Daily Business News Mongolia

At the initiative of the World Bank organized “Economic policy” forum in Mongolia. The event coincides with discussions of important economic issues including the Cabinet action plan for four coming years, draft budget and monetary policy.

Q: How do you view the final outcome of the forum? Did you define ways to overcome Mongolia’s crisis with less loss?
David Dollar: -The main goal of this forum was to let well-known scholars and scientists gather and discuss what would the short term effect of the world crisis be and how to overcome it. I In my opinion this discussion was really interesting and useful that economists, Government and Parliament representatives as well as civil society delegates attended and discussed particular topic from different angles.

Richard Pomphret: -Many people attended this 2day forum, however I presented my lecture at NUM due to lack of seats. Over 300 people attended. Egor Gaidar, former Russian Prime Minister also presented his lecture at Mongol bank office just in prior to the forum. We are glad that Mongols received us nicely. Discussions and questions at the forum showed me that Mongols are educated, knowledgeable and are on their development path.
Justin Ling: -We think that financial crisis would affect relatively less on Mongolia in a short-term because your banking and financial sectors are less dependent on international banks, finances and their loans. However it doesn’t mean that world crisis would not influence on Mongolia at all. Due to this crisis economy of highly developed countries tend to slow down. For instance, copper price fell down under USD 4000 within a month and oil price decreased twice since July. Thus all of these, especially copper price fall would affect adversely on your export income and Government income would drop down. Therefore previously planned investments would pend and be postponed. As a result Mongolian economic growth would slow down. Overall slowdown in the economy would affect the banking sector in turn. Real estate price could maintain its highness as before. Some of mortgage loans of banks might be non-performing so Mongolian Government should think of how to escape from crisis and how to maintain financial stability. On the other hand, low-income and vulnerable groups would be hit hard by the slow economy much. Also they are under pressure of too high inflation rate. It would be proper if the Government focus on vulnerable groups and extend right targeted assistance and support. It’s good that the Government of Mongolia is to take several measures. Minister of Finance S.Bayartsogt and Advisor to the Prime Minister N.Enhbayar introduced on the Government action plan for the coming years. We discussed about it.

Q: How do you assess Mongolia’s economic management?
David Dollar: -A very nice introduction on the Government action plan for 4 years. According to the introduction Mongolian economic management seemed okay in terms of quality however the Government should make some “settings” in the policy with regard to new situations. WB is going to give a comprehensive recommendation to the Government soon. Generally, there are a lot of things to learn from other countries with natural resources. Perhaps Prof. Pomphret would talk about it.

Richard Pomphret: -Azerbaijan, Kazakhstan and other countries which developed on the basis of their natural resources have one thing in common. They all created funds in order to ensure availability to the public. I couldn’t comment on what policy Mongolia should take though during the forum discussions on what kind of policies could be taken have been held. A lot of money flows into the economy of countries based on minerals. It affects on inflation growth. Besides loan lending increases. On the other side, people want real price when purchasing and selling on the market. As for your country, high inflation rate is because of external situations.

This is good that banks have been using its domestic deposits as financial sources without taking huge loans from foreign banks and financial organizations. In other words Mongolian banking sector has not joined the international integration, so it won’t be affected directly by the world financial crisis. However I agree with Justin Ling on negative effect of the crisis on your overall economy. It will definitely influence on the financial sector. Thus it would be proper to puruse long term policy, considering domestic and external factors and to continue renovations in banking sector. According to the introduction presented by your authorities renovations are still in progress.

Besides, Mongols criticized the policy rate of Mongol bank was too tight. But I think it isn’t too tight by comparing 34 percent inflation and 11 percent loan policy rate. Mongolian Government should direct investments to education and health. It is true what Justin Ling has said that a right targeted assistance is important. It is possible to save particular amount of money in a foreign country by creating a fund n order to prevent possible risks. Since foreign investors are eager to invest in Mongolia to run operations, the above version could be a very promising one for your country.

Q: World financial crisis started to affect on economic sectors. Major corporations lost much and unemployment takes place. How long would this crisis continue?
Justin Ling: -We don’t know how long it would continue. It is good if it finishes soon. It doesn’t matter whether this financial crisis is short or long term, what is important is that we wish it doesn’t become a social crisis affecting the people. We should give a hand to those who become unemployed. On the contrary educational and insurance sectors must be under focus. Health issues of those people should not remain unnoticed because such crisis diminishes future opportunities and therefore it must be under control. As per your country, the Government has to cut some costs as the economy slows down. Since there might be numerous troubles and problems that Mongolian Government face, international financial and donor organizations would assist and support especially in social welfare and care sector. Surely the World Bank will provide assistance. It will be the aid granted by the International development association or a technical aid. We have particular conditions when providing assistance, for example, grants shall be provided to a vulnerable group under income of…, etc. As a result the aid could reach the targeted group.

Q: We get questions from our readers as well. There is a question: What is the difference between this crisis and crisis in 1929.
Justin Ling: -Shortly, this crisis is very serious and is incomparable to the crisis in 1929. Today we cannot overcome this crisis by taking measures separately. Since the crisis covers all, we could deal with it by uniting. During 1929 crisis, stock exchanges went bankruptcy after one another and banks became incapable. The Government couldn’t do anything at the time. Thus it covered many countries and lingered on. As we witnessed that inconvenient truth, we take preventive measures like improving bank liquidity. Companies lost liquidity and investment capacity and go bankruptcy during 1929 crisis. Nowadays big countries prevent from crisis based on their experience witnessed in 1929. This crisis is caused by loan boom.

