Politics
The 2020 parliamentary election looms over Mongolia as populist politics continue to keep the country in a deadlock that has so far lasted a quarter of a century. Dubbed a “democratic oasis” for its geographic placement between two authoritarian giants, Russia and China, Mongolia may have the status of parliamentary republic, but when it comes to getting things done, the role of the legislature is often paralysing. Chronic issues facing the country include slow progress in approving major projects and little momentum in addressing environmental issues such as air pollution in the capital, Ulaanbaatar.
Meanwhile, there are uncertainties over the 2021 re-election prospects of Populist Mongolian President Battulga Khaltmaa, a former Sambo wrestler who won the presidency as a member of the centre-right Democratic Party (DP) in 2017. He is not exactly close to his party and is more of a Donald Trumpesque figure than a regular politician. Analysts say the return to active politics of a former Mongolian president, Elbegdorj Tsakhia, who held office from 2009 to 2017, might pose further difficulties for Battulga. If Elbegdorj gets in the way of Battulga getting the DP nomination, the centre-left Mongolian People’s Party (MPP) would be unlikely to let the president run as their candidate. However, the DP may struggle to find a viable alternative to Battulga, a politician who opponents fear might be attempting to sway Mongolia towards strongman politics and away from democracy.
Generally, Mongolian parliamentary election cycles see citizens overwhelmingly vote against the party controlling the parliament out of frustration that the sitting government has failed to achieve its promises. Actual policymaking is thus completely divorced from the group holding power at any given moment. The ball—the ball being control over parliament—constantly rolls back and forth between the MPP and DP, with no concrete implications for policy.
Elections are charged with nationalist discourse over Mongolia’s mineral-rich resources. Candidates attempt to capitalise on ordinary Mongolians’ distrust of foreign mining companies. Mongolians typically exist in a constant state of anger that their mining wealth has yielded no benefits for them, but only for a privileged few. The majority of the electorate appears to favour public ownership of Mongolia’s mines. More of the same can be expected in 2020—with the mining sector providing the main political weapon.
The situation has long been inconvenient for Anglo-Australian miner Rio Tinto’s flagship Oyu Tolgoi copper and gold project. The successes and failures of its mine are often seen as a barometer for the general state of foreign investment in Mongolia. Oyu Tolgoi is 66%-owned by Rio Tinto’s subsidiary Turquoise Hill Resources, while 34% is held by the government.
In 2019, Rio Tinto faced difficulties after calls by a parliamentary working group to enact changes to the terms of the Oyu Tolgoi expansion deal. Legislators complained that under the agreement as it stood, Mongolia would not be seeing any dividends until 2039. Mongolia funds its share of the mine’s development costs via loans provided by Rio Tinto and its lenders. The debt is repaid by deferring dividends. Rio has previously expressed support for “win-win solutions” to this matter such as by lowering project funding costs.
The uncertainty faced by Rio dissipated in December when it announced that a new government resolution
“effectively re-confirm[ed] the validity of all the investment agreements between the Government of Mongolia, Rio Tinto and Turquoise Hill Resources”. The statement came after the parliament gave unanimous approval to a resolution instructing the government to find ways to improve the implementation of the 2009 Investment Agreement, the 2011 Amended & Restated Shareholder Agreement and the 2015 Underground Mine Development & Financing Plan. The development ended an 18-month review of the investment agreements governing the operation and development of the Oyu Tolgoi mine by the Parliamentary Working Group.
This does not mean, however, that if the current MPP-run parliament was to be replaced by a DP-controlled one in 2020, more mining sector anxieties would not arise for Rio to tackle.
Business
The Oyu Tolgoi mine expansion project was originally set to see its first output by around 2020, but that is now not likely to occur until the second half of 2021. Such a delay would hurt the mine’s free cash flow. The longer period needed to complete the project has been caused by management failures and geopolitical obstacles, which pushed the expansion costs up to $6bn-$8bn, compared to the original $5.3bn. Oyu Tolgoi has been producing copper and gold since 2013
Mongolia’s economy in 2018 and 2019 benefited greatly from another major segment of its mining sector—coal. Coal mining saw a 38.1% y/y surge in the first 11 months of 2019, due to growing coal exports to China. Beijing replaced North Korean coal with Mongolian coal in 2017 in a sanctions response against North Korea's nuclear testing activities. China has also been replacing coal exports from Australia with Mongolian coal. Mongolian coal shipments to China grew by 12% y/y to $2.947bn in January-November.
Amid the coal boom, Mongolian state-owned coal miner Erdenes Tavan Tolgoi earlier this year picked banks for its planned Hong Kong initial public offering (IPO) to raise over $1bn. They reportedly include Bank of America and Credit Suisse Group. The company operates the Tavan Tolgoi coal mine, located in the Gobi desert. It is the largest coal ore deposit in Mongolia, estimated as having a total of over 6bn tonnes of coal with more than one-third of that is high-grade hard coking coal.
A successful sale of shares in Hong Kong would mark the third attempt to raise money to develop the Tavan Tolgoi mine following the failure of international partnerships in 2011 and 2015. In 2018, Mongolian lawmakers approved a plan to sell up to 30% of Tavan Tolgoi. No specific details exist on the size and timing of the offering and, as such, it is unknown whether the offering will take place in 2020 or later.
On another front, Mongolia’s livestock industry, once the primary engine of the country’s economy, is facing threats from climate change and overgrazing, according to
a report from the International Monetary Fund (IMF). The national and regional costs to economic growth and inequality from this environmental threat are expected to continue to grow without prompt policy action, the Fund argued.
Mongolia’s livestock industry accounts for nearly 90% of agricultural production and employs 25% of Mongolians, providing more jobs than any other sector. Major challenges are arising in the sector as hotter and drier summers along with massive overgrazing have resulted in sharply accelerating land degradation. The damaged land, in turn, harms the food supply for the livestock and leaves animals poorly prepared to survive increasingly frequent extreme bouts of cold weather. Land degradation and desertification have also contributed to the formation of “yellow dust storms”, which contribute to rising health and economic costs.
The government has attempted to stem the land degradation with official livestock targets in the National Livestock Programme by setting limits on the number of livestock, which reflect the carrying capacity of the grasslands. The measures, however, have gone mostly unheeded and actual livestock numbers are twice the required levels.
Without prompt action, 2020 is likely to witness the continuation of this environmental trend. The likelihood of this is compounded by the government’s resolution adopted in September to grant monetary incentives to members of herder cooperatives and citizens with livestock who supply sheep wool and camel wool to the nation’s wool processing plants. That continues the government-approved four-year programme from 2018 to boost the country’s cashmere industry and value-added wool-products in an effort to diversify Mongolia’s mining-dependent economy. However, this is likely to encourage further overgrazing and thus land degradation.
Mongolia is the world's second-largest producer of raw and washed cashmere as the country’s goat population amounts to 27mn and its annual cashmere production capacity stands at 9,400 tonnes.
The overall business environment in Mongolia has lately improved only slightly according to the World Bank’s Ease of Doing Business latest ranking. The Mongolian score edged up just 0.1 of a point to 67.8 year on year.
In terms of the country’s Ease of Doing Business ranking, Mongolia fell to 80th position from 74th.
