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Mongolian Investment Law Reforms: Too Little, Too Late?
Today 12 hours 5 minutes
Mongolia’s government is reportedly preparing to amend a controversial foreign investment law passed earlier this year. Under that law, foreign companies investing in specific industries, including mining, were required to obtain prior government approval for investments above a defined threshold. The passage of this law reflected a growing trend in resource nationalism in Mongolia; however, changing economic circumstances now seem to be prompting a rethink of such policies.
In the past couple of years, Mongolia has been trumpeted as one of the world’s economic success stories, posting a GDP growth rate of 17.3% in 2011. The causes of this rapid economic growth prompted a political debate over the extent to which Mongolia should let foreign companies exploit its vast mineral reserves, rather than doing so indigenously. This was a key factor behind the rise in support for a more nationalist approach to economic development that impacted parliamentary elections earlier this year and drove the passage of the foreign investment review law.
Circumstances have now changed significantly. While still outpacing many developed countries, Mongolia’s GDP growth dropped to 11% in the second quarter of 2012 and exports are reported to have fallen by almost 40% in the same period. This decline has been attributed to a number of factors. Demand for mineral resources has weakened globally and prices have fallen accordingly, making new investments less profitable. However, many companies cited Mongolia’s apparent emerging hostility toward foreign investment as a cause for concern and the principal brake on decisions to inject further capital into the country. These concerns were reflected in recent statements by President Takhia Elbegdorj that the new law was driving away foreign investment.
Now it appears that there will be three- or four-fold increase in the threshold for which government approval will be required for foreign investment in key industries from its current level of approximately USD 70 million. Of course, this change has yet to be formally approved; however, it does indicate that Mongolia’s political leaders are ready to act in the face of a very rapid and unexpected decline in the country’s economic prospects.
Any such change in the law will, however, be only one issue that Mongolia’s government will need to confront in the coming months. Corruption remains a persistent problem, in spite of efforts to tackle it in recent years. The government also recently announced a further delay in the IPO of the company operating the large Tavan Tolgoi coal mine, a project seen as an important step in Mongolia’s integration into the international financial and securities communities. Questions also remain about the extent to which the government’s more nationalist coalition partners will support the change, given ongoing suspicions in many segments of Mongolian society about the net benefits of foreign investment, particularly from China.
Foreign investors frequently confront laws regulating investment in strategic industries that are critical to a country’s national and economic security. Mongolia’s apparent decision to change its law so soon after its enactment indicates that governments can sometimes underestimate the response of foreign investors to such moves. Investors may simply not be willing to see a particular high growth market as so attractive that they will work within whatever legal framework a country offers. The question will now be whether Mongolia’s government is prepared to continue efforts to eliminate corruption and quell broader nationalist sentiments in an effort to give investors further confidence, or whether changing global economic circumstances simply render the reforms moot.
Source: Global Torchlight