Mongolia bets on mine deal to boost economy
• Cash-strapped Mongolia’s deal to expand the US$6.5-billion Oyu Tolgoi mine is a big step toward stabilizing its economy, but as it waits for the investment boost to feed through, it is leaning on oncefeared China to help shore up its finances.
The landmark agreement with Rio Tinto to resume construction of the underground copper mine ended a two-year dispute during which foreign investors had shunned the country and slumping coal exports left it short of reserves.
The mineral-rich country’s heavy reliance on the mining sector has led to boom-bust cycles and credit downgrades by ratings agencies worried over weak external liquidity.
Foreign investment fell 87 per cent in 2014, which slowed growth to 7.8 per cent from 12.3 per cent the year before. China helped Mongolia’s central bank stave off economic collapse with a currency swap agreement to help it maintain reserve levels.
The Oyu Tolgoi project is the biggest single foreign investment in Mongolia, and the deal with Rio rekindles hopes for a slew of other stalled projects.
“Mega projects lift longterm growth equilibrium upwards,” the Bank of Mongolia’s chief economist Sandagdorj Bold told Reuters, referring to hopes it will lead to a revival of foreign investment.
In the meantime, the swap agreement with China was “one of the tools to absorb the shock of balance of payments pressures,” said Bold.
The swap agreement, which works similarly to a credit line, also comes with fees and interest paid to the PBOC, but without many of the strings that are typically attached to an international bailout. “The cost is very reasonable,” said Bold, adding he could not disclose the terms of the agreement.
Analysts at ratings agency Moody’s said in an article on Thursday that the development of the underground mine would “provide significant impetus” to Mongolia’s economy, with higher foreign investment substantially replenishing its reserves.
“Nonetheless, until an actual ramp-up in production occurs, Mongolia will remain heavily dependent on a ... bilateral swap facility with the People’s Bank of China,” it added.
Swings in global commodity prices and foreign investment flows have left Mongolia’s economy lurching between boom and crisis in recent years.
The country burned through its reserves in 2009 as copper prices collapsed in the wake of the global financial crisis, and needed a bailout loan from the IMF and other international lenders, and the launch of the first phase of Oyu Tolgoi, to avert a full-on crisis.
Rising coal prices and a revival of copper drove growth to a 17.5 per cent peak in 2011, but in recent months, the economy has been weighed down by a slowdown in China, the main consumer of its resources, and government meddling that made investors less enthusiastic about its mining sector than three years ago.
“The government had assumed that the post-(crisis) surge in commodity prices was permanent,” Tim Condon, chief Asia economist at ING in Singapore, wrote in a research note. “Populist visions of being the Saudi Arabia of copper and coal drove negotiations with foreign investors.”
The latest downturn had prompted an IMF warning that Mongolia’s foreign reserves were likely to fall too low to finance its trade deficit, underlining the importance of the swap line with Beijing.
Lkhagvasuren Amar, an economist at the Asian Development Bank, using central bank figures from March, estimated that Mongolia had drawn down an equivalent of US$1.7 billion out of a maximum US$2.5 billion from the currency swap.
“I would find it a quite healthy buffer,” said Amar.
The People’s Bank of China has inked swap agreements with 24 central banks to promote the yuan as a global currency. China’s close proximity, as well as its position as a lead investor and top trade partner, makes the yuan a unique fit to the Mongolian economy.