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Economy

Mongolian president sets new reform goals

Mongolian President Tsakhiagiin Elbegdorj

ULAN BATOR -- Mongolian President Tsakhiagiin Elbegdorj can rightfully boast that he has persuaded parliament to take a more welcoming stance toward foreign investment, but he is aiming for even more.

     Elbegdorj, who was re-elected last June to a second four-year term, addressed businesspeople in Ulan Bator last month and sketched out plans for 13 new bills. He used the slogan, "From big government to smart government."

     "After three years when I leave, they will talk about my legacy," Elbegdorj said. "Investors want direct answers to how safe, how secure their investments are."

     The proposed laws would impose greater fiscal discipline on government borrowing, enhance transparency at "all levels of government," limit the kinds of investments the government can make, and reform property and contract rights.

Adapting to change

Bayanjargal Byambasaikhan, chairman of the Business Council of Mongolia and managing partner of the financial advisory company NovaTerra, sees the reform of land ownership rules as most critical.

     "What we have is a law written 10 to 15 years ago when the economy and businesses were small and people didn't know much about international standards," said Byambasaikhan, who was at the president's address. "Now we need rules in line with international project finance standards."

     Elbegdorj's plans may be too ambitious given the country's political structure, a hybrid of presidential and prime ministerial systems, even though both are led by the Democratic Party.

     "Thirteen (bills) is too many, I think," said Luvsandendev Sumati, head of the Sant Maral Foundation, a nonprofit polling agency, pointing to discord both within the ruling party and with its coalition partners, especially the Mongolian People's Revolutionary Party, and the tendency of lawmakers to stake out populist positions. 

     Elbegdorj summoned parliament for an emergency session last September after the tugrik, Mongolia's currency, fell 7% against the U.S. dollar in a month amid a worrisome decline in foreign investment and a jump in the projected budget deficit.

     Legislators endorsed a new foreign investment law that removed a restriction, imposed in 2012, requiring government approval for foreign private companies' investments in "strategic sectors," including mining, the main engine of the country's economic growth. Another new law, which takes effect this month, eliminates preferences for local securities investors. A separate measure establishes a framework for custodial banks and nominee shareholding to facilitate foreign institutional investment. However, the legislature rejected some government proposals on budget issues.

Make-or-break moments

The change in tone by the legislature toward foreign investors, after a few years of belligerence that helped delay the opening of Rio Tinto's $6.5 billion Oyu Tolgoi copper mine and other projects, appears to be having some impact. Last month, the state-owned Development Bank of Mongolia sold 30 billion yen ($287 million) of 10-year samurai bonds with a coupon of just 1.52% with the help of a guarantee from the Japan Bank for International Cooperation.

     Analysts differ on whether economic growth is slowing or accelerating. The Economist Intelligence Unit has projected that Mongolia will be the second-fastest growing economy in the world this year, behind South Sudan, with gross domestic product rising 15.3% thanks to the first full year of operations of Oyu Tolgoi. However, Ulan Bator-based Mandal Asset Management believes growth will slow to 10% from an estimated 12% last year.

     Elbegdorj and officials from the Mongolian Stock Exchange have been touring foreign financial centers to promote investment. They hope the recent reforms can help drive a rebound in foreign inflows. Foreign direct investment into the country last year declined 36.6% to $2.43 billion, according to an estimate by Mandal, and the tugrik is now around 20% weaker than a year ago. 

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