Mongolia: a leading frontier market

Overshadowed by China, Mongolia has quietly emerged as the fastest growing economy in the world. Expected to grow at 15.3% in 2014, its economy has many burgeoning industries with rapid growth rates and untapped resources. As a nation powered by its abundance of natural resources (large deposits of copper, coal, molybdenum, tin, tungsten and gold) Mongolia’s government is looking to reduce its reliance on natural resources and develop other sectors to ensure long term sustainability. As a result, sectors such as property development, renewable energy and mining present unique global investment opportunities. Mongolia’s story of rapid growth and urbanisation is a distinct one – that of an emerging frontier and a market for business and investment - it may not only be the world’s fastest growing economy, but also the world’s best kept secret.

Mongolia’s story

Mongolia became a democracy in 1990 after almost 80 years of communist rule since its independence in 1911. Its story and growth has been very low-key compared to the spotlight that has been shone on the rest of the region. With a population of almost 3 million and approximately 30% of its population living nomadic or semi-nomadic lifestyles, Mongolia is still at the early stages of the growth cycle and maturation, a new investment opportunity for those who can take a long term position.

The reason most people haven’t heard about Mongolia’s rapid growth story is that its GDP is only around USD11billion. To put that in perspective, the economy of the City of Newcastle in FY2012-13 was roughly the same, AUD12.4billion and Sydney’s economy alone was AUD319.5billion. Its capital, Ulaanbaatar (UB), is home to 1.1 million people and has seen property prices in the city centre grow on average 30% in 2013. In addition, overseas visitors to Mongolia are expected to grow by 50% to 700,000 by 2024. Currently, over 50 Australian companies have a presence in Mongolia including Rio Tinto, Xanadu Mines, Leighton Holdings, McMahon Holdings, Minter Ellison, Macquarie Bank and WorleyParsons. Many respected commentators have said Mongolia’s fundamentals are strong as ever and numerous fortunes will be made in the next decade in Mongolia just as they were in the last.  Although prone to climatic, political and economic cycles, Mongolia’s overall trend is very positive.

An emerging frontier

Mongolia is one of the world’s last frontiers for investors to benefit from continual and rapid double digit growth. With over USD10billion currently committed to infrastructure and mining projects – the economy shows no signs of slowing down.

Mongolia’s strength is the sheer speed of its growth – the equivalent to Australia’s annual growth rate in one month. Also, what separates Mongolia from other high-growth markets such as those in the Middle East, is that it is both safe and politically stable. Its competitive advantage in the natural resources space is its location, its strategic neighbours China, Russia, Kazakhstan, will see Mongolia be able to competitively ride the highs and lows of the commodities market prices.

Mongolia is currently seeking investors in mining, energy and transport infrastructure to finance the US$50billion of mega projects planned by the government over the next 10 years. Chinese companies are currently negotiating to invest in a US$2billion highway connecting Russia, Mongolia and China. China is currently Mongolia’s biggest foreign investor, accounting for over 30 per cent of its FDI and controlling over 5,000 companies operating in Mongolia, mostly commodity exporters. A key pillar in the future growth of the Mongolian economy is investment. Today, foreign direct investment accounts for over half of the nation’s total GDP and the government is striving to attract more FDI to stabilise and secure their nation’s economy and social development. So, where are the potential opportunities?

1. Property

Mongolia’s property market is more liquid than its equity market and an increasingly popular destination for FDI in Mongolia.  For conservative investors, real estate presents an opportunity in Mongolia, which does not distinguish between foreign or domestic investors in the real estate market, protecting the rights and interests of everyone. In addition, laws that prevent expropriation, eviction or confiscation are strongly enforced and protected by property laws and the constitution of Mongolia. In addition, demand will be stimulated by a recently implemented mortgage policy which reduces interest rates from around 20% to 8% which will see GDP per capita increase to USD$6,000 from USD4,000 and further increase the demand for property.

2. Clean Energy

As part of its move away from a reliance on non-renewable energy, Mongolia’s renewable energy industry is a priority for the government. In fact, Mongolia’s first wind energy system, called Salkhit Wind Farm (31 turbines), located 70km Southeast of the capital, was opened by one of Mongolia’s largest conglomerates, Newcom in partnership with GE, EBRD and the Dutch Development Bank in July 2013. This marks the first major step to a sustainable future, generating approximately 5% of Mongolia’s energy needs, reducing pollution and improving stability in a country heavily dependent on fossil fuels.  The companies involved plan to transform Mongolia into one of Asia’s renewable energy centres. Potential growth in this sector is enormous, with Newcom’s estimating that Mongolia’s southern province alone possesses enough wind energy potential to power the entirety of China, that is, more potential than any other country in the region. More specifically, the Asian Development Bank claims Mongolia holds approximately 1.1 terawatts of potential capacity in this area.  Mongolia’s government has even showed interest in the concept of an “Asian Super Grid” – a massive energy grid that connects the majority of Asian nations who would supply the grid with the energy needed to function properly.

