Despite the election of Democratic Party (DP) candidate Khaltmaa Battulga as president, the Mongolian People’s Party (MPP) will continue to drive the legislative agenda, given its parliamentary dominance. This will ensure adherence to an International Monetary Fund (IMF) bailout package and efforts to stabilise the investment environment.

Security Environment

On 9 July 2017 DP candidate Khaltmaa Battulga secured the presidency in a second round run-off election. Despite the electoral success of the DP in this election, the presidency is a largely ceremonial post and, facing a MPP dominated parliament, Battulga will struggle to materially influence policy during his tenure.

Security risks in Mongolia are generally low, and there is a limited threat of terrorism or civil unrest. Where protests do occur, they are likely to be in connection with political issues and are not likely to turn violent. Mongolia’s foreign policy aims to maintain sound relations with both China and Russia.

However, Battulga’s campaign promised to rebalance the trade relationship with China. China accounts for four-fifths of Mongolia’s yearly exports, and Battulga has raised concerns over China’s strategic interest in the country. Despite this, relations with China are unlikely to materially worsen. Any attempts by Battulga to limit Chinese investment in Mongolia will likely be blocked by parliament, although there will be concerted efforts by the DP and MPP to engage with other countries, including Japan and South Korea.

Trading Environment

Mongolia’s economy is likely to experience an uptick in real GDP growth in 2017. A drop in foreign investment in 2016, driven by suppressed global commodity prices and resource nationalist policies, contributed to weak annual growth of 1.1%.

In 2017, renewed investor interest in major natural resources projects, a result of business-friendly policies under the MPP, will drive growth of 2.2%.

Sovereign credit risks remain elevated in Mongolia. Foreign exchange reserves stood at USD 1.2 billion in May 2017, yet USD 1.5 billion in foreign debt is due in 2017 and 2018. However, a three-year USD 434 million Extended Fund Facility (EFF), approved by the IMF in May 2017, will partly ease short-term liquidity risks. The agreement forms part of a broader USD 5.5 billion financing package, provided by the World Bank, the Asian Development Bank and the governments of Japan, Korea and China. Designed to support the government’s Economic Recovery Plan, the package will support foreign exchange reserves and banking sector reform. The package is also expected to enable Mongolia to meet its upcoming debt obligations.

However, stringent fiscal targets associated with the facility will weigh on economic growth. The IMF programme mandates that the budget deficit must be reduced to 1.5% of GDP by 2022, from 17% in 2016. As a result, the government has cut nonessential spending, which could slow growth in the short term.

Investment Environment

Battulga’s election campaign focussed on resource nationalist policies. This included a proposal that all mining revenues should be deposited in Mongolian banks. However, foreign mining firms are unlikely to see a return to the hostile business environment seen under the previous DP government. In 2012, the DP government sought to limit foreign ownership by invoking the Strategic Entities Foreign Investments Law, to prevent Chinese firm Chalco from acquiring South Gobi Resource. The MPP has 85.5% of seats in parliament, and has pursued more investor-friendly policies since June 2016. Battulga’s election is unlikely to materially change this.

The MPP government announced plans to enhance the business environment for foreign investors in August 2016, creating a council to ensure legal certainty and resolve outstanding disputes. Attracting foreign investment is central to the government’s economic stabilisation plans, particularly in maintaining the IMF programme and meeting foreign debt repayments. In October 2016, the government approved an intergovernmental agreement with Canada, which will offer additional protections for Canadian investors. In an indication of revived confidence in Mongolia, the second phase of the USD 5.3 billion Oyu Tolgoi copper and gold mine began in mid- 2016 and outstanding disputes over the development of Tavan Tolgoi coal mine are now likely to be resolved.

Published Date:2017-08-01