A month before elections, Mongolia's economy is in shambles

DAISUKE HARASHIMA, Nikkei staff writer
Known as the Ger District, this area of suburban Ulaanbaatar is home to hundreds of thousands of people living in poverty. (Photo by Daisuke Harashima)
ULAANBAATAR The 18-building apartment complex in southern Ulaanbaatar has seen better days. Constructed in the late 1940s, its buildings are now so rickety that there are fears they may collapse. The government decided the complex should be torn down and a new one built -- but that was several years ago.
"When will they demolish this building? I want to move into a new condominium soon," said Enkhbaatar, a 43-year-old livestock farmer who lives in one of the cramped, drafty units.
Under the government's original plan, the successful bidder for the project would use its own funds to tear down and rebuild the complex, and the government would pay the bill upon completion. But then Mongolia's economy slowed, and the construction company that won the bid pulled out, citing fund shortages. Other companies tried to take over, but none of them have been successful. Just when the complex will be knocked down remains unknown.
With rebuilding unlikely, the government has settled for cosmetic improvements, repainting the exterior wall of some of the buildings in May. Critics say the ruling Democratic Party is trying to give a facelift to buildings along the route where motorcades of foreign VIPs will pass when the country hosts the Asia-Europe Meeting in July. When this reporter was visiting the apartment complex, a woman who seemed to be a Democratic Party supporter asked me if I had been sent by the main opposition Mongolian People's Party. She also stopped me from taking photos.
The general election scheduled for June 29 is projected to be a close race between the Democratic Party, which is feeling the heat from corruption scandals involving its lawmakers, and the People's Party. Whichever side wins, rebuilding state finances and reviving the economy will be job one for the new government.
Enkhbaatar, who has a wife and five children, has lived in the apartment complex for his entire life. The family is to be given an apartment in the yet-to-be-built condominium, but with the project stalled, he has no choice but to continue living in his 7-sq.-meter room.
The tiny space has a TV and a washing machine but no shower. The family has to share a bathroom and a kitchen that has no hot water with other residents. Temperatures fall to minus 20 to 40 C in midwinter. The freezing drafts are almost impossible to bear, Enkhbaatar said.
Because the room is too small for a family of seven, Enkhbaatar's three preschool-age children live in a traditional tent called a ger in a town some 50km from the capital. The family sells milk and earns 15,000 tugrik ($7.50) a day. He cannot sell the room or use it as collateral for a loan until the new condominium is built. All he can do is wait for the day when his whole family can live under one roof.
FEAST TO FAMINE The Mongolian economy is taking a beating on multiple fronts.
Rich reserves of coal, copper and other resources are a key revenue source for the country, but they also make it susceptible to market fluctuations. Copper prices nosedived in the wake of the 2008 global financial crisis, sending gross domestic product growth to minus 1.3% in 2009. The ensuing resources bubble helped the country post double-digit growth between 2011 and 2013, but the economy has lost momentum since 2014 in tandem with falling resources prices. The World Bank estimates that Mongolia's GDP expanded 2.3% in 2015 and will grow just 0.8% in 2016.
Dependence on China plays a major part in the current slump. Mongolia has few foreign trade partners because of its location -- sandwiched between Russia and China -- as well as the relatively small size of its mineral outputs compared to those of South American producers. China accounts for roughly 80% of Mongolia's exports and 30% of its imports. With the Chinese economy losing steam, demand for infrastructure is dropping. Mongolia's coal trade with its neighbor is unlikely to pick up any time soon as China faces overproduction in its own coal industry.
Mongolia's sudden change of fortunes has left its mark. Genghis Khan Square in central Ulaanbaatar is close to hotels and the municipal office. But despite the prime location, the skeleton of a half-built 25-story office building looms over it. Sources said construction began two years ago but has since been halted.
Another unfinished building nearby, its exterior crumbling, has been abandoned for four years. A relative of a serving lawmaker was reportedly in charge of the project before the funds dried up.
Restaurants that were once crowded late into the night are now almost deserted. The owner of an upscale Japanese restaurant said the number of customers has fallen to around 60% of its peak.
Foreign-denominated debt is yet another headache for the government. Mongolia will have to redeem debts worth $2.1 billion between 2017 and 2018, but it is said to be unable to repay them, partly because of its previously free-spending policy. Although the government has reportedly switched gear to austerity, expenditures are still expected to outstrip revenues this year, according to a government source. If bond issuances for refinancing do not go smoothly, Mongolia could default on its debts.
BRIDGING THE GAPS Another issue facing Mongolia is its staggering income gaps. In the so-called Ger District in northern Ulaanbaatar, former nomads who came to the capital looking for jobs live in tents and work as construction workers or taxi drivers. More than half of the capital's population of 1.4 million people live in the district, and many of them struggle to make ends meet.
The district lacks proper roads, and electricity is the only utilities service available. Residents buy well water for 1 tugrik per liter. It is not uncommon to see people drinking vodka during the day. Many families keep guard dogs to ward off burglars.
Bolormaa, a 28-year-old kindergarten teacher, has been living in the district for three years. Her monthly salary of 400,000 tugrik is barely enough to buy firewood and coal for heating, and she sometimes has to borrow money from her acquaintances to cover living expenses. She has no expectations for the June election. "It doesn't make any difference. I expect nothing from the government."
At the same time, the number of people with annual incomes of $1 million or more is said to be increasing by around 1,000 each year. A government source said these millionaires use their connections with lawmakers or senior government officials to line their pockets.
There are some positive developments. The government announced in May that Anglo-Australian mining giant Rio Tinto will resume its expansion of Oyu Tolgoi, one of the world's largest gold and copper mines. The $5.3 billion project had been suspended due to a disagreement between the government and Rio Tinto. And an economic partnership agreement with Japan will go into effect in June, raising hopes for more investment by Japanese businesses.
All the government can do in the meantime, according to one source, is wait for resources prices to rebound.



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