Comments on: Financial crisis and Mongolian economy

By: James S. Klich II

James S. Klich II — Tue, 14 Apr 2009 01:11:12 +0000

Mongolia can transform itself into a green economy and protect its heritage at the same time. Mongolia will have some wonderful opportunities in the future. You can still produce coal and copper but protect the environment at the same time. Mongolia do not let large corporations get away with huge amounts of pollution!

By: Batsaikhan

Batsaikhan — Thu, 05 Mar 2009 18:38:39 +0000

It is interesting to read observations and comments by David Dollar and those who have extensive experiences in Mongolia.

I would like to highlight it is the first financial crisis experienced by Mongolian Government since adoption of free-market economy. What Mongolia faces is the realities of systematic disorder (I mean here global financial system) and negligence of negative consequences of undisciplined economic policies (sorry, but I don’t agree with some policies taken last few years). The symptoms of vulnerability in Mongolia were observed since mid 2008 when oil prices heat up (petrol is about 25% of Mongolian import, 2007 NSO Statistics) leading to one of highest inflation in Asia, too populist social welfare programs that heavily burdened the budget (I would not critique the policies at all, but the way of distribution to all, rather than targeting the vulnerable groups only) and construction industry bubble (40,000 household programme, which provide tax facilitation to construction companies (tax difference went to construction companies rather than to buyers) contributed more to the bubble, as the realized market price on supply/demand rather than discounted price thought by Government. Today real estate price is down 20-30%, which I believe is the actual perceived value).

And many people were optimistic on protection from spillover effect of US financial crisis to Mongolia, as Mongolia does not have assets abroad, did not have any investment banks and was quite isolated from global financial system. However it was not true, as Mongolian domestic market is small and its export is not diversified, and unfortunately niched to minerals only. As global demand decreases, Chinese production slows, copper and gold prices go down. Nobody is sure how long the crisis continue, everybody is closely observing what US and EU will do next. Asia, especially China is focusing on domestic consumption, rather than putting all bets on US and EU. This may be good sign that may help Mongolia.

However seriousness is that Mongolia faced reality of triple crisis: financial, economic and currency, against most of countries which experience financial and economic crises. So, Government action to stimulate consumption might have a risk to lead to more tugrug depreciation and further consumer price inflation.

However, I believe the crisis should give much bigger lesson to Mongolians, which is financial discipline to all level. Last few years showed that Mongolia is not in rank among their Asian counterparts who tends to save. Mongolians were like Americans, want to spend if there is an opportunity (I am happy that Mongolian banks don’t have loose policy on credit cards, otherwise all might be bankrupt today). We missed good opportunities to build up reserves to be prepared for future.

I don’t believe faith of Mongolia is only in minerals. Mining sector will act only as a way to mobilize resources. The more important goal is how Mongolia distributes those resources (into infrastructure, social capital and income generating businesses) and build-up more competitive, productive and value-added sectors. If the Government can not achieve it by putting individual ambitions and short-term visions aside, there is a little hope for rapid growth and Mongolia will remain China’s sub-contractor.

By: Subotai

Subotai — Thu, 26 Feb 2009 22:23:34 +0000

Actually Mongolia is still about 50 percent nomadic or at least living in rural areas. The percentage of the population living in cities has actually declined in the last twenty years. What this new period of “democracy” and “free markets” has brought is poverty and a move backwards. During socialism there were factories built to create cashmere sweaters. most of those have since closed and now most Mongolian Cashmere is exported unprocessed which is less money less jobs and more dependence on foreign companies. As for the mining i am glad this is being delayed. Especially if it going to be a mine owned by a private American company. look at places where there is or has been a lot of mining West Virginia Montana, Wales all those places were poor because of it or poorer relative to the other parts of the country. Overall it sort of runs counter to spiritual beliefs about not cutting the land that are part of Mongolias nomadic legacy. i think some limited mining is probably unavoidable in a country as poor as Mongolia but it should be at least mostly in the hands of the Mongolian people who have always believed that individuals do not own land. it should be done with the upmost care for the environment and it should improve the quality of life for the people that work there and their families. Big multinational companies just dont care about people they want to rape Mongolia and squeeze out every dollar they can. Some people are saying that Mongolia is a capitalist country. i would say it is becoming a capitalized country. Through both public and private forms i firmly believe that the Mongolian economy must remain in the hands of Mongolians and the capital she produces must stay at home. Some executive in America doesnt need the realtively small amounts he can squeeze from Mongolia. the children sleeping next to breaking water pipes on the streets of Ulan Baatar needs a better future

