It is said that there are many ways to skin a cat. Kuppy has provided us with his analysis of Mongolia here and here. Following on from this I asked an investment banker friend to provide us with his perspective on Mongolia. Sam is smart, well educated, and young. He could at this stage in his life choose to work in pretty much any country in the world. Read on to find out where he now lives and why.
Driving through the Gobi desert earlier this year, the stark landscape of southern Mongolia reminds me of outback Australia – dry, desolate and with a sprinkling of livestock dotting the horizon. It takes a tough people to populate this environment and Mongolians have lived there for centuries, grinding out a living in unforgiving terrain just as the early settlers did in Australia.
Of course there are other similarities between Mongolia and Australia – both countries are huge, sparsely populated and blessed with mineral resources. This similarity ended when we tried to leave Khanbogd, a soum (town centre) in South Gobi province, and found that we had to wait a couple of hours because the electricity to power the petrol pump would not be turned on until 2pm!
Despite sitting on undeveloped mineral resources valued at close to USD 1 trillion, it is obvious when you are on the ground in Mongolia that the country is sorely lacking in infrastructure and also the capital to remedy the situation. The country (and the mining industry for that matter) needs roads, railway, power plants, processing plants and logistics centres to be built so that the mineral wealth can be extracted, processed and transported to market in a cost efficient manner.
When one takes a look at the banking sector and capital market in Mongolia, it is easy to comprehend the current situation. The total assets in the Mongolian banking system amount to just under USD 5 billion at the end of 2010, with total loan outstanding at around USD 2.5 billion. The market capitalization of the Mongolian Stock Exchange was approximately USD 1.1 billion in December 2010 and this was after growth of 121% from 2009! Even comparing this to the market capitalization of the “Big Australian” alone, BHP (USD 220 billion), or even its smaller sibling, Rio Tinto (USD 143 billion), we are not even batting in the same league.
So obviously there is not a lot of capital in the form of domestic savings to be tapped for much needed infrastructure development. This will serve to further slow down the development of the mining sector. The Government estimates that nearly USD 20 billion of capital is required over the next 5 years, with priority areas in the mining sector (USD 10.2 billion) and infrastructure development (USD 7.7 billion). It will be difficult to satisfy this capital need from domestic sources, as such foreign capital will need to be involved.
Perhaps recognizing this, the Government has made the regulatory environment welcoming to foreign investors. Aside from certain strategic mining reserves, foreign investors can fully participate in the economy on par with locals. Whilst the laws and regulations are not always clear-cut (even for Mongolians!), it is clear from meetings with government officials that they are practical minded and willing to work to reach a solution. It’s a matter of knowing the right people to speak to.
As the dividends roll in from the mining boom, infrastructure will improve, the laws and regulations will evolve, the income level of the people will rise significantly, creating a consumer society with demands for restaurants, designer clothes, cars and electronic goods much like their peers anywhere. Actually, Mongolia is projected to be one of the fastest growing economies in the world over the next 20 years.
For any intrepid investors willing to take a chance, this is almost getting in on the ground floor. Of course everything is not rosy. You only have to step out of the airport to realize this. But it’s a decent country to live in – people are friendly and open-minded, public safety is not bad.
I moved fulltime to Ulaanbaatar in May of this year and now have a front row seat as I watch this country take off. Mongolia reminds me of China in the 1990’s. I was there but I did not stay because I wanted to experience that rite of passage that all Australians go through – working holiday in London and backpacking through Europe. Who would have thought a second chance would come around? Now I’m fully prepared to take advantage of this opportunity.
Sam is from Melbourne, Australia and has recently joined a local Mongolian bank heading up its investment banking division. He now works with the Government and local entrepreneurs to raise capital overseas. If anyone wishes to get a hold of him feel free to drop us a note and we will furnish his details to you.
Fortune favours the bold – Latin proverb