Investment needs smart policy

How foreigners perceive us

How do large foreign investors perceive
Mongolia? The following evaluation is the result of several
interviews – some of which l conducted myself – with
investors about their impression on Mongolia. Optimistic minded
investors would likely reply that the reasons for investing
in Mongolia lies in the fact that Mongolia and the Gobi
area constitute a long -term, high quality, and low cost
investment (product) , whose location on the back of energy
hungry china offers the huge advantage of lowering costs
of transportation with comparison to continents and
countries such as Africa and Australia. In other
words, the cost of transporting Mongolian raw materials to China
is minimal. When the Oyu Tolgoi and Tavan Tolgoi mining deposits
will be put into exploitation, when large companies’ financial
transactions and shares will be circulated through Mongol Bank and the
Mongolian Stock Exchange, the country’s financial market will rapidly
expand and so will the number of companies participating to the
development.

However, some criticisms acquire an in-depth experience of Mongolia,
its political, economic and legal environment. For example, it is
believed that Mongolians do not have the money to resolve the problem
of roads and transportations. This is a major issue as the size and
quality of the country’s reserves of coal and copper are irrelevant if
the infrastructure to transport and sell them is inexistent. Such a
situation will leave Mongolia no other way than to sell its wealth at
the minimum price offered by the neighboring countries-a price of
course much lower than on the world market. lnvestors also worry that,
despite the country’s wealthy natural resources, it is unclear whether
the capital that will be accumulated as a result will be adequately
managed. ln their views, it is ambiguous whether Mongolia’s development
plan is valid and justified, what the future course of action is and
what will be developed first. ln other words, the Mongolian current
policy is at the image of its rural unpaved and dusty roads ,it lacks a
road map. The difficulties to find a reliable and knowledgeable work
force in Mongolia also reinforce these uncertainties. Meanwhile, the
property law and business legal environment due to protect investments
are inadequately developed. For example, if a loan provider issues a
loan to a Mongolian company and a problem occurs, the possibilities to
sell loan collaterals and make up for the losses are scarce. It is also
likely that the outcomes of a court settlement will be entirely left
to the judge’s discretion. The biggest difficulty when it comes to
working in Mongolia is that the success of an enterprise relies on the
politicians assuming function in the relevant offices-a lot of time is
wasted on finding out what they think about your business-as well as
the stability of the policy in vigor. More criticisms arise from the
fact that the balance sheets of Mongolian companies are not very
reliable. In Mongolia for instance, capital expenditures are very high
due to the instability of the loan interest rate. Similarly, inflation
and the togrog exchange rate investment hidden additional cost are also
very high. Moreover, the bank monitoring system is unreliable, making
it hard to trust, and the monitoring system, and the banks. Such
difficulties will be the cause of many headaches for those who invested
in Mongolia. They will complain, shake their heads and say that
Mongolians are too proud to understand that the ‘’ world will keep on
turning with or without Mongolia.’’ It can be concluded quite clearly
that Mongolia, although resource rich, experiences a lot of
difficulties and faces many challenges due to its underdeveloped
infrastructure, precarious policy, lack of capable human resources,
small and weak banking and financial market, weak corporate governance
and unstable exchange rate.

What needs to be done?
It is of course understandable that foreign investors did not come for
the simple joy of developing Mongolia, and they, being the ones with
the money, should to a certain extent advance rather exigent demands.
However, Mongolia possesses raw materials highly demanded on the world
market and needed by the world industries. Their prices are increasing
on the international markets, as a result of which investors are more
than willing to invest in the country’s mining sector without being too
dainty. However, this situation is far from being a blessing. More than
80% of our exports are made up of mostly raw minerals such as coal and
copper and the state budget is becoming too dependent on such exports.
Rich mining companies are snatching off the best personnel from other
sectors and raising expectations of average wages levels. The
strengthening of the togrog has lowered the competitiveness and income
of companies in the trade, services and industry sector; while other
expenses have increased. This is called the Dutch disease, and the only
way to avoid this is to diversify the economy. ln other words, it is
necessary to develop the country’s cashmere industry, banking and
financing system, its tourism and freight companies to be capable of
creating a substantial number of jobs and raise the percentage share of
export and budget income. But investors cannot be pushed to invest
directly in these sectors. Therefore, the new generation needs to show
some resourcefulness to inject into the national economy the profits
resulting from all these investments. To do so, it is necessary to
first, strengthen the overall investment environment in Mongolia;
second, develop the monetary-financial environment; and third, promote
domestic and foreign investments into specific sectors of the economy.
Of course, a lot of time will be required to reform the investment
environment, especially when taking into consideration the improvement
of the legal system. However, two or three matters urgently need to be
paid attention to first. With the issuance of loan certificates by the
Government of Mongolia to the private sector, the issue of the banking
and financial institutions in ‘’raising capital from abroad’’ can be
resolved; Government’s international bond will become a ‘’benchmark’’
for the investors investing in the Mongolian capital market. Today,
foreign investors considered Mongolia to be as black as night, and for
the Government to sell bonds and determine basic interests according to
market principles would be for them an event similar to the lighting of
a torch in a dark tunnel. Indonesia is a good example of a country
that started late but became one of the most efficient recent forces in
raising capital. With the wealth of its natural resources and its well
developed tourism sector, it has successfully raised capital using its
own ‘weighted’’ potential as a loan guarantee. In the future, Mongolia
needs to create an investment fund similar to the Chile Fund, Chinese
Investment Corporation or Singapore Temasek Holdings. This fund can
render a vital financial support to non-mining sectors’ innovations and
to promote export related activities, and become the main actor in
indirectly diversifying foreign investments.