Renewables sector offers investor opportunities in Mongolia

30 August 2018

Mongolia continues to offer investors in the renewables sector a stable security environment and supportive climate conditions. However, rebounding economic growth belies a continued overreliance on revenues from natural resources, which generates significant downside risks.

Security Environment

Mongolia offers investors a stable and low risk security environment, as the country maintains good relations with neighbouring Russia and China. There is no history of domestic terrorism in the country, and the likelihood of a terrorist attack occurring is low. The risk of civil commotion is similarly low, as protests are not a frequent occurrence in the country.

Any demonstrations are likely to be peaceful and concentrated in central Ulaanbaatar. Many protests are organised by opposition parties outside parliamentary buildings in the wake of elections or during coalition negotiations. However, these are unlikely to result in violence or property damage for commercial assets. Chinese nationals working in Mongolia will face an elevated risk of assault by nationalist groups, as anti-Chinese sentiment has risen in recent years. However, there is a limited risk to Chinese-owned commercial assets.

Trading Environment

Mongolia’s robust economic performance is forecasted to continue throughout 2018, with real GDP growth expected to reach 5.5% in 2018. Growth will be driven by rising commodity prices and investment in the mining sector. 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%.

However, Mongolia’s reliance on a small number of major projects as drivers of economic growth generates downside economic risks. Growth will also be driven by upgrades to transport infrastructure, with rail projects to link mines with the Chinese and Russian borders forming a significant part of the project pipeline.

Sovereign credit risks have fallen in Mongolia in recent years, in part because of support from an International Monetary Fund (IMF)-led USD 5.5 billion financing package, which was approved in May 2017. However, Mongolia has not made substantial progress in tackling structural economic imbalances, in particular its exposure to commodity cycles. Whilst the budget deficit fell from over 15% of GDP in 2016 to 3.9% in 2017, normal spending was financed by drawdowns from the Fiscal Stability Fund.

The fund is supposed to support the fiscal position in times of low commodity prices, and it is concerning that the government has used this resource during a period of higher revenues from natural resources. Moreover, fiscal reforms proposed in the 2018 budget have been delayed, including income tax amendments and extension of the retirement age.

CPS Subscribe banner

Investment Environment

Investor interest in Mongolia’s power sector is growing, particularly as domestic power demand rises in line with urbanisation and expanding industrial production. The government has launched a two-stage power development plan, with the first phase to 2023 involving the development of a modern power network.

The second stage from 2023 to 2030 will focus on Mongolia becoming a power exporter. The country has significant renewables potential, given its sunny and windy climate. The government is encouraging of foreign investment in renewables, as it aims to secure 30% of generated electricity from renewable sources by 2030. In May 2018, the European Bank for Reconstruction and Development (EBRD) agreed a EUR 31.5 million loan to Desert Solar Power One for a 30 MW solar photovoltaic plant to be constructed in Mongolia. The plant will be Mongolia’s largest solar project.

The current government is pro-foreign investment, and this has eased expropriation and contract risks for foreign investors. However, contract enforcement in Mongolia can be challenging, as many lower courts lack experience in commercial law and judicial corruption is common. However, in December 2017 the Supreme Court’s ruled that the government’s nationalisation of the Erdenet Mining Corporation was illegal, and this should reassure investors that the Mongolian judiciary is independent and impartial.

Mongolia Pricing Table
 †††† Underwriters commented that they are selective as capacity is usually tight.

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Nicaragua, Ethiopia, Mongolia and Kazakhstan all of which have been the subject of recent enquiries from JLT's client base.

World Risk Review September 2018

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.

Download Risk Outlook

For further information, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com.

YOU MAY ALSO BE INTERESTED IN