Mongolia back from the brink after u-turn on ‘catastrophic’ bank law
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Mongolia back from the brink after u-turn on ‘catastrophic’ bank law

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A law in Mongolia forcing all large projects to run sales revenues through local banks that was passed in April had threatened to pull the plug on investment by Rio Tinto and an IMF bail-out until the government performed a u-turn just 20 days later

The Mongolian government’s last minute u-turn on a controversial banking law that threatened to undermine investment in the region has pulled the country back from the financial brink by unlocking $5.5bn of funding including a much needed sixth IMF bail-out.

At 4am local time on April 14, Mongolia passed a law that would have mandated all large projects to run their sales revenues through local banks. The law was in direct contravention of an investment agreement between Mongolia’s government and Rio Tinto over the Oyu Tolgoi mine on which the country’s growth hopes are pinned.

“The passage of this law became a serious issue very quickly,” said Nick Cousyn, chief operating officer at Ulaanbaatar-based brokerage BDSec.

“There was a real danger that if they hadn’t repealed it, Rio would have stopped working there. They are the country’s biggest tax payer. It would have been catastrophic.”

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The law change was not without its immediate consequences. The International Monetary Fund, which had reached a staff level agreement on a three year $440m extended fund facility, told the government it would not commence the funding programme unless the law were repealed.“The IMF made it clear that they would not provide assistance with this kind of law on the books.” said Cousyn. “Any infringement on the OT agreement risked compromising the $4.4bn investments made from global donors like the EBRD, IFC and World Bank.”

The Mongolian government’s decision to repeal the law on May 4 was met with relief. The IMF’s funding programme is expected to unlock $5.5bn of total funding, including relief from the World Bank, Asian Development Bank among others.

Copper bottomed

Historical data point to GDP growth acceleration following IMF programmes. But much of Mongolia’s prospects are still dependent on production from its copper and coal mines: some 30% of its revenues now come from mining. Once the Oyu Tolgoi mine reaches full production in 2021, it is expected to account for 33% of Mongolia’s GDP.

While global commodity prices are weak, Randolph Koppa, executive vice chairman of the Trade and Development Bank of Mongolia, said that copper prices were more favourable, and more resilient in the long term.

Infrastructure spending is top of the investment list, but diversification of Mongolia’s economy is also on the agenda. However, Koppa said that this could only happen once revenues from the mine were realised. The government has plans to open a new airport which Koppa said could be a transport hub to reach Asia from the US. The country’s farmers are producing organic beef and cheese to export to China and tourism is a focus for the future.

Investor confidence in the region has also improved of late, with yields on the country’s Eurobonds coming down from around 13% in September last year, to 5%-6% this month.

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