An agreement on the Oyu Tolgoi mine expansion project has finally been reached between Rio Tinto – which owns a 66% share in the mine via its Turquoise Hill subsidiary – and PM Saikhanbileg’s government. The second development phase of this giant gold and copper mine estimated at USD 5.4 bn for underground operations will resume after having been frozen for two years due to a dispute around financing and tax payments. Moreover, there is hope that the Parliament soon gives its green light to develop the other big mining project, i.e. the USD 4bn Tavan Tolgoi coal mine.
Impact on country risk
With political obstacles being progressively lifted in the mining project saga, Mongolia’s investment framework could appear friendlier and thus raise investor confidence. A more attractive investment climate should reverse the sharp downward trend in FDI that has resulted from rising suspicion about the government’s business stance. Mongolia would largely benefit from it as it much relies on FDI to drive GDP growth (expected to tumble to 4.4% this year from an 11% average rate in 2010-2014) and to finance a wide current account deficit forecast at 11% of GDP this year. This positive evolution with regard to exploiting Mongolia’s largest mines are of particular importance in a gloomier context combining much lower commodity prices and slower Chinese demand, namely two crucial factors for Mongolia’s economic performances. It remains to be seen whether this long-awaited mining deal is a clear sign of enduring political commitment towards investors that will survive future governments, the next test being the 2016 Parliamentary elections. Meanwhile, until Mongolia bears fruit from further exploitation of its giant mines, country risk will remain vulnerable to external shocks, pressures on foreign exchange reserves and local currency. Therefore, Credendo Group’s downgrade of Mongolia’s short-term political risk rating from 3/7 to 5/7 in 2014 is not going to be reversed soon.
Analyst: Raphaël Cecchi, email@example.com