Tag Archives: Economy

New Budget means Mongolia is Open for Business



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A draft of the 2017 budget for Mongolia is approved including a budget framework and an overview of policy through 2019.  The budget projects a 9.1% deficit for 2017.

The budget expects economic growth of 3% in 2017. In the interests of maintaining a stable tax environment for companies, taxes are not expected to increase. The government aims to improve infrastructure in the mining sector, move forward in large mining projects and generate budget revenue by increasing construction and investment.

The government’s operating expenses are set to be cut by 1% over 2017.  At the same time, money has been set aside for loans and scholarships for top students, as well as funding for private and public colleges.

There are also steps included to minimize the deficit, for example, operating expenses for state organizations will be cut. Each organization will receive a cut of 10% to 100%, depending on the organizations function. Expenditures for a number of state funded programs and events will be reduced by 410 billion MNT.

Mongolian parliament has approved the reduction of the number of domestic bonds issued and will promote economic growth by taking steps to ensure proper spending of funds received from foreign loans.

These measures, to limit the deficit, to promote large mining and infrastructure projects, and investing in Mongolia’s schools and students, are all positive steps for the country at a time when the overall economy has slowed due to global economic forces. If the increase in mining and infrastructure projects proceeds as expected, Mongolia could return to double digit growth in the coming years.

New Mongolian Plan on Overcoming Economic Difficulties



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The Mongolian economy has faced challenges in recent years, including decline of foreign investment and slow down in the economy. The current government of Mongolia has stated that restoration of the reputation of Mongolia is the top priority. The cabinet has established a new council responsible for communicating with investors in hopes of attracting more foreign investment.

 The Minister of Finance has recently presented a draft of a new Program on Overcoming Economic Difficulties and Stabilization. The Program includes over 60 policy proposals designed to stabilize the Mongolian economy, assist with economic restructuring, and securing sustainable growth.

 The plan aims to achieve 3% economic growth in 2017. This is be accomplished by coordinating monetary and budget polices, and attempts to increase foreign exchange. Growth of 5.1% is targeted in 2018 and 7.1% in 2019. Better infrastructure, transportation and non-extractive exports are expected to contribute to growth.

 The plan lays out growth of 20,000 jobs each year between 2017-2019 and aims for 8% percent unemployment by the end of 2019. The processing industry is expected to grow by 6.3% by 2019.

 The Program estimates that exports from Mongolia will amount to USD 5.4 billion in 2019, and imports will amount to USD 5.5 billion. Increased construction activity is expected to contribute.

 The Program aims to increase annual FDI investment to USD 2.0-3.0 billion. Overall the Program is a positive indicator for prospective economic growth in Mongolia. Conditions for foreign investment are expected to improve. LehmanLaw Mongolia will be watching closely and are ready to assist any foreign company considering a new investment in Mongolia.

China’s Smart Oil Investment In Dornogovi



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The Mineral Resources Authority of Mongolia (MRAM) and Smart Oil Investment of China signed a production sharing agreement for an oil exploration site on Oct 14, 2016.

Smart Oil Investment of China was selected for the tender for oil exploration at Ergel 12. The company obtained an 8 year exploration license. During that time, Smart Oil Investment plans to conduct gravity and magnetic exploration, 2D and 3D seismic surveys, and drill eight exploration and evaluation holes for the sum of 35.5 million USD. The company will spend one million USD for land reclamation.

Signing an agreement with a company that has resolved investment issues and ready exploration plans in a time when the nation’s foreign investment and exploration have slowed down is vital in intensifying oil exploration in Mongolia. The production sharing agreement for oil exploration is a big step towards attracting more foreign investors to the nation’s oil sector.

In accordance with the production sharing agreement, Smart Oil Investment will give 40 percent of oil explored to the government of Mongolia. The MRAM noted that Mongolia’s stake may increase to 70 percent if the company’s oil exploration is higher than 15,000 barrels per day.

Establish A Mongolian Credit Union! Why Not? (You have to be Mongolian)



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As with many developing countries, liquidity is an issue in Mongolia, especially for individuals without significant financial assets to start with. Banks often won’t make loans to those with limited income. Is there an alternative?