By: Gary Tucker

Gary Tucker — Tue, 03 Feb 2009 00:07:00 +0000

The following is just an idea. I ask nothing personally from the idea accept to see it acknowledged and perhaps someone in position to do so may act upon the idea.

Mongolia could become the center of new development for all of North Asia. I have created a plan that creates 6 development holding companies. In the proposal the company controlling all of North Asia is to be headquartered in Darhan/Darkan. Each of the 6 companies is to be headquartered in a developing country, (China, India, Ecuador, Ukraine and Egypt). Each of the 6 companies is to use the initial cash flows for direct foreign investment in developing countries. ALL developing countries. The stimulus to the developing world would then translate into jobs in the developed world as knowledge/equipment and such would be quickly needed.

The companies are all publically traded, have interconnecting stakeholdings, and are composed of land holdings and commerical properties (inluding mineral rights etc), government bonds and cash. ALL acquisitions are to be made by trading stock in the company for these assets. All assets acquired are done so with the intention of not trading until maturity or for decades at a time. There is to be no internal debt of any kind for any of the six companies.

The income from these companies would be used in the early stages for building and repairing new and existing properties.

As each of the 6 companies owns approximately 6% of the other 5 companies, in the end each company is owned approximately 33% by the other 6.

Each of the 6 companies also own approximately 6% of each individual property, bond holdings and cash of the other 5 companies as well.

In theory this would mean Green River North Asia, headquartered in Darkan, could have assets and market value of well over a trillion US dollars with no debt. But some $US 660 billion of those assets are actually in the other 5 area companies. Ownership however would be approximately 66% within North Asia.

Initial funding of all six companies can be done by any world government wishing to trade any portion of any type of government bond held by that government for shares in the new companies. It would also be initially funded by banks also trading not only bonds but portions of bank owned real estate for the same. Industrial/financial/service companies could trade buildings in a share trade- lease back agreement. By spreading the risk on a large scale, but with no debt or leverage, this would provide a financial foundation for attempted recovery.

You would find a multiplier effect of any initial IPO moneys to act as such. Each company raises lets say $US 500 billion and uses the interlocking formula described, and the combined net assets of the 6 companies would be $US 4.5 trillion instead of $US 3 trillion.

This method combines cash flows from numerous sources worldwide and focuses the income towards development. It is like thousands of raindrops coming together to form a river. A directed river.

It is my hope that each of the six companies upper management would all be women but that is not essential, just thinking that coordination between companies might be less confrontational.

I have sent this proposal to many people with no reply. Hopefully someday someone will hear.

gltoffic@aim.com

By: Barry

Barry — Sun, 25 Jan 2009 02:01:37 +0000

A financial crisis brought on by the Mongolian Governments own inability to make decision in a timely fashion.
Example, Oyu Tolgoi miming agreement, three years in the negotiating and still they need more time to decide. My recomendation to Ivanhoe Mining and Rio Tinto,,,, pullout and do business where there is a much better business climate.
To not get this agreement done 2 years ago has cost the Mongolian government billions in revenues already. To delay longermay put off the commencemnet of production another 5 years. IVN and RTP nor BHP will stay around for that, they have other places to spend the money, which could be considered a waste of their time so far.
Ignorance may not be so bissfull for the Mongolian people in the future.

You simply cannot fix stupid.

