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Mongolia's new nationalist president must contend with a parliament dominated by his opponents and the economic realities of Mongolia's dependence on the IMF and China.
Outlook and implications
Policy instability; Tax increase
Sectors or assets
Foreign mining companies, especially Chinese
On 11 July, Khaltmaa Battulga of Mongolia's Democratic Party (DP) was sworn in as president. He won narrowly, with only 50.6% over two rounds, against Miyegombo Enkhbold of the ruling Mongolian People's Party. Winning with less than 50% of votes would have forced a new election with new candidates under Mongolia's constitution. The turnout was 61%, and 8.5% of voters indicated no support for either candidate. Enkhbold has accepted the result. His Mongolian People's Party still holds 65 out of 76 seats in Mongolia's unicameral parliament, the State Great Khural.
Battulga (his given name and used by Mongolian convention) has interests in Mongolia's agribusiness, tourism, and agriculture sectors, including Talkh Chikher JSC, Mill House LLC., Genco Tour Bureau JSC, and Bayangol Hotel JSC, in all of which he has either major or controlling stakes. He has served as a member of parliament since 2004 and held ministerial briefs for road and transport, and industry and agriculture.
In early 2016, a photo allegedly of a court document signed by Battulga was circulated on Mongolian social media, which ostensibly revealed that he was a suspect in an investigation into embezzlement and money laundering through public offices. In April 2016, the offices of Tumen Khishgten and Bayalgiin Khuvi, construction companies based in Battulga's Bayangol Hotel Office, were searched by a dedicated anti-corruption police force but no formal charges were brought against Battulga and he denies all allegations. Several aides were arrested and some have left Mongolia. As president, Battulga can appoint juries and the state's chief prosecutor. He is not, however, immune from prosecution and the allegation can be revived if his political opponents choose to seek his impeachment.
Battulga's campaign focused on tightening state control and increasing the government's capture of revenues from mining in Mongolia. He campaigned for a bill requiring the use of Mongolian banks to deposit all mining revenues, so that tax authorities are able to clearly assess miners' tax liabilities, and Mongolian banks benefit from the interest accrued on these deposits. The requirement was abandoned by the Great Khural in early 2017 because agreement over it was delaying IMF approval of the USD5.5-billion Extended Credit Facility Agreement, on which Mongolia's precarious fiscal position depends.
Weaker prices for copper, gold, and coal in recent years and a sharp slowdown in FDI in 2014 and 2015 made the fiscal deficit balloon to more than 20% of GDP. IHS Markit projects the negative balance of payments to widen to almost 12% of GDP by 2018, from 10% in 2016, as imports for foreign-financed mining projects grow. FDI inflows should resume in 2017 with the acceleration of construction on the second phase of the Oyu Tolgoi copper and gold mine, and the IMF facility will ease short-term liquidity pressures. Mongolia, however, is also dependent on Chinese demand. China accounts for almost four-fifths of Mongolia's annual exports and almost all (98.5%) of its exported copper concentrate. If the Oyu Tolgoi mine comes online as envisaged, copper will account for one-third of Mongolia's GDP. Battulga's campaign and his first speech as president repeatedly promised to "rebalance" China-Mongolia trade relations. Our Sovereign Risk Service rates Mongolia at 45 (or BB+) in the short term but 60 (B-: Very High Payments risk) in the medium term.
Battulga's election is unlikely to jeopardise IMF support or trade relations with China in the one-year outlook. Mongolia's president can veto legislation passed by parliament, but that veto can be overturned by a two-thirds majority. The ruling MPP holds 65 of the Great Khural's 76 seats and, although increasingly unpopular, enjoys stronger party discipline than Battulga's fractious DP.
Although MPP rhetoric will move towards Battulga's in recognition of public frustration with fiscal austerity and dependence on foreigners, the MPP will continue their policy emphasis on fiscal discipline. As long as there is demonstrable progress on that central objective, the IMF will accept popular nationalist policies, such as requiring all mining revenues be directed into Mongolian banks. This is likely to increase all miners' tax liabilities, but the risk of inconsistent, arbitrary, or politicised tax claims on miners is obviated by a strong consensus among Mongolian policymakers around the need for a transparent and professional investment environment – even more for the duration of the IMF's facility. The reassurance sovereign bondholders take from the IMF's continued support will reinforce that support as debt servicing obligations are met this year (and servicing costs likely fall).
Policymakers' acceptance of the need for FDI to meet fiscal targets will also protect the Chinese mining companies that were criticised by Battulga during the presidential campaign. Mongolia tried to limit Chinese (and all foreign) ownership under Battulga's DP in 2012 with the Strategic Entities Foreign Investments Law. The DP government invoked the SEFIL to block the acquisition of Toronto-listed South Gobi Resource acquisition by Chalco, a Chinese state-owned company. It was successfully blocked – but at the cost of a sharp fall in FDI. Mongolian policymakers will be keen to reassure investors now even more than in 2012, during Mongolia's economic boom.