Dating from 2011, the Mongolian Law on Credit Unions allows a Credit Union to be established with at least 20 individuals Mongolian citizens as participants. The Credit Union, formed voluntarily by its members is to be governed in a democratic manner with each member having voting rights. The Credit Union is owned collectively by its members. A Mongolian company or other entity may be a part of a Credit Union.

There are some requirements for Credit Union members, each must be resident in the same locality, and there must be some unifying or communal relationship between the members, either in terms of business, industry, or a religious, social or educational commonality.

The Credit Union will be established with a charter approved by a meeting of its members. A management board and Audit Board must be elected to manage and oversee the Credit Unions affairs. Of course when dealing with people’s finances, a license is required. After acquiring the license to operate the Credit Union is able to offer credit and savings services, but these are limited to the Credit Union’s members.

There is no minimum amount of capital the Credit Union must have to be established. The assets of the Credit Union shall consist of the contributions of the members. The Credit Union may charge fees upon membership. Profits may be distributed in accordance with the Credit Union’s Charter. A single member may not contribute more than 10 percent of the Credit Union’s total assets.

The World Bank Warns Mongolia on Debt



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The World Bank projects that the Mongolian budget deficit will reach over 18 percent of national GDP by the end of this year. If current trends continue government debt financial obligations will reach 90 percent of GDP.

 The report welcomed the swift measures announced by the new government to address the growing fiscal risks, and called for strong fiscal and monetary policy adjustment to address increasing fiscal and balance of payments risks.

 The World Bank noted that the central bank has provided significant liquidity to the government, and warns that continued financing of the government could worsen macroeconomic vulnerability.

 The World Bank also cautioned that falling mineral exports would add challenges the balance of payments in 2017, but indicated that with proper fiscal and macroeconomic management such problems could be overcome.

Free Trade Ties Between Mongolia and China Growing



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In May this year, China’s Minister of Commerce Gao Hucheng led an economic and trade delegation from the PRC in a visit to Mongolia. The delegation met with Mongolian Prime Minister Saikhanbileg to discuss facilitation of trade between Mongolia and China. During the meeting of the China-Mongolia Economic and Trade Joint Committee, the two sides reached broad consensus as to several areas of cooperation.

At the meeting, Minister Gao indicated that China would like to actively promote cooperation, accelerate the establishment of a China-Mongolia-Russia economic corridor, and promote the construction of free trade zone with cross-border economic cooperation zones, and generally promote the sustained and healthy development of bilateral economic and trade relations.

The Mongolian side noted that Mongolia attaches great importance to relations with China, and regards China as a good neighbor, good friend and reliable partner. Mongolia will strengthen cooperation with China is several areas, including to accelerate the establishment of a free trade zone, and promoting cooperation in the development of mineral resources, energy and animal husbandry. Mongolia and China will work to facilitate trade.

The parties expect the construction of a Free trade zone between Zamiin Uud and Ereen hot (aka Erlian) to be completed by the end of this year, 2016. The Free trade zone will cover almost 18 sq.m on Mongolian and Chinese border. About 50 business entities from China and Mongolia will operate in the zone. According to the bilateral agreement on establishing cross-border economic cooperation zone, Mongolian and Chinese export and import taxes will be zero within the zone.

Mongolia and Japan Enter Economic Partnership



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On 8th of May 2016, Governments of Mongolia and Japan exchanged a diplomatic note verbale on implementation of the Mongolia-Japan Economic Partnership Agreement (EPA). Accordingly, the agreement entered into force starting from 7th of June 2016.

The agreement seeks to increase trade of goods and services, encourage investment and people-to-people relations between the two countries. It is also an important part of Mongolia’s efforts at strengthening its own regional economic integration. The agreement enables Mongolia to attract investment and adopt know-how from Japan, export its goods and services to Japan and to third markets and to further link itself with regional economies and production chains.

The agreement covers liberalization of 5700 tariff lines from Mongolian side and 9300 tariff lines from Japanese, enabling Mongolian businessmen to supply goods originating from Mongolia to Japanese market ate preferential tariff rates.

The annual monetary circulation in trade between Mongolia and Japan is generally between USD 300 million to USD 500 million, which is equal to 3-4 percent of the entire international trade of Mongolia. The parties expect this number to grow due to the positive effects of the new EPA agreement.

