Mongolia’s Foreign Direct Investment at a Crossroads
In the past decade Mongolia has attracted the attention of many investors. The economy of one of the most sparsely populated countries in the world relies on its massive wealth of natural resources. Coal, copper, iron ore, gold and uranium are just a small part of the mineral abundance the country has to offer. After the end of the Soviet domination in Mongolia more than 20 years ago, the local economy started to grow at an enviable pace. Since the beginning of 2003 the annual real Gross Domestic Product (GDP) growth rate of this small Central Asian country surged between 7% and 10.6% for six consecutive years. In 2009 the global financial crisis hit Mongolia and for the first time in 16 years the economy contracted, by 1.27%. Despite the setback, the downturn did not last long and in 2010 Mongolia’s GDP registered 6.4% real growth. However, the best for the country was yet to come. In 2011 Mongolia recorded real GDP growth of 17.5%, which turned it into the fastest growing economy in Asia.
The impressive pace of development is rooted in the huge amounts of foreign capital that Mongolia has attracted over the past few years. The country drew significant investor attention in the second quarter of 2010 when inward foreign direct investment surged almost eight times on an annual basis. The upward trend peaked in the same quarter of 2011, resulting in more than USD 1.37 billion in the form of foreign direct investment (FDI) receipts. Total FDI in Mongolia in 2011 exceeded USD 4.71 billion, more than 80% of which was due to large capital inflows to the mining sector. In 2012 the total FDI invested in the local economy shrank by 17% to USD 3.9 billion but it remained stable as a proportion of GDP, amounting to 40%.
According to the Bank of Mongolia, foreign investment in the first five months of 2013 is still lagging behind last year’s numbers. Given that FDI is one of Mongolia’s growth pillars, its decline does not bode well for the economy as it seeks to transition into a middle-income economy. The disruption in capital inflows, especially in the mining sector, is a factor behind the sudden decrease in the country’s exports. International trade in mineral products on average has amounted to about 85% of the total exports of Mongolia in the past three years.
The current downturn in investor interest in Mongolia can be explained by the recent presidential elections and last year’s parliamentary vote. Despite some protectionist measures in his previous term, the re-elected president Tsakhia Elbegdorj is expected to allay the fears of foreign investors. In recent weeks the government has approved a new legal framework for foreign investments, which is supposed to ease restrictions on overseas companies. Additionally, in the beginning of July 2013, the British-Australian mining giant Rio Tinto started shipping copper from one of the world’s five biggest copper mines situated in Mongolia – Oyu Tolgoi. The significant mineral wealth of Mongolia, right at the doorstep of China, is a prerequisite for booming industrial development in the years to come. The only question mark for the country remains on the route that the government will decide to take going forward.
The impressive pace of development is rooted in the huge amounts of foreign capital that Mongolia has attracted over the past few years. The country drew significant investor attention in the second quarter of 2010 when inward foreign direct investment surged almost eight times on an annual basis. The upward trend peaked in the same quarter of 2011, resulting in more than USD 1.37 billion in the form of foreign direct investment (FDI) receipts. Total FDI in Mongolia in 2011 exceeded USD 4.71 billion, more than 80% of which was due to large capital inflows to the mining sector. In 2012 the total FDI invested in the local economy shrank by 17% to USD 3.9 billion but it remained stable as a proportion of GDP, amounting to 40%.
According to the Bank of Mongolia, foreign investment in the first five months of 2013 is still lagging behind last year’s numbers. Given that FDI is one of Mongolia’s growth pillars, its decline does not bode well for the economy as it seeks to transition into a middle-income economy. The disruption in capital inflows, especially in the mining sector, is a factor behind the sudden decrease in the country’s exports. International trade in mineral products on average has amounted to about 85% of the total exports of Mongolia in the past three years.
The current downturn in investor interest in Mongolia can be explained by the recent presidential elections and last year’s parliamentary vote. Despite some protectionist measures in his previous term, the re-elected president Tsakhia Elbegdorj is expected to allay the fears of foreign investors. In recent weeks the government has approved a new legal framework for foreign investments, which is supposed to ease restrictions on overseas companies. Additionally, in the beginning of July 2013, the British-Australian mining giant Rio Tinto started shipping copper from one of the world’s five biggest copper mines situated in Mongolia – Oyu Tolgoi. The significant mineral wealth of Mongolia, right at the doorstep of China, is a prerequisite for booming industrial development in the years to come. The only question mark for the country remains on the route that the government will decide to take going forward.
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