Strategically located between Russia and China, Mongolia provides rare opportunities for savvy business leaders and investors to start new businesses and expand existing ones. In recent years, Mongolia has suffered economic hardship, as can be seen from the stark drop in GDP growth over the past few years.
As a consequence, the country has embraced economic evolution. Political and business leaders have been forced to seek ways to fuel the economy, not only from mining which was the backbone of Mongolia’s economy for many years, but also from other sectors such as agriculture, renewable energy and tourism. At the same time, a global wave of technology and entrepreneurship have impacted the way Mongolians think and do business, spurring bold initiatives and a reaching out to the international community.
We explore three trends that show why now is the perfect time to invest and to do business in Mongolia.
INCREASING ECONOMIC DIVERSIFICATION
According to the World Bank, while livestock provides subsistence, income, and wealth for nearly half of Mongolia’s population, only 7 percent of exports consist of raw livestock materials and primary processed products. This is in stark contrast with statistics for the mining sector, which only employs 5% of the workforce but has produced nearly 90% of Mongolia’s exports since 2000.
This imbalance has spurred the Mongolian government to initiate policies and programs that support export-oriented, non-mining sector enterprises in Mongolia. For example, in the government’s “Policy Paper on Sustainable Development 2030”, a goal of increasing the percentage of secondary and final processed products in total exports from 4 to 15 percent by 2020 is emphasized.
However, small and medium sized enterprises, which make up more than 80 percent of registered businesses in Mongolia, lack the knowledge, skills, capital and networks to develop and distribute products that can compete in international markets. Therefore, foreign talent, expertise, capital and connections are well sought after in the country, particularly in fields relying on the environment and ecosystem.
In order to decrease the economic vulnerability and meet the needs of the majority of Mongoliansociety who are dependent on non-mining sectors, Mongolian governments have been obliged to diversify Mongolia’s economy. In doing so, in addition to export-oriented support policies and programs, Mongolian governments have introduced various programs and policies supporting import substitution. In the last five years, the growth volume of imported products has been triple that of exported products, giving more justification for the latter programs and policies.
In addition to macro-economic motivations, a strong societal need for food security has led to the opening of a large variety of food factories. Many of them have been formed in partnership with foreign companies and experts who have the sophisticated technical skills to complement their Mongolian partners’ local knowledge. Despite Mongolia’s vast landmass and her people’s preference for locally produced food, the country still relies heavily on imported food which means that food production in Mongolia is still under-tapped, for example.
In this country of vast territory, patriotic people and thirst for advanced technologies and international connections, savvy investors and business people will discover many opportunities. If you are keen to explore the country’s potential and form strategic partnerships, the most efficient and effective way to do it will be to join the Discover Mongolia Business Tour 2017 in August, 2017!
IMPROVING POLITICAL STABILITY
The unexpected results of the 2016 parliamentary election, with the Mongolian People’s Party (MPP) winning by a landslide 65 out of 76 seats, led to the MPP forming a one-party majority government which has been stable and effective. However, in less than a year in office, the current government has been both heavily praised and criticized.
Foreign organizations and individuals, such as foreign investors, neighboring countries, and international organizations like the International Monetary Fund (IMF) have been supportive. In May 2017, the IMF Board of Directors approved the government’s request for a three-year IMF Extended Facility Fund (EFF) of USD$440 million. By reaching this agreement with the IMF, the Mongolian government has opened bigger credit lines from larger Asian economies like China, Japan and Korea, as well as from other international banks like Asian Development Bank (ADB) and World Bank.
According to the IMF, “The total external financing package will thus be around $5.5 billion and will support the authorities’ “Economic Stabilization Program,” which intends to restore economic stability and debt sustainability as well as to create the conditions for strong, sustainable, and inclusive growth”.
The need for the IMF program arose from the sharp deterioration of the government’s fiscal position and Mongolia’s macro-economic situation, most notably the depletion of the country’s foreign reserves, which situation arose mostly due to the downturn in commodity prices over the past several years and poor investment and fiscal policies and excessive borrowings by the previous government. The latest parliamentary election results were a reflection in part of society’s desire for a government with more fiscal discipline and policies to better encourage investment. While there remains ongoing support within Mongolia for resource nationalism and a populist agenda, the results of the election suggest that continued economic liberalization, macro-economic stability and economic growth through increased foreign investment and continued integration with international markets are viewed as the stronger model for Mongolia’s future development.
Historically the MPP, formerly known as the Mongolian People’s Revolutionary Party, has built the most credibility and political stability during its time in government. The below chart illustrates the number of days the Democratic Party appointed Prime Ministers led the cabinet, none of whom completed a full four year term. In contrast, all the MPP Prime Ministers have completed the elected full four year terms over the past 25 yearswith only one exception. Additionally, the previous IMF bailout in 2009 was successful under the MPP government.
Therefore, it is expected that the IMF’s EFF implementation over the next three years has the best chance of success under the MPP, and that it will reinforce political stability and ease barriers to doing business in Mongolia for both locals and foreign investors and business people.
Mongolia is also set to benefit from China’s One Belt, One Road Initiative, which has six main economic corridors that will provide extra investment and partnership opportunities for foreign investors and entrepreneurs. Mongolia is a part of the China-Mongolia-Russia Economic corridor, for which agreements have been made by various Mongolian governments as well as the current President.
STRENGTHENING ENTREPRENEURIAL CULTURE
According to a recent survey done in the United States, youths around the world have become more similar to their peers in other countries as compared to previous generations in their country of birth. Becoming inherently entrepreneurial, global-minded, innovative and environmentally-aware and socially-sensitive are some of the trending, unconventional characteristics among Generation Y “millennials” and their later generations in Mongolia. The number of young Mongolians working for international corporations at home and abroad, as well as starting and running businesses in international markets have increased dramatically over the past several years. In addition, the success of Mongolian start-ups, like LendMn, in raising significant capital in overseas markets like Singapore, proves the capability and competitiveness of young Mongolians.
However, the independent and self-reliant nomadic mindset is still dominant among Mongolians. Therefore, Mongolians are culturally different from Asians of other nationalities who tend to be more collectivist, and this difference creates both opportunities and risks.
In order to assist foreign investors and entrepreneurs interested in doing business in Mongolia the Discover Mongolia Business Tour 2017 will educate participants on the common challenges and business risks in the country and offer solutions in mitigating such risks and leveraging the unique advantages of Mongolia, so that they can conquer markets at home, in China, in Russia, and in Asia. The tour is jointly organized by some of the country’s leading institutions such as the National Development Agency of Mongolia – the Government Regulatory Agency, the Business Council of Mongolia and the Mongolian National Chamber of Commerce.
Written by: Enkhzul Orgodol, Co-founder, “Doing Business in Asia”
Edited by: David Wilks, Co-founder, “Doing Business in Asia”
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