POLITICAL

Mongolia’s prime minister, Ukhnaagiin Khurelsukh, and his cabinet survived a parliamentary attempt to sack them in November. The attempted dismissal was related to an ongoing Mongolian anti-corruption authority investigation into allegations that senior government officials and parliamentarians channelled more than $1mn in government money to their families and friends.

In October, the Ikon news website had revealed leaked reports which posited that the country’s most powerful people were using a government fund to grant loans to family members and companies while also placing the money in high-interest bearing accounts. The fund was set up 18 years ago to offer loans to owners of small and medium sized enterprises (SMEs) at 3% interest—banks and financial organisations in Mongolia normally charge 12%-30% interest. An equivalent of $25mn in Mongolian tugriks was allocated to the fund in 2018’s budget. SMEs account for about 17% of Mongolia’s GDP but face high profit taxes and must contend with difficulties caused by the fluctuating local currency. They are seen as very important to Mongolia as it tries to move away from over-reliance on mineral resource exports.

Ukhnaagiin Khurelsukh, Mongolia’s embattled prime minister.

The move to boot out Khurelsukh came 14 months after the ousting of the last prime minister, Jargaltulgiin Erdenebat. Short-lived cabinet terms are not uncommon in Mongolia where 15 different cabinets and 13 prime ministers have been seen since the country’s independence was established in 1992. Cabinet terms have lasted an average of 1.5 years.

Given this history, it is rather possible that 2019 will witness repeated attempts to kick out the current cabinet, especially if more results from the embezzlement investigation reveal connections to members of the current government.

Khurelsukh may have survived a vote of no confidence after weeks of unrest in the capital Ulaanbaatar, but he now faces the prospect of juggling ruling party and opposition interests to retain power and deliver on new pledges to fight corruption.

The PM’s own party, the Mongolian People’s Party (MPP), initiated the confidence vote and, even though the MPP holds 85% of the seats in the 76-member parliament, the Ikh Hural, Khurelsukh only won the backing of 40 parliamentarians, with 33 voting against him. Commentators said he had entered into some high-pressure wheeling and dealing to secure enough votes that could end up costing the taxpayer a worrying amount. Analysts said the factional public infighting was unprecedented for the party. It is usually regarded as a disciplined and united force in comparison with the rival Democratic Party (DP).

In a staunch defence, Khurelsukh declared that the move for a vote was a ploy by MANAN—that’s the Mongolian word for “fog”, while it is also an acronym combining the Mongolian abbreviations for the MPP and the DP. MANAN is taken to refer to what observers have described as Mongolia’s “30 families”. They are an elite group that the prime minister claimed controls both parties. Khurelsukh alleged that MANAN, led by current speaker of parliament and former PM Miyegombyn Enkhbold, was engaged in an attempt to remove the government because it was seen as interfering with their business interests. In contrast, Khurelsukh painted himself as a champion of the people focused on battling elitism and grand corruption. That was the populist approach taken by President Khaltmaagiin Battulga (DP) when he won election in 2017.

Mongolia’s leading political commentator, Jargalsaikhan Dambadarjaa, told the South China Morning Post in early December that the turmoil caused by the scandal would ultimately lead to “cleaning the public government of its bad features” and strengthen democracy. He predicted that this would be reflected in the 2020 parliamentary elections when new, perhaps less experienced, lawmakers would be elected for their outsider status.

ECONOMIC

Mongolia, GDP growth & inflation. Source: World Economic Outlook, IMF.

In its latest Global Economic Prospects report, released on January 8, the World Bank anticipates that Mongolia’s 2018 GDP growth will amount to 5.9% and predicts 6.6% and 6.3% for 2019 and 2020, respectively.

Despite the recovery, the IMF believes the country’s foreign reserves and bank capital still haven't reached appropriate levels. In November, the Fund urged Mongolia's authorities to dampen high credit growth and build external buffers.

Mongolia’s trade surplus contracted by 36.1% y/y to $931.7mn in January-September last year. Trade with China accounts for approximately 60% of Mongolia’s total trade, while trade with Russia makes up another 15-20%.

FINANCE

Mongolia has received its fifth tranche of funding from the IMF, equivalent to around $36.22mn, as part of the Extended Funding Facility (EFF) agreement, bringing the total amount of disbursements since the beginning of the programme to around $217.33mn. The agreement, totalling $434mn, is part of a larger $5.5bn bailout programme backed by international financial institutions.

The East Asian nation received $728mn from international lenders under the rescue package in 2017 and expected to receive another $836mn in 2018.

Fitch Ratings and Standard & Poor’s latest sovereign ratings for Mongolia placed the country at 'B' with a stable outlook.

Recapitalisation of Mongolia’s banking sector and the adoption and enforcement of the non-performing loan (NPL) resolution framework are seen as the main short-term priorities in order to improve the country’s financial resilience and reduce borrowing costs, the European Bank for Reconstruction and Development (EBRD) said last November.

BUSINESS
Source: World Bank's Doing Business 2019 report.

The World Bank's Doing Business 2019 assessment saw Mongolia's Ease of Doing Business score rise slightly by 0.27 points to 67.74. On the other hand, the country's ranking in the accompanying report fell to 74th from 62nd the previous year.

Anglo-Australian metals and mining corporation Rio Tinto said in October that while capital costs for the $4.4bn expansion of the flagship Oyu Tolgoi gold and copper mine remained in line with the overall budget, shaft-sinking challenges were likely to lead to a delay in the project's first production. Some observers believe that the project, originally scheduled to see its first output in late 2019 to early 2020, won't be achieving sustainable production until late 2021.

The Oyu Tolgoi mine, located in the Gobi desert, is seen as a barometer for Mongolia's investment climate. It is jointly owned by Mongolia’s government (34%) and Turquoise Hill (66%), in which Rio Tinto has a 51% stake. The mine has proven and probable reserves of 1.45bn tonnes. Arguments over profit-sharing and difficulties caused by nationalist rhetoric have held up and complicated its development in the past.

As a landlocked country with a big need for infrastructure development, Mongolia will continue to look for ways to benefit from China’s huge Belt and Road modern trade infrastructure initiative. Mongolia enjoys warm relations with Beijing. Efforts are under way to build a Russia-Mongolia-China economic corridor by modernising railroads and highways.

Other modernisation efforts are centred on Mongolia’s cashmere industry, with experts attempting to unlock much more value for the country, the world's second-largest producer of raw and washed cashmere.

Mongolia’s cashmere goat population amounts to 27mn, compared to just 5mn in 1990, and its annual cashmere production capacity stands at 9,400 tonnes. The EBRD intends to provide consultancy services to Mongolia’s herders, cooperatives and other “Pasture User Groups” to bring about improvements in the sustainability of Mongolia’s pastureland, herd quality and management and fibre collection.

The size of Mongolia’s pastureland has been shrinking due to overgrazing in recent years as the overall number of livestock in the country has been rapidly expanding. Mongolian cashmere and wool garment manufacturers are thus facing issues arising from the pressure to increase the supply of cashmere. The situation is “adversely affecting fibre quality and is leading to biodiversity degradation”, the EBRD noted.

Approximately 90% of the country’s cashmere is exported while the rest is processed into final products. As such, Mongolia is missing out on its potential to annually export 19.8mn pieces of knitted and textile products, which would amount to earnings worth $1.78bn in the event that Mongolia started fully processing all of its cashmere at home.