Number of banks and financial organizations are hit by crisis. If their Governments do not save them a lot of organizations might go bankruptcy in the future, biffing the real economy. Thus USA and European countries adopt decisive steps. But if it doesn’t affect the real economy and stops, loss would be less. No one guesstimates how long the crisis lingers. Perhaps its effect on real economy might not be as deep as we think and crisis overcoming will not last long. Shortly, our experience and knowledge accumulated from 1929 crisis create conditions for preventing great depression. It is important to believe everything is going to be all right.

Q: -At what level is Mongolia’s economy and investment environment?
Arshad Sayed: -I think Mongolia did well during the transitional period. The World Bank carries out “Doing business” research and Mongolia rank 41 in the first research year, at 45 afterwards and this year at 58. Mongolian ranking might seem going backwards, but it’s doing very good in comparison to other South East Asian countries. Investment amount in the recent years show it that investment amount of the last three years equals to the sum of those of the previous ten years. However Mongolia’s got a challenge to be competitive in the regional level. For this, there are number of sectors and factors to be improved. Other researches, too, say one thing.

First of all, attention must be paid on reducing bureaucracy and corruption. According to the research, over 60 percent of Mongolian businessmen accepted they give bribery and corruption in order to run activities. Next areas include logistics network of infrastructure, transport and customs activities. The third one has no connections with business but there must be professional cadres since there will be a lot of investment flows. This is good that Mongolian Governm,ent formulates legal acts and resolutions related to state and private sector partnership. This is a very important document for foreign investors come to Mongolia. Also it would be useful for those who want to cooperate with Mongolia if it defines specifically what kind of mining policies are going to be pursued and how its legal environment would be.

Q: Mongolian state is to own more than 51 percent of strategically significant deposits. Could it be a favorable conditions for foreign and domestic investors?
Richard Pomphret: -If the Government wants to take 51 percent, no investor would be pleased with it. But it doesn’t mean that investors would not conclude agreements at all. Most importantly, focus should be paid on how investors should invest and how to operate. For example, if you could specify how much the tax would be, especially royalty and production revenue tax, this would be the starting point because transparent policy and tax is very important to the current and future investors. Your Government is going to use the major deposits in the near future. Major projects require transparent and clear Government regulations. It was asked from Egor Gaidar during the forum and he said: “I don’t want to consult on it. But it would be really terrible and hopeless idea if Russians do so.”

Q: We plan to use major deposits including Oyutolgoi and Tavantolgoi but we worry about investors’ financing due to world financial crisis.
Justin Ling: -There are few companies that could finance such major projects. Due to world financial crisis, stock price of major mining corporations fall down rapidly, however their equity is pretty much. Price of any item always fluctuates on the healthy market. Thus major mining companies consider potential risks. World class major companies would be interested in how beneficial the project would be rather than in short-term price fall. I believe, if you use this financial crisis as the opportunity to improve investment environment of your country, you’ll have more than one investor. Thus it would be significant for the Government to do it immediately because conclusion of agreements, forming plants and making profits require much time. Therefore, if you make decisions now and start projects, financial state shall be improved, and price will increase when production begins. If you don’t start projects, waiting for price growth the price might go down, who knows. It is time for the Government and the society of Mongolia to realize today is the right time for making investment decisions. Also owning of 51 percent by the Government is not the only way Mongols could protect their interests.
If the Government takes 51 percent and incorporates other things in the investment agreement improperly, it might lose more than 51 percent. Thus it is important to study investment conditions of investors, stability of term, and honesty to agreement as well as how these companies treated the environment and locals when running operations in other countries. Your projects are bog and long term ones, so it is important to create favorable conditions and environment for foreign investors.

Q:-The World Bank warns political parties that promising much money is wrong, but no measures are taken. It’s been warned inflation would go up if child money is distributed in 2004. And now discussions are on giving away “Homeland profit” or MNT 1.5 million. What are your positions?
David Dollar: - In other developing countries it was common to give away conditional cash. In other words, the person who’s taking the money, should meet specific criteria, For instance, in China cash is distributed to people whose income is under particular level. In Mexico, money is provided when low-income families send their children to schools. This is an example of providing cash for preparing educated new generation. I’d recommend providing MNT 1.5 million to people below particular income level. Poverty accounts for 32.2 percent in Mongolia and social vulnerable groups are hit by inflation. If you plan to distribute this much money to everyone, you have to wait several years. Today foreign and domestic financial situations are difficult.

Q: Mr. Justin Ling said that economy of a mining-based country is indefinite. Mongolia is a agricultural country but is now a mining one. What advices would you give to our policy makers?
Justin Ling: -Good management is essential for managing natural resources. It is useful to combine two policies: diversifying economy and expanding economic base. Price of minerals very and fluctuate much so it is important to create stockpiling without spending all incomes obtained during high price. When price drops down, accumulated funds can be used for projects and investments. It is vital to invest in perspective areas such as infrastructure, education and health which in turn prevents from vulnerability. Thus the Government should focus on investments. Good investment expands economic base, focusing the economy on finished production and processing industry. This is the development secret of Scandinavian nations like Finland, Sweden and Norway. These countries were like you, having great mineral resources. Today they have high income because they spent their money as I described above. Finland has 5 mln people and is a scarcely inhabited country like Mongolia. It was one of the poorest countries during XIX however it is now highly developed industrial nation based on wood and iron ore – main domestic raw materials. Its Government paid attention to education and infrastructure, which created in turn conditions for Nokia. This country can become your model country. Since Mongolia has a lot of mineral resources, I believe it’s going to become a higly developed, powerful nation in the future.

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