Barry

By: ZO

ZO — Tue, 09 Dec 2008 16:25:36 +0000

I partly agree with Roy. But what I criticize from the government is its inaction. Yes Mongolian government is struggling to tackle with its millions of needs stemmed from its poor population and all those messes. Who does not have a mess these times? 18 years earlier, when Mongolia was entering democracy, it had very well educated population but now I really don’t think that is still the case. Of course I am not comparing Mongolia with some underdeveloped African countries. I fear Mongolia is following a well known example of these. What I understood from the business is the top executive is to be blamed in any situation. That has its fundamental and very precise justifications too. So government is in our case. Governments inability to take protective action in the case of falling commodity prices and rising oil prices era is making lives harder and harder here. What Worldbank and IMF suggests Mongolia is to keep its expenditure at its lowest point and refrain from issuing eurobonds. But right now we need a huge infrastructure investment to bolster the economy otherwise the collapse is inevitable, in my opinion. I just had got information from my info points that retail sales dropped almost 70% during the past 1-2 months, the thing I feared from the start of this year. Now I am carefully looking at the NPL figures on the bank balance sheets. I am ready to get surprised.

I am an independent economist, who does not have any educational background in economy.

By: Claudia

Claudia — Fri, 07 Nov 2008 00:12:16 +0000

Hello Roy, interesting points. I work with David in maintaining his blog and I’m pretty sure if you posted them on David’s blog, he’d reply. Here’s a direct link to his original post:

https://eapblog.worldbank.org/content/financial-crisis-could-provide-mongolia-opportunity-for-reform

In that post you will also find links with more information about the conference David mentions and to the presentations.

Cheers,

– Claudia

By: Claudia

Claudia — Fri, 07 Nov 2008 00:05:57 +0000

Hello Roy, interesting points. I work with David in maintaining his blog and I’m pretty sure if you posted them on David’s blog, he’d reply. Here’s a direct link to his original post:

https://eapblog.worldbank.org/content/financial-crisis-could-provide-mongolia-opportunity-for-reform

Cheers,

– Claudia

By: Roy Dongen

Roy Dongen — Mon, 03 Nov 2008 09:46:14 +0000

It was interesting to read David Dollar’s article although with many parts I unfortunately can’t agree as a person being active in Mongolia nearly 10 years with our private NGO Mongol Saikhan Foundation and the last years with our auditing firm Panthere Midland Audit and our consulting firm GANYMEDES.
First of all a vast majority of Mongolian people don’t live a nomadic life at all anymore. Mongolia has a population of roughly 2.8 million people and if you deduct Mongolians living in cities or even abroad maybe about 700,000 people or 150 to 200,000 families still live on the traditional nomadic life.
Secondly the government has tried to make savings for the future as David Dollar rightfully remarks but there is not really a lot of non focussed spending.
The raise of salaries by 3 % of GDP was a very necessary step to keep salaries for government officials at least a little bit in step with salaries in the private sector. A step really needed to reduce the temptations of corruption. Two years ago for example a starting civil servant at the justice department made much less than a waiter in the private sector. Some correction on this field was (and still remains in many cases) necessary.
Thirdly to so-called give aways (of 4 % of GDP) where start up premiums for young people starting a family. This money was intended for newly weds to invest in their private housing (but even far from sufisant to even get housing in a ger district) and the other most important so-called give away was an initial and yearly premium for each born child. Mongolia has less than 3 million people in a country 3 times the size of France or Texas. The population is young (70 % is younger than 35 years) and should be encouraged to continue to grow for various reasons. Important is however that people are able to feed their children, to give them at least some shelter and to take care of their health. Since the introduction of this premium it has been a little more easier for people to start their own families including raising children and the number of child deaths has actually decreased.
In the world of macro economics it is always easy to describe the patient a medicine. And in the west we indeed can follow this kind of doctors orders due to high living standards. But we cannot blame Mongolian government for trying to take care of their own population.
The fact that a large majority of mining projects didn’t start yet and although prices are indeed temporary falling (the worlds natural resources are limited so they will rise again while due to the geological circumstances mining in Mongolia is faster profitable) is maybe good for the country. Agreements will be made in a realistic way and the economy has not been fully depended (and governments spoiled) by the income from the mining sector yet. This is fully supported by governments and major corporations which are lining up to explore Mongolia’s natural wealth like Japan (investments for 3 years covering 2 billion) Korea, India, France, China, Vietnam, Australia, Canada and recent interest from Germany and UK.