April 1, 2012
BY: Robert Hallberg,
The days of the Wild West in the United States are long gone, but Mongolia is as close to the Wild West as an entrepreneur can hope for these days. It is a post- Soviet satellite state in the middle of free-market reform. It has a red hot economy with a GDP that grew 15% last year and the outlook for 2012 looks just as good.
The country is very rich in natural resources but it also has one of the most favorable demographics in the world. Mongolia is a country that is dominated by young people: 70% of the population is under the age of 35. This means that they move extraordinarily quickly and are hungry to get deals done. Mongolia is an intriguing country with a long and fascinating history. But because of its close proximity to the old Soviet Union it was heavily influenced by its neighbor during the communist rule. Consequently they suffered from 70 years of economic stagnation with widespread poverty and high unemployment. It wasn’t until after the collapse of the Soviet and the fall of communism that Mongolia started to transform itself into a democracy with a free economy.
Mongolia started to grow rapidly after year 2000 as a result of economic reform and rising commodity prices. Their economy has expanded by 600% since year 2000 and the future looks bright. The IMF estimates that Mongolia will be among the four fastest growing economies in the world for the next four years, with an expected GDP growth of 23% in 2013.
Despite a population of only 3 million people, Mongolia is a geographically vast country full with natural resources such as coal, zinc, copper concentrate, oil, and molybdenum. It has mineral deposits that will likely rival those of Australia and Canada. Mongolia is the 6th largest country in Asia and the 18th largest in the world. The country covers an area of 603,909 sq miles which is about 3 times the size of France and more than 4 times the size of the United Kingdom. You will probably find more open space here than in any other place in the world. Mongolia is home to some of the largest mineral deposits in the world, yet the country has until now been ignored by virtually all retail investors. The value of the resources in Mongolia has been estimated to be north of $1.3 trillion. Just Imagine the kind of growth this can give an $8 billion economy controlling these resources. We just have to look to other resource rich countries like, Qatar, Kuwait, or Australia to get an idea of what will happen to this economy. You can imagine what will happen to real estate, financial services, basic services, and retail when money from foreign investors really starts to flow into this tiny economy.
Despite its vast natural resource most of its people live in poverty, with 20% of the working population making less than $1.25 per day. Dirt roads are the norm and you won’t find more than a few miles of paved roads in most cities. Nevertheless, Mongolia is on track to become one the fastest-growing economies in the world for the next 10-15 years. GDP is likely to soar along with asset prices. Profiting from this coming boom might be easier than you think.
Mongolia is a tiny economy and just a small amount of growth will make a huge impact. By starting from a low base, just a few billion dollars in foreign investment will send the economy soaring. The chart compares the annual gross domestic product of Mongolia with small city-states like Singapore and Hong Kong as well as a few multinational companies, to put things in perspective. Politics and Economics Mongolia emerged from the shadow of the former USSR and has adopted a multiparty system as well as a new constitution in 1990. Two parties are currently sharing power, the communist Mongolian People’s Revolutionary Party (CMPRP) and the Democratic Union Coalition. However, the CMPRP is communist in name only and has adopted free-market principles since the fall of the Soviet Union.
Mongolia is also very different from its neighboring countries, Russia, and China, in that they have a free press and open elections. Economic reforms in recent years have supported economic expansion and reductions in poverty. Mongolia also has a competitive tax rate and an open trade regime that is also promoting the emergence of a vibrant private sector. The individual income tax rate is a flat 10 percent, and the top corporate tax rate is 25 percent. Other taxes include a value-added tax (VAT) and an excise tax, and the overall tax burden amounts to 20.6 percent of GDP.
The heritage foundation ranks Mongolia as “moderately free” economically. You can see a chart on how they ranked in the areas of rule of law, limited government, open market, and regulatory efficiency. As with any other frontier market, the opportunity does not come without risk. Mongolia is moving in the right direction but they still have a cumbersome bureaucracy which is leftover from the communist rule. Business owners in Mongolia as well as foreign investors have cited that the bureaucracy has been one of their biggest hurdles. The legal system also needs improvement. Property and contractual rights are recognized, but enforcement is weak. In addition, the judicial system remains inefficient and vulnerable to political interference.
The Mongolian Stock Exchange (MSE) has been one of the best performing markets over the last two years, tripling in value from around 6,000 to over 20,000 today. As of 2010, the MSE had 336 companies listed with a market capitalization around $1 billion. Nevertheless, investing in this stock exchange is not as simple as purchasing stocks on the NYSE through your broker. The MSE is very inefficient and in need for a complete overhaul. There is currently no virtual or remote trading available. Traders have to physically go to the trading floor and input orders, and the exchange is only open between 11 am and 1 pm. The trades can be seen on the MSE’s website but the information is displayed with a 5 minute delay. On a positive note, the MSE is in the process of modernizing the exchange and they made a partnership with the London Stock Exchange (LSE) to bring it up to the latest in trading technology.
There are a couple of ways to get direct or indirect exposure to Mongolia, short of jumping on the next plane and purchase stock certificates on the local stock exchange in Ulaanbaatar. For example, the Canadian based Mongolia Growth Group (MNGGF.PK) is investing in real estate and also offers insurance to the retail and corporate market, while other companies such as Mongolia Mining Corporation (MOGLF.PK), and Prophecy Coal (PRPCF.PK) offers direct exposure to Mongolia’s vast mineral deposits. Mongolia has literally thousands of unexplored mineral deposits and local companies along with the Mongolian governments have setup joint venture agreements between mining powerhouses like Rio Tinto (RIO), Ivanhoe Mines (IVN), and Entree Gold Inc (EGI). The focus of the joint venture is the Oyu Tolgoi copper mine, which is scheduled to begin production in 2013, with a 27-year estimated mine life. A total investment of close to $5 billion is expected over about ten years to get the estimated $300 billion of mineral wealth out of the ground.