Macro Research

Mongolia Outlook 2010-2020

We believe that the Mongolian economy has bottomed out and is expected to grow rapidly over 8% in 2010 thanks to launch of major mining projects and strong inflows of foreign direct investments (FDI).  Various estimates suggest that Mongolia’s economy may grow 30-35% per year after the Oyu Tolgoi mine starts operation in 2013. Encouraged by the go-ahead in the Oyu Tolgoi project and the Government’s strongly stated interest in speeding up other major deals, foreign investors are already snapping up smaller companies with assets in Mongolia. The quest for resources by larger foreign companies will likely boost M&A activities that would further boost the economic expansion in Mongolia.

In our view, the banking sector in Mongolia still remains vulnerable, due to the lingering effects on the global economic crisis on the Mongolian economy primarily through escalating non-performing loans and the lack of funds for recapitalization. In our view, the Mongolian banks may face further stress and even failures on increasing NPLs this year unless the central bank takes immediate effective actions. We expect MNT to appreciate up to 10% against the USD by the end of 2010 on the base of expectations that the Mongolian economy will receive substantial foreign investments and export revenues will surge due to projected increases in international prices for the major Mongolian export commodities. 

In our view, in 2010 MSE Top 20 Index will gain +76% reaching 11,000 level, catapulting Mongolia into the world’s top three best performing markets.  Mongolia will likely to become the best performing equity market in Asia in 2010.  The overall improved business environment in Mongolia, the launch of Oyu Tolgoi, the selection of the foreign partner(s) for Tavan Tolgoi, the Government initiatives to establish and list the “national champions” internationally and locally and to reform the Mongolian stock exchange as well as growing interest of international investors in the Mongolian stocks and resources would be main catalysts for the expected rally in 2010.

We firmly believe that 2010 will herald the start of multi-year bull market for Mongolian equities and assets.  In coming years, Mongolia will emerge as the star performer among equities globally. We advise investors to seek actively the exposure to the Mongolian equities and assets as we believe the earlier investors will be richly rewarded over the coming years.

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Mongolia produced a truly impressive performance in 2010, leading globally as the best equity market, second fastest growing economy and the second best performing currency. Driven by strong resource-linked investments and developments, we anticipate this exemplary performance will continue through 2011.

We expect the Mongolian economy to grow up to 10% in 2011 (or 33% in US$ terms due to further estimated appreciation of the MNT against the US$) and may continue outperforming, ranking among the top three fastest growing economies. The primary growth drivers for 2011 will be the US$2.3bn capital budget (over one-third of Mongolia’s GDP in 2010) allocated by Ivanhoe Mines and Rio Tinto for Oyu Tolgoi, strong and growing investments across the mining sector as well as other asset classes, the substantial increase in government expenditures, the positive outlook for commodity prices, rising export values driven by strong Chinese demand and growth in personal income underpinned by inflows of foreign capital and the expansion in government social payments.

Eurasia will remain an important region for China in securing an access to natural resources and produce political stability in the region as well as exporting its goods, originated from the northern-western regions of China. Facing further increased demand for natural resources, cash-rich Chinese companies will continue to acquire commodity assets by investing in energy and commodity projects in Eurasian countries for future guaranteed supply. Along with resource companies, Chinese sovereign wealth funds are likely to increase their exposure to the region by diversifying their portfolios in favor of natural resources on optimism that the world economy will recover sooner than later that will lead to rebound in prices. Eurasian countries will also maintain their interest in strengthening economic and political cooperation with China to sustain the balance of power amid rising competition for the region’s abundant natural resources by Western countries and Russia. In order to diversify export markets of natural resources, mainly oil and gas, and growing concerns around Russia-Ukraine and uncertainties along Russia-backed routes to European Union countries, the Eurasian countries are likely to intensify the construction of China-oriented oil and gas pipelines. China, in return to the Eurasian countries’ will to provide access to commodities, will continue to support these nations with low-interest rate loans through various channels, including the Shanghai Cooperation Organization, CAREC or bilateral arrangements.

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Full comprehensive Guide to Eurasia Frontier markets:

1.Azerbaijan
2.Iran
3.Kazakhstan
4.Mongolia
5.Russia
6.Turkmenistan
7.Uzbekistan

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Shockwaves the recent commodities slump sent through the Mongolian economy are yet another example of boom and bust cycle dangers. This report takes a quick glance on foreign investments and recent economic developments in Mongolia. The paper notes that despite current economic difficulties, Mongolia has immense economic potential and offers unique opportunities to investors. Unlocking these opportunities is a challenge faced by the Government as well as business in Mongolia...

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This report shows examples for Wealth creation in Eurasia region. Examples provided in Oil and Gas, Metals and mining and Banking sectors.

Early institutional and individual investors created 16x returns on investments on average in over US$20bn deals. Nearly US$17bn 7 deals in oil and gas industry brought the largest investment returns, 21x on average, for initial shareholders. The most prominent value creation deal, South Korea’s KookminBank’s acquisition of a 30.5% stake in Kazakhstan’s BankCenterCredit created 1720x return for investors.

May 24 Presidential election results validated our positive outlook for Mongolia. We view the election was held fairly based on democratic principles that ensured a peaceful transition of executive power. By achieving this, Mongolia confirmed its commitment to further promote democracy in the political system, outperforming other countries in the Eurasia region. We view this as positive for the nation’s long-term growth and stability that will make the resource-rich nation an attractive destination for foreign investors.