affect Mongolia’s economy?
 There are different trends for each mineral product. The issues of global warming, climate change and green development are being discussed all over the world, which creates a favorable situation for our economy. In other words, the demand and production of renewable energy and electric vehicles will grow globally. As a result, demand for metals such as copper, gold, uranium, and rare earth elements will increase.

Our country has abundant resources of renewable energy. Special attention should be paid to the full utilization and export of energy. Due to the emphasis on green development, the demand for coal is likely to decrease in the long term but will remain strong over the next few years. We must take full advantage of this opportunity. It is very important to complete the railway connection and optimally organize customs operations.