3. Mining

The oldest and largest destination of foreign direct investment in Mongolia, Mongolia’s mining sector presents vast opportunities for investors. In fact, there is estimated to be approximately USD2trillion worth of mining commodities still in the ground and it would be no surprise if Mongolia’s GDP reached USD100billion in the next ten years. With the world’s most rapacious consumer of natural resources on its doorstep and an abundance of natural resources, Mongolia has been described as the “Saudi Arabia of Asia”. In such a position, there is every reason to believe that Mongolia’s growth boom is sustainable. In 2010, FDI inflows to Mongolia were just US$1billion, rapidly reached $4.7billion and $4.4billion in 2011 and 2012, respectively. Most of this investment went into the mining sector.

Mongolia’s story is not all one of high growth numbers and glowing statistics, it also has a number of challenges along its growth trajectory including:

  1. Inflation: Mongolia’s rate of inflation is concerning reaching 13.7% in May 2014. Government spending as a percentage of GDP was 14.1% in 2012, significantly reduced from the years in the early 1990s where levels left investors sceptical as to whether such a stimulus was justifiable or sustainable.
  2. Quality Control: The real estate market has huge growth potential but the average lifespan of a building in Mongolia is about 20 years (at most) as buildings are currently built at low cost and poor quality.
  3. Infrastructure: Mongolia’s infrastructure sector is experiencing  growing pains as the government tries to control development. The City of Ulaanbaatar council will not be giving out new heating permits for non-residential construction until 2016. This may mean a number of some soon-to-be opened apartment complexes will lack heat and power failures may be a regular occurrence.
  4. Equity: The Mongolian Stock Exchange has a capitalisation of approximately $2billion and there are more than 300 companies listed on the exchange. Mongolia’s equity market is in its early stages of development, securities regulation is still extremely new and untested and liquidity in the equity markets is low, with the entire stock market’s trading volume a mere $50,000 to $100,000 per day. However, many investors have avoided the potential risk and exposure by investing in companies on the ASX whom have operations in Mongolia.
  5. Pollution: Mongolia’s capital, Ulaanbaatar, was ranked as the world’s second most polluted city mainly because of the coal fired power stations and coping with extreme winters. During winter pollution levels are six to seven times higher than the WHOs highest acceptable limits.
  6. Agriculture: Under the Soviet Union between 1921 and 1990, Mongolia’s transformed from a nomadic nation to an industrial agricultural exporter. The fall of the Soviet Union resulted in a sudden crash of its food industry which left farmers in a newly privatised market economy. As a result of subsequent overgrazing of land and oversupply of livestock, Mongolia has a 78% desertification rate of the country’s arid lands today. Consequentially, the country is now quite dependent on its import of dietary staples such as wheat, potato and milk.
  7. Government regulation: At the centre of a long term dispute between Rio Tinto and the Mongolian government is a $6.6billion Oyu Tolgoi copper mine. Rio Tinto has been in an extended dispute with the government over the revenue sharing arrangements and restrictions around sending profits overseas. As a result, Mongolia’s government greatly undermined foreign investment and left investors nervous at the restrictive and unpredictable nature of Mongolia’s investment regime, causing foreign investment to plummet.
  8. Foreign Investment Laws: In 2012, the Mongolian government introduced new laws surrounding foreign investment which saw FDI decrease by over 50%. However, recent revisions of the law after much negative backlash stemmed the extent of the damage. A new law implemented in October last year saw an end to different rules for foreign and domestic investors and a simplification in investment approval processes for foreign investors.

So why Mongolia? As the fastest growing democratic and politically stable country in the world, Mongolia presents an opportunity for foreign investors to gain a foothold in one of the world’s last emerging frontier markets.  Although challenges remain, there is no doubt that the Mongolian story will capture the eyes and ears of international investors, business leaders and entrepreneurs from around the world.

        I.            has a capitalisation of approximately $2billion and there are more than 300 companies listed on the exchange. Mongolia’s equity market is in its early stages of development, securities regulation is still extremely new and untested and liquidity in the equity markets is low, with the entire stock market’s trading volume a mere $50,000 to $100,000 per day. However, many investors have avoided the potential risk and exposure by investing in companies on the ASX whom have operations in Mongolia.