Institute for National Strategy
The economic situation is dire and the previous cabinet has managed itself into a position of high debt, with accompanying high inflation, high interest rates and a steadily devaluing currency. Inflows for direct investment have slowed to a dribble due to long lasting commercial disputes, and a lack of confidence in the rule of law and government behavior.
Will “new PM” Saikhanbileg’s new government make the correct policy settings, fix the big problems in the correct order, and direct scarce resources to where it will deliver most benefit in the medium term.
Evidence is clear that political leaders are plentiful and political rhetoric is cheap but brave and sensible policy making and execution is much scarcer. Will this new leader organize parliament for success and choose the best team and prioritize correctly for the challenges upon us?
As the new PM says, “we are the ones who are guilty for this crisis”, and this implies that new people, new attitudes, new associations, new ethics need to be put into place to support new ideas and effective delivery mechanisms.
INS wish Mr. Saikhanbileg and his new team success, and provide a critique on policy related issues that have been raised already by the PM plus other critical issues.
INS comments on PM statements to date
Let us be clear about where we are at?
- There are no short term fixes for our overall situation.
- The number of large commercial disputes outstanding has frightened away FDI and made the raising of government and bank debt prohibitively expensive.
- Soft loans from China and Russia and cheap loans and short term subsidies to Mongolians and businesses are now turning into medium term policy stances and a long term debt problem.
- The level of subsidies in total appears to outweigh the previous governments largess via payments from the Human Development Fund.
Fix the commercial disputes ASAP
- Signing the IA in 2009 drove economic recovery, then economic growth and opened Mongolia for business. Damning the IA and Rio Tinto’s investment and efforts in Mongolia has been a serious mistake by key leaders and politicians. The litmus test for Mongolia now is whether the key leaders empower their negotiators to honor FULLY the IA and associated contracts for the life of the project. The investing and financing world is watching and waiting for this outcome.
- The new PM is urging Mongolian business to raise money from overseas sources. This will be difficult without OT resolved and Phase 2 restarted. Where funds are raised the investors will require a huge risk premium added to the borrowing rate to reflect the uncertainty of doing business in Mongolia.
- The PM has admitted the mistakes with the 106 licences – so very quickly returning the licences to those who are no longer under investigation is critical. Withdrawing the sham “tender process” is essential for regaining credibility.
- There are other commercial disputes between GoM and investors that also stand in the way of Mongolia regaining international credibility – and a taskforce should resolve a plan for their identification and fast removal from disputation.
Find alternate solutions to existing problems
- National Council on the Economy – to promote economic diversification
- INS: The risk here is that this will become a talking heads forum – much more time should be spent on executing the critical focus areas.
- GoM is contemplating a number of new Funds and subsidy programs
- A new loan management system (to get the right balance between commercial debt and soft loans) and an Investment Fund will be advanced
- INS: supporting the economy while not further enlarging the GoM debt is a difficult task. Solving commercial disputes will open the doors for private sector borrowing, thus taking pressure of GoM lending and exchange rates
- A swap loan deal will also be made with Russia whereby fuel will be paid by Ruble debt and other trade will be transacted in Rubles
- INS: the danger here is that Mongolia has to reverse the swap and further currency depreciation will add significantly to the cost of this facility. Mongolia is already exposed to this via the Chinese swap arrangement.
- A $1B soft loan from China will be taken out and has been linked to
- the Chinggis bond and Chinggis loan repayments,
- increasing the interest rates payable by those already in receipt of Chinggis funded loans from the DBM.
- Further loans via an Investment guarantee fund for private sector
- A “Bail out” method to help ailing Mongolian businesses
- INS believe
- it will be difficult for banks to take “shares as security” when the distressed company is technically insolvent.
- The ability to raise loans here is questionable, unless the GoM is seeking to give “guarantees for failure”.
- There will be no increase in economic activity, with little chance of loan repayments, plus danger funds are directed to political friends
- INS believe
- A new GoM backed “private sector guarantee” fund to back private sector investments
- INS : May work longer term but guarantees will not be seen as sovereign strength given the number of commercial disputes the GoM has unresolved.
- Establishment of a Mongolia Wealth Fund to hold shares in OT, TT and 2-3 other strategic deposits
- INS: Holding shares in any mines is a losing strategy for the GoM. This is a philosophical issue the GoM needs to address as it will hold back development in the country.
- Re-organization of the social insurance fund into an Investment Fund based on Chilean and Scandinavian practice
- INS : This is a good idea, and must be well structured and focused on real economic growth activities.
Reorganisation of the GoM out of SoE’s is discussed
- INS : international experience shows that partial privatizations are not usually successful and do not generate funds for government or increased economic outcomes.
Important Mega projects are again being promoted
- INS : Getting large projects going is critical, however the funding needs to be put into place and some of these projects have very unclear technical and commercial feasibility.
Cotinuation of the residential mortgage and extending this to a business mortgage program
- INS : this will further add to GoM debt and it is better to expand the banking sector to provide commercially justifiable and secured loans – rather than waste scarce GoM funds and increase GoM debt.
Mongolia needs a political and economic program to put Mongolia back on the map. It is important that the PM’s new team give very careful consideration to understanding
- The “golden rules” which drive international investors and financiers thinking about investing in Mongolia
- what it really takes to solve a large commercial dispute quickly?
- the importance of incentives to make Mongolia as attractive as “investment hot” destinations.
The PM also needs to address the following high level issues
- State ownership in mining
- Real estate and urban development
INS believe the GoM should look at the urban development issue immediately
- Aside from OT phase 1 real estate development in UB has been the second reason for economic growth. Unfortunately housing affordability is expensive despite government subsidies to owners and property developers (for raw material inputs). INS believe:
- the price of housing (and the quality offered) has little to do with the cost of producing it, with high margins to developers.
- The number of unfinished buildings is more to do with developers’ running out of money, than to do with other factors
- Mongolians deserve better value for money than they are getting
- Cost-effective community friendly low-rise development should be evaluated and promoted.
- Mongolians deserve better than to be crammed into small apartments in high rises with very low level community facilities.
Analyzing the events of the past two weeks, there appears to be more bias towards continued pump priming of the economy through GoM raised debt and overseas soft loans, than on talking about the need to fix the commercial disputes and consequently restoring confidence in Mongolia.
A continuation of government funded pump priming plus rising GoM debt, will not see a slowdown in inflation, a lowering of interest rates, or a strengthening of the currency. International investment will want to see a focus on macro-economic stability and cleaning the backyard of legal disputes. Significant foreign inflows are unlikely without a change in investment fundamentals.
Organizing for success in a crisis is crucial. It becomes harder when you have only a short time before the 2016 election. The use of delivery units (along the lines of TT Power project) should also be put into place. They must be financed, resourced and led for success.
Today is a tough time to become a nation’s leader. For Mongolia’s sake we trust Mr. Saikhanbileg will consider all of the policy choices at his disposal. Leadership in a storm is a tough assignment, and we believe Mongolians will respond favorably to a leader who will administer the correct medicine.
Cameron Mcrae, INS President