Why Mongolia must master its reticence in resources

His Mongolia Discovery Fund, which now has $20 million under management, invests in local equities, local property, and private equity-style stakes; additional investments by his other funds total commitments to Mongolia to $30 million. He hopes to bring the Mongolia fund to a soft close at $100 million. And in September he announced the launch of Eurasia Capital Mongolia, a dedicated investment banking and brokerage firm, which should have 20 professionals on board within a year covering capital markets, sales and trading, research and investment management. “There are incredible opportunities,” he says. “More and more Mongolian companies will raise capital locally, and there will be Mongolian assets which find their way into the international capital markets.”

For him, the mining law amendments will be a “mega trigger”, but not one he has to wait to be pulled before committing to the country. “I have had people ask me why am I going ahead and doing these things now, not waiting for certainty on the mining contracts? But this is a process that is irreversible.”

Djumanov was not the first to see the appeal. Mongolia International Capital Corporation, the first investment banking group in Mongolia, was set up in 2005, as a venture between local Anod Bank and The Balloch Group, a Beijing and Canada-based investment advisory firm launched in 2001 by Howard Balloch, formerly Canada’s ambassador to China. Euro-China Group, a Swiss investment firm, bought in to MICC in May 2007. Asia Pacific Investment Partners, an emerging markets-focused investment company founded in 2001, today operates out of offices in Oxford, Hong Kong and Ulaanbaatar; its investment portfolio includes a cashmere producer, Moda Mongolia; Mongolian Properties, founded to help foreign and domestic clients looking to rent or buy properties in Mongolia; and some high-end property developments.

And Frontier Investment & Development Partners, best known for its Cambodia-focused private equity fund, is also reported to be planning to raise a Mongolia fund of up to US$100 million. 

But there are worries too. “The challenge is to avoid boom-bust cycles that have be-devilled previous holders of the top spot,” Condon says. And a truly enormous warning sign hove into view this year as inflation hit 34.9% year on year in July. Comparisons with countries like Vietnam and Kazakhstan, where sudden growth has been impeded or completely derailed by headstrong inflation, are irresistible.

Worse, Mongolia is perhaps even more vulnerable because it is so concentrated. One country – China – accounts for nearly 70% of exports. Commodity exports (minerals) accounted for 36% of 2006 GDP. When commodities boom, Mongolia’s terms of trade increase, which can cause inflation. (Commodity volatility doesn’t help in the other direction, either: budget projections were built on an estimate of $6,700 a tonne for copper, and it has now fallen below $3,500.)

Domestically, inflation is driven by imported food prices, since 50% of household income is spent on food and Mongolia is only self-sufficient in meat and dairy products. Petroleum imports have an effect, as do civil servant pay increases. According to Trade and Development Bank, planned capital expenditures were seven times higher in 2008 than 2005, social welfare six times higher and public wages three times higher.

Still, at an individual level, Mongolians do appear to be getting a progressively better deal. According to Trade & Development Bank, wages have doubled in the past two years, with average household income up 54% (to MNT264,000); unemployment is about 2.8%. House values and car usages are increasing.

It’s true that 30% of the population is considered poor, and much of it is still Nomadic: even in the city, much of the population still live in portable tent dwellings called gers. But this is considered part of the Mongolian opportunity: Kapper says there is a need for 100,000 housing units in Ulaanbaatar alone, as well as infrastructure and the various mining industry supply-chain requirements. He says US$5 billion of investments is needed in Ulaanbaatar housing alone – 1.5 times the entire assets of the country’s banking sector – and $8 billion for infrastructure. The investors that step in to provide it will have to be frontier-spirited – and patient.

BOX: BANKING SECTOR

Few nations have seen such a dramatic shift in their banking sector in the last decade as Mongolia. In the early 1990s there was only one bank, the State Bank of Mongolia, which was then broken up into numerous others – all of which failed. In 2000, when the World Bank came in to help with the restructuring of the banking system, the combined national banking industry was about US$175 million in size. Today it’s almost 20 times bigger.