October 12, 2013 by Timothy Sifert
Mongolia will be easing restrictions on foreign investors looking to buy assets in the country in a bid to revive inflows and boost growth.
As of November 1, private firms and individuals will no longer need government approval to invest in strategic industries. Only foreign state-owned entities wanting to own more than 33% of strategic sectors, or 50% of other sectors, will have to seek consent from the government in Ulaanbaatar, according to a one of the latest drafts laws that has yet to be officially published.
The move has been welcomed as a positive step towards a more open local market, but bankers have also warned that the country’s uneven record with outside investors could still hamper its prospects for attracting more capital from overseas.
Unpredictable rules have discouraged foreign dealmakers from setting foot in the country, despite its renowned mining reserves and proximity to China. Investors say there is a backlog of investments, which could be pushed through because of the change.
“The new law is very good news,” said Lee Cashell, chief executive of Asia Pacific Investment Partners, which invests in Mongolian property development and cement production. “It was clear the government realised this was an urgent situation that needed to be taken care of. There should be a spike in FDI one or two months after it’s in place.”
A rise in investment would be welcome. In the first eight months of the year, FDI fell almost 48% year on year to US$1.8bn. The World Bank also recently revised down its 2013 growth forecast for Mongolia to 13% from the 16% it projected in April. In addition, the Bank of Mongolia’s international reserves declined to US$2.7bn in August from US$4.1bn, Moody’s said.
Improving Mongolia’s standing with investors comes just as the sovereign is considering another foray into the debt markets. The sovereign is understood to be looking at its first Samurai bond, a financing backed by the Japan Bank for International Cooperation. The country has already made some recent forays into global capital markets. A sovereign bond issue and a loan from Development Bank of Mongolia have already pushed up foreign debt to US$4.7bn last year from US$2.2bn in 2011, according to Moody’s.
“This is an interesting time for Mongolia,” said Howard Lambert, chief representative, ING Mongolia. “The government issued US$1.5bn in five-year and 10-year bonds last year, these are the first sovereign bonds issued by the country; investors now have 1.5bn reasons to follow the country more closely.” The sovereign issue and other outstanding securities from the country will give prospective borrowers spreads to use as references their owns fundraisings.
“Previously, we have seen international issues from Mongolia’s corporate, financial and quasi-sovereign sectors, the sale of the sovereign bonds gave a reference point, which, until recently, had been lacking,” Lambert said.
The new law will not only relax restrictions on mining. Telecom and banking are open to investment as well, as well. Under the existing regulation those sectors were considered too important to allow private companies to buy without official consent. The government approved the previous law in May 2012 and an April 2013 amendment still did not provide foreign firms with the clarity they needed, a Moody’s report said. The new regulations will effectively repeal the previous law, according to a Mongolia-based lawyer.
“This is a good development, but it is not the only thing they need to do,” said Anushka Shah, analyst in the sovereign risk group at Moody’s. “Policy has been unreliable for foreign investors in the past. I don’t think investors are going to jump in right away.”
Meanwhile, Hong Kong’s Securities and Futures Commission and the Financial Regulatory Commission of Mongolia last Friday signed an agreement to exchange information related to regulation of the two markets.
With the new law in place, prospective investors are going to focus on the Mongolian Government’s plans to develop the Oyu Tolgoi mine for signs on how the wider economy will develop. That copper and gold mine – the country’s largest – has become a symbol of the uneasy relationship Mongolian politicians have had with international investors. Earlier this year, Rio Tinto put on hold a US$5bn-plus expansion plan for the mine after the government said it would need to approve the project.
FDI suffered in turn. The dollars Rio Tinto did not spend in the country led others to opt to invest elsewhere, sources said. However, where there is a challenge here, there is also opportunity. Local investors are watching the production of the phases one and two of the mine for signs.
The first phase of the mine started shipping copper concentrate to China in July. Investors saw the shipment as one of the first signs that Mongolia’s mining-based economy would deliver on its promise to international markets. As of September 18, the mine produced 160,000 tonnes of concentrate and shipped about 38,000 tonnes.
“What I’m keeping my eye on is the production from phase one of Oyu Tolgoi,” Cashell said. “People mainly talk about progress on phase two. That’s important, but I’m watching the first phase. If it increases as it’s supposed to, it will have a huge impact on the economy. It could be responsible for five or six percentage points of growth next year.”
SOURCE: IFR Asia