Rio Mine to Spur Mongolia’s Return to ‘Rapid’ Growth, ING Says

Oct. 16 (Bloomberg) -- Mongolia’s economy is poised for a return to “very rapid growth” after the government signed an agreement with Rio Tinto Group and Ivanhoe Mines Ltd. to develop the Oyu Tolgoi copper-gold project, ING Groep NV said.

“Oyu Tolgoi is like the 2003-2008 commodity price boom, only bigger,” Tim Condon, chief Asian economist for ING, said in a report yesterday. “It is a huge, positive demand shock” for Mongolia’s $5.3 billion economy, he added.

Ivanhoe and Rio last week signed the agreement with the government to develop Oyu Tolgoi, which Rio has called the world’s largest copper-gold resource. Mongolian President Tsakhiagiin Elbegdorj said last month the project may operate for 30 years and generate $30 billion to $50 billion of revenue.


Mongolia’s currency should be allowed to strengthen to keep inflation from accelerating as the thousands of jobs created by the project increase demand for goods and services, Condon said.

“Even if most of the initial project cost spending for Oyu Tolgoi is on imported equipment and has no impact on the local economy, mine construction will require workers -- Ivanhoe estimates 6,000,” he said. “Thousands of ancillary support jobs also will be created.”

Production will start in 2013, Rio said this month. The project, including an open pit and an underground mine, may require about $9 billion in capital spending over three decades.

Oyu Tolgoi, which means “turquoise hill” in Mongolian, lies about 80 kilometers (50 miles) north of the country’s border with China. It is estimated to contain about 36 million tons of copper and 45.2 million ounces of gold.

Louis Vuitton

Companies such as Louis Vuitton, a brand of the largest luxury goods maker LVMH Moet Hennessy Louis Vuitton SA, and Salvatore Ferragamo SpA, whose shoes are worn by Jennifer Lopez and Zhang Ziyi, are planning to open stores in the nation of about 2.7 million people in coming months.

A rules-based policy regime and a stable exchange rate stance will help the economy avoid boom-bust cycles associated with commodity price fluctuations, Condon said.

“As occurred during the commodity price boom, some of the increased spending from new Oyu Tolgoi jobs will leak abroad through increased imports,” Condon said. “But not everything people consume is imported. Services, especially housing, are harder to import. Unless there is a powerful supply response the increased demand will boost their prices and Mongolia will experience a repeat of high and volatile inflation.”

The nation’s consumer price index climbed to an 11-year high of 34.2 percent in August 2008. It has since eased, with the Bank of Mongolia reporting inflation at 4.9 percent in July, according to the central bank’s Web site.

Currency Strengthens

The Mongolian Togrog weakened more than 45 percent against the U.S. dollar between November and the middle of March, according to Bloomberg data. It has since gained about 14 percent.

“An appreciating Togrog will attract labor and capital from export-oriented activities and encourage the substitution of imports for locally-produced services where this can be done,” Condon said.

The International Monetary Fund in April approved a $229.2 million stand-by loan for Mongolia to help it stabilize its economy after declining mineral prices hurt revenue and investment. Fitch Ratings Ltd. this week raised its outlook on Mongolia’s sovereign debt rating to stable from negative, citing “more disciplined’” government spending and a buildup in foreign exchange reserves.

A rules-based policy regime, and a free-floating or pegged currency, will help the country “on a path to sustained, rapid growth that avoided boom-bust,” Condon said.

“Oyu Tolgoi with the existing high-discretion regime in which populist pressure determines the allocation of resource rents and exchange rate policy juggles protecting traditional exporters and curbing inflation pressure” would put Mongolia on a path to “boom-bust,” he said.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

Last Updated: October 15, 2009 23:36 EDT
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