Mongolia’s economy is rallying, following a fiscal and balance of payments crisis in 2016. This is being driven by resurging investment in the country’s mining sector, as the current government pursues a business-friendly policy agenda. Sovereign credit risks will continue to recede as government debt levels fall.
Foreign investors operating in Mongolia will benefit from a robust security environment. There is no history of domestic terrorism in the country, and the likelihood of a terrorist attack occurring is low. If a terrorist incident were to occur, it would most likely target public spaces or government buildings in Ulaanbaatar, rather than commercial mining sites. Mongolia has good relations with Russia and China, reducing the risk of an interstate conflict with its neighbours. Moreover, Mongolia maintains an active role in the international community, contributing to peacekeeping operations in both Iraq and Afghanistan. In May 2017, Filipino president Rodrigo Duterte stated his intention to sponsor Mongolia’s links to the Association of Southeast Asian Nations, in a reflection of Mongolian efforts to enhance relations with a range of countries.
Mongolia’s economic recovery is expected to continue in 2018, following an estimated real GDP growth rate of 5.0% in 2017. Growth rates, which fell to a low of 1.1% in 2016 during a fiscal and balance of payments crisis, will be driven by strong investment in mining projects. The Mongolian People’s Party (MPP)-led government continues to demonstrate its commitment to attracting foreign investment in the mining sector, announcing in March 2017 that the land available for exploration would increase from 9.6% of the country to 20.9%. This will reassure investors in the medium-term outlook, supporting robust investment in existing projects. The second-phase of development at the Oyu Tolgoi copper and gold mine will be a key driver of growth, accounting for around one-third of the Mongolian economy when full production is reached in 2021.
Sovereign credit risks have fallen in Mongolia under the current administration. Measures introduced by the government in the 2018 budget include customs duty taxes on petroleum, alcohol and cigarettes, as well as increased social security contribution fees and a 10% tax on interest income. It is estimated that this will increase tax revenues in 2018 by 2% of GDP. As a result the general government deficit is expected to reach 6.5% in 2018, from 15.9% in 2016, whilst gross general government debt (GGGD) is also falling. GGGD is forecasted at 87.5% of GDP in 2017 from 91.4% in 2016. Stabilising sovereign credit risks will be supported by an International Monetary Fund (IMF)- led USD 5.5 billion financing package, which was approved in May 2017.
Despite the positive outlook, political instability remains a risk in Mongolia. In September 2017, the cabinet and prime minister were removed following a no-confidence vote, which temporarily delayed an International Monetary Fund review of Mongolia’s Extended Fund Facility. Whilst the review eventually occurred in October 2017, leadership changes are a relatively common occurrence in Mongolia, elevating the risk of sudden policy reversals and a return to resource nationalist economic policies.
On 8 December 2017, the Supreme Court ruled that the nationalisation of Erdenet Mining Corporation (EMC) in February 2017 was illegal. The Mongolian parliament took full ownership of EMC, which was previously 51% state-owned, after Mongolian Copper Corporation’s (MCC) acquisition of a 49% stake in June 2016 was marred by allegations of procedural irregularities. December’s court ruling has reinstated MCC’s stake in EMC. The decision should enhance investor confidence in Mongolia’s legal system, as it is indicative of the court’s independence and impartiality when dealing with commercial disputes. The decision also underscores the low risk of expropriation in Mongolia.
The nationalisation of EMC was at odds with the MPP’s otherwise business-friendly policy agenda. A robust economic outlook should ensure that the government does not move away from such policies in the one-year outlook.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Egypt, Nigeria, Angola, and Vietnam all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
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