Commentary by William Pesek
Sept. 12 (Bloomberg) — I’m barreling down a Mongolian highway at 70 miles (113 kilometers) an hour and am about to die.
That’s what I thought as my sport-utility vehicle veered into a ditch to avoid two massive cows the other day. It wasn’t my driver’s fault. The ditch — which locals call a pothole even though it could swallow a Volkswagen — was actually on the road.
Welcome to rural driving, Mongolian-style. My near-death experience didn’t happen hundreds of miles from Ulaanbaatar, but 20 minutes outside the Mongolian capital. It was my own all-too- graphic reminder of the desperate infrastructure needs of what’s heralded to become Asia’s fastest-growing economy.
They don’t call this a “frontier market” for nothing. At less than $5 billion, Mongolia’s economy is a rounding error for neighboring China and Russia. Yet those looking for risky investments that might pay off handsomely in the years ahead are increasingly looking to Mongolia.
Of course, Dow Jones Industrial Average stocks could be considered a risky bet these days, never mind Vietnamese shares. Given the volatility out there, who would want to take chances on a nation that on July 1 declared a state of emergency to quash anti-government protests? An hour with Ganzorig Ulziibayar could change your mind.
“People tend to think Mongolia is a backward economy, that it’s all minerals and nothing else,” says the chief executive officer of Prime Insurance. “There is great potential in infrastructure, real estate, construction, retail industries and many other areas.”
More Than Mining
There’s still plenty of Genghis Khan in this nation of about 2.9 million. Statues of one of the world’s most famous conquerors litter the capital. There can be little doubt that this landlocked, isolated and sparsely populated nation the size of France is still Khan’s.
It’s also the land of never-falling prices, partly because of global interest in Mongolia’s rich deposits of copper, gold and other minerals. Accelerating capital inflows into Mongolia’s immature, yet relatively open, economy are raising concerns about overheating.
“One of the risks is that Mongolia has never seen a down market,” says Peter Morrow, chief executive officer at Khan Bank. “The bankers, the lenders, the people — they’re just not used to that.”
Khan to Friedman
If the land of Khan is the land of the perpetual bull market, it won’t be forever. For this is becoming the land of Milton Friedman, too. A change is coming, as it does to all developing nations experiencing a sudden boom. The question is how economic-policy makers react.
“Mongolia’s resource endowment should make it Asia’s fastest-growing economy,” says Tim Condon, head of Asia research at ING Groep NV in Singapore. “The challenge is to avoid boom- bust cycles that have bedeviled previous holders of the top spot.”
Mongolia’s to-do list is a daunting one. Price trends, for example, are “alarming,” Condon says, noting that inflation was almost 35 percent year-over-year in July. Some economists say the central bank’s monetary policies are fueling a credit boom.
The government needs to reduce poverty in a nation in which the average income is less than $200 a month. It must reduce corruption and improve government and corporate transparency. Its young democracy should manage its precarious position between authoritarian China and Russia.
Educating its population to compete in the Internet age is another challenge.
“It’s hard to find skilled managers and technology knowledge among Mongolians,” says Luvsan Khurelbaatar, president of pharmaceutical company Monos Group.
Perhaps the biggest headache for President Nambaryn Enkhbayar and lawmakers is to iron out laws dictating how foreign companies and the government will divide up mineral profits. Rio Tinto Group and Ivanhoe Mines Ltd. have spent more than four years seeking approval for a $3 billion project to develop Mongolia’s Oyu Tolgoi deposits of gold and copper.
The issue is politically explosive. Recent elections featured pledges that foreign companies won’t be allowed to plunder Mongolia’s natural resources. Mongolia’s democracy also has taken its lumps. Riots in July over a disputed parliamentary election left five dead in Ulaanbaatar.
Challenges aside, it’s worthwhile to consider how far Mongolia has come. Just ask Laurenz Melchers, who has lived in Ulaanbaatar for 10 years.
“I’ve seen this place go from being a very dark place to a very vibrant place,” says Melchers, director of trade and service company Mongolian Star Melchers.
For all the potential bumps in the road, Mongolia is moving in the right direction.
A nation known more for its nomads, horses and yurts than for business, Mongolia is opening up to a world far more enamored with China in East Asia and Kazakhstan in Central Asia. There’s an unmistakable buzz to the streets of Ulaanbaatar — and a sense of national pride.
Some of that reflects the success of Mongolian athletes at the Beijing Olympics. Photographs of the nation’s first two gold medalists are omnipresent. Yet the excitement is more about a tiny, historically important nation entering the globalization age with great potential and alacrity.
“This is a new era for us,” says Orgodol Sanjaasuren, chairman of Mongol Post Bank.
One should expect some craters, errrr, potholes along the way. Mongolia is likely to be worth the trip.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Ulaanbaatar, Mongolia at email@example.com