Today I have the responsibility to give a macro view of government.
- This is a difficult topic to do well – especially when there are so many experts in the room
- This report will be a business centric assessment of government performance
- When we talk about government we often refer to the different arms of government collectively – which can be confusing,
- I apologise in advance for switching between the parliament and the cabinet and the ministries and the bureaucrats
Some opening observations –
- Mongolia’s leaders do not want Mongolia to live in splendid isolation from its neighbours, financiers and trading partners.
- there is a country wide hunger for rising standards of living,
- there is a fast-growing realisation in business and government that this improvement can only be earned by effectively competing in the global economy.
The first panel talked about
- economic performance, the declining level of GDP growth,
- how the past 2 governments have borrowed heavily and debt maturities now need to be dealt with over the next 24 months
- minimal foreign currency reserves, with some recent relief with 750m in government loans raised this month.
The key point here is there is a legacy at the end of this term of government
- The next government will need to be exceptionally disciplined – in terms of refinancing smartly, and managing its finances frugally. But this will not stimulate the economy.
- Stimulation of the economy will mainly come from the business sector.
- The government’s role is to stimulate confidence so that investors and banks will invest into Mongolia – whether through the private sector or via PPP’s.
To judge the performance of this government we need to think of three periods
- Period 1 was early 2010 to early 2013 – post signing of the OT IA
- this was a period where we had a strong global economy, high confidence in Mongolia, strong FDI, large projects actively under consideration double digit GDP
- BUT we also saw attitude problems between government and businesses/investors
- Period 2 was mid-2013 to mid-2014 – new government and deferral of OT phase 2
- This was a period where the global economy showed signs of strain, commodity prices were dropping, multiple disputes between government and business were becoming public and large projects were stuck on the drawing boards
- Period 3 is late 2014 till now
- The Mongolian economy has slowed to almost zero growth. The global economy is shaky and very low commodity prices have made investors extremely cautious
- However, we see a significant change of attitude by government towards business, but this does not rekindle FDI as investors memories of period 1 and 2 remains strong
So we are confronting very serious economic challenges and will soon face another serious (but recurring) challenge – the formation of a new government in July.
Sumati’s recent polling has indicated there is a reasonable chance we will have a change in political leadership, new parliamentary leaders and a new cabinet. If the 2012 election has set a precedent, we may also see wholesale change-out in the senior ranks of the Ministries that run Mongolia. This is an issue that investors – especially those who have been here over election cycles – think about.
I wrote an article in early February, after the “vote of no confidence” in the Prime Minister. The theme was “difficult times but positive progress”. My key observations at that time were:
- Win-lose political actions against foreign investors were now regarded as mistakes of the past – and that hard lessons were learnt from highly public disputes.
- The more thoughtful politicians now realised they were in fierce competition with many countries equally desperate to attract investments and associated financing.
- Foreign investors and financiers were still watching cautiously from the sidelines
I also stated that PM Saikhanbileg had worked earnestly to
- To resolve complicated disputes in a principled manner
- To put key projects back onto a positive footing
- To implement solutions that were based on international standards and that recognised “sanctity of contract”
My view on performance then said nothing about the plethora of legal changes that have occurred, many of which have had positive (and at times negative) impacts on businesses confidence to invest or attempt to help business owners and promoters achieve world class competitiveness.
I won’t talk to the legal and policy changes specifically. You should refer to Randolph Koppa’s slides that lay out policy and regulatory changes that have been put into place. We are not in a perfect place yet, but we are heading in a better direction than we did in late 2012 and 2013.
But I will talk about political leadership. Moving to a much stronger “pro-business” stance has not been an easy position for the current Prime Minister to take. He has had to build credibility off a very low base.
And please remember that previous governments comprising both major parties have taken actions that devalued the sanctity of contract, and shown disrespect to investors who took huge risks to bring projects and finance to Mongolia. Both parties have contributed to the credibility and reputational problem that Mongolia is now seeking to turn around.
Remember building a reputation is easy, rebuilding a tarnished reputation is much more difficult.
But what is important, and factual, is foreign investors are starting to take serious notice. Foreign investors have been impressed with the recent efforts of the current government to resolve multiple disputes – significantly related to exploration and mining development – and to get the Oyu Tolgoi project finance re-instated.
And getting the PF back into place – all $4.4B of it is a remarkable achievement for Rio and the government. But they remain cautious – and they ask if this shows a broader maturity of the political parties and political process towards business.
Let’s think about investors for a minute – they are not charities and they have an eye on what can go wrong with their investments. Understandably, investors are naturally cautious of politicians and political parties. And Mongolian politicians are no different to their foreign counterparts – resorting to blame and criticism is often a more successful path to re-election than laying out clear strategies and plans.
Some Mongolian politicians are postulating that Mongolia’s economic situation is the victim of a global slowdown, Chinese economic restructuring and a fall in global commodity prices and this has led to a fall in FDI.
It is my view that Mongolia had already damaged its reputation – and FDI flows – before the external factors started to bite. I make 3 observations.
- Firstly – bad politics, bad laws and poor behaviour towards foreign investors goes back to before the 2008 general election.
- Secondly – every major political party and leader has made mistakes in dealing with the business community and new investors – and I am talking both domestic and foreign
- Thirdly – the Mongolian political parties have not yet found a formula for fast-tracking win-win outcomes on projects of national significance to the economy.