Mongolia’s Economy is Global: Trades with 136 countries



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The National Statistics Office of Mongolia has recently released a report detailing Mongolia’s vital trade statistics. The report indicates that Mongolia has traded, either exported to or imported from, 136 separate countries over the first seven months of 2016. The total turnover from trade during this period is over 4 billion USD.

Exports are said to comprise USD 2.54 billion during the period while imports are at 1.83 billion. The total turnover from trade appears to have decreased by 12% (USD 647.4 million), compared to the same period last year. That amounts to a 17% (376.2 million) reduction in imports and 9.6% (271.2 million) reduction in exports.

Overall, the balance of trade surplus at this point in 2016 stands at USD 709 million, and increase of USD 105 million over 2015.

We are looking for the trend in decreased overall trade to be reversed as Oyu Tolgoi’s underground gold and copper mining operation ramps up.

Mongolia Construction Sector: Status and Outlook



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These are difficult times for the construction and real estate sectors in Mongolia. This is demonstrated by the recent trend in which newly build apartments are not being sold. Apartment prices are so high that ordinary citizens are often unable to afford the price for an apartment. At the same time, construction companies are relying on high interest loans to fund continued development projects. On top of that, many construction projects lack coordination and city planning and end up without access to basic needs such as parking areas, playgrounds and parks, or access to schools.

The situation has been described as a bubble, driven from the economic boost the country had received from the mining sector. As a result of the bubble, it is often impossible to obtain a clear and accurate valuation of a property, including land and any structures. This results in inflated property purchases by construction companies without any reasonable ability to obtain a return on the investment. Construction companies which cannot repay loans risk the seizures of properties and buildings by banks seeking to collect. If this happens, the properties are sold at a 40% discount off market price.

 Typically in Mongolia, a construction company plays the role of a Real Estate company. Construction companies not only build buildings, but become responsible for sales and continued maintenance of the property. A better system may be for Construction companies to focus on building a building in compliance with all environmental and safety regulations, and then sell directly to a property development company, which has responsibility for such things as funding, community planning, and long term maintenance.

 It is clear some kind of reform is needed in the sector. Experts have proposed three main solutions. Firstly, the system for property zoning should be improved. There should be government designated zones for residential spaces, industrial areas, and green areas. Secondly, steps should be taken to limit high interest loans for property development, and valuations should be moved to a lower more market based rate, property taxes should be imposed. Finally, an electronic database should be established containing all information in connection with any given property. This would provide the public with convenient access to property information, which will allow for more informed purchases.

Mongolia Facing “Challenges,” but Long Term Growth Prospects “Strong”



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This month the World Bank released its 2016 East Asia and Pacific Economic Update, with the subtitle Growing Challenges (The full report is available here). According to the report, Mongolia’s economy grew by 2.3 percent in 2015. Growth is good, but significantly lower than the 7.9 percent seen in 2014. The decline appears to be connected to decreasing government spending and exports as a result of slowing Foreign Direct Investment.

The broader causes are well known and include reduced demand from Mongolia’s southern neighbor and greatest trading partner, China, and a widespread decline in global commodity prices. The decreased demand hurts Mongolia’s mining exports. According to the World Bank, declining commodity demand exposes the need to increase development of institutions and human capital, which will help the country better adapt to changes external demand for Mongolia’s exports.

The World Bank flags Mongolia’s growth in recent years, driven my mining exports as being linked to a “decline in economic complexity.” To remedy this, the report recommends “removing barriers to economic diversification.”

These barriers may include formal restrictions on or policies which are not welcoming toward foreign investment. They may also include limitations in public goods such as education, health and infrastructure. Without these public goods in place, foreign and domestic companies face challenges in finding the right people, and in conducting their daily operations. In particular, the quality and quantity of infrastructure in Mongolia is “extremely limited,” presenting a significant barrier to investment and growth.

According to the World Bank, “Mongolia’s long term growth prospects remain strong.” However, in the short term the country faces challenges due to the global decline in commodity prices.

The World Bank recommends reasonable reforms which are expected to strengthen the internal resiliency of the Mongolian economy and ensure that the “most efficient and adaptable companies can succeed” and grow.