It is the legacy of these 3 negative factors that has international investors and lenders still sitting cautiously on the sidelines. They are waiting to see what happens after the June election.
Investors involved with Mongolia for some time have memories. They clearly remember that after the 2012 election a cabinet was formed which included reformist MP’s. Investors remember that these new ministers unfortunately believed their post-election task was to prosecute populist and confidence-breaking election promises that in hindsight have failed Mongolia – it’s economy and its people.
Investors also remember that the long festering dispute over the Oyu Tolgoi IA and the knee-jerk introduction of SEFIL were in play before the change of power in mid-2012.
- They remember other disputes that were not handled well by government
- They remember projects that have been sitting on the drawing boards – that should be in operation now if a truly supportive government process was in place.
So investors – who are not charities – needed to see a change in attitude and action to help rebuild confidence in Mongolia as a place where your investment would be respected and supported.
My assessment remains that the economic rescue mission started in May 2014 when the 100-day revival program was announced. This program did not stop the economy from further slowing, but it did herald in a more consultative approach to working with the economic engine room – the business sector.
Recently I have met with many foreign promoters, investors, lenders and ambassadors since 2013. They have been pleasantly surprised by what has been achieved in the past 12 months. However, those with real and significant money to sponsor projects are not rushing to Mongolia’s door – yet.
These investors report to their own shareholders and lenders – who are not charities – and their financiers are wary of three factors. These factors can be put positively – as questions to the aspiring political parties.
Question 1 Can you articulate what discipline is required to build an attractive and sustainable investment climate? Certain panellists today were astute and candid
- Tuyen of the IFC – discipline means demonstrating policy stability AND regulatory predictability
- Peter Morrow– Mongolia must continue the modernisation of SOE’s into viable and productive structures – and support those Mongolians who have actively promoted this critical initiative.
Question 2 Will you build on the positive momentum made over the past 18 months?
Question 3 Will you take important actions to enhance Mongolia’s “investibility”
- will you restrain further growth in government debt?
- will you further enhance legal frameworks and regulations – especially for business?
- will you appoint competent Ministers committed to deliver positive and integrated outcomes?
- will you retain the high-performing bureaucrats and bring in expertise where it is really needed?
- will you provide “best practice” structural support for large projects?
We know serious investors are risk averse – and will consider another critical “current issue”
- will the “emerging dominant political party” be able to form and maintain an effective coalition with a high performance cabinet and supporting ministries.
I now make some personal comments based on recent experience.
Firstly, global investors today – are witnessing countries dependant on their extractive industries adjusting quickly – to reduced government revenues, slowed growth rates and FX devaluation. While painful for the government, they are helping their “mining and infrastructure industries” to survive by removing inefficiencies and taking supportive actions. Why? Because business remains the engine room of the economy, even in hard times.
This is important to consider – because potential investors will ask if Mongolia needs to do more here.
Secondly, it is imperative that Mongolia’s leaders more fully appreciate that Mongolia’s economic recovery does not just depend on a lift in global GDP and commodity prices.
Fact 1 without significant investment there will be only minimal growth.
Fact 2 Investors – and not government – will fund the projects that grow Mongolia’s economy.
Fact 3 Winning investment to Mongolia relies on government successfully addressing the attitudes of international investors to risk and reward.
Fact 4 government itself needs to continue reforming positively and competitively and lock this change in to win the confidence of investors
Fact 5 project promoters, investors and lenders are not charities and expect to make profits.
There are some key factors for Mongolia’s political parties to understand – which Randolph Koppa has also mentioned
- Many international investors and lenders have been burnt in this global downturn and have become much more cautious – specially to emerging markets
- For large scale investors – Finding “safer havens with high returns” is still their goal.
- The larger accumulation funds are not rushing “foolishly” to the emerging economies.
- Some “emerging economy” countries are just not on “credit approved” lists
- and that applies to Mongolia in certain cases.
So finally I make a few closing observations
- The last twelve months have seen a serious effort by the current government to right the Mongolian ship.
- However, the global economy and low commodity prices are placing extreme pressures on our government and the confidence of potential investors.
- Therefore, Mongolia needs to work harder and be more disciplined than most other “emerging countries” to be able to claim “rights to low cost finance”
Putting on my BCM hat I say that the business community needs to lobby Mongolia’s political parties and leaders to do several important things.
Firstly – we need to impress on the political parties to start talking “more effectively” about the policy platforms that are essential to underpin a competitive investment climate, governed by the rule of law. Investors are listening in to the election rhetoric as well.
Secondly – we need to appeal to the “political collective” to lift their “collective game”. They must be asked to recognise that
- Mongolia must work harder and more effectively than its “emerging economy” competitors – on the things it can control.
- Mongolia’s reputation will be enhanced much more by positive investor friendly actions, including party policy platforms, than by expensive PR programs
In closing – and after having listened to all speakers today – I advocate that we encourage Mongolia’s political parties to commit to:
- Building on the recent achievements of the Prime Minister’s cabinet, and
- Publicise policy and demonstrate leadership behaviour – during the election – that improves Mongolia’s chances of winning FDI and cost-effective access to foreign lending.