Mongolian Election Shocks, New Government Looks To Reverse Fortunes

It was an old fashioned blowout. Not even close. The Mongolian election shocked everyone, from pundits who have more degrees than a thermometer to mere mortals like me. No one predicted such a lopsided result. Indications leading right up to the eve of the election were that it was too close to call. But when the votes were counted, the Mongolian People’s Party (MPP) won a super majority in parliament by taking 65 seats out of 76. Of course, this has been taken, maybe a little unfairly, as a massive repudiation of the current Democratic Party and its leader, Prime Minister Chimediin Saikhanbileg, who was further humiliated by losing his own seat.

The Democratic Party made some major errors that cost them dearly in the realm of FDI. One was taking aim at Rio Tinto, the Anglo American mining company, with regards to the Oyu Tolgoi (OT) mine. OT being one of the world’s largest known copper/gold deposits, news of the government’s action traveled quickly, spooking foreign investors well beyond the commodities sector. The flow of foreign capital soon, all but dried up.

But when Saikhanbileg came to power as Prime Minister, he realized the errors that had been made and set about correcting them. He made a high profile visit to the U.S. where he met not only with politicians in Washington, but also with the investment banking community in New York. Soon thereafter, Indian Prime Minister Narendra Modi made a high profile visit to Ulaanbaatar, pledging $1 billion for infrastructure projects.

A persistent criticism towards Mongolia has been that it is very reliant on China for exports, and attention should be pivoted towards opening new markets, so that they can give themselves some immunity against that risk. An all too familiar story of a commodity exporting nation suffering due to a downturn in the global economy.

However, as a result of the inroads Saikhanbileg has made, FDI has picked up and GDP growth rose in the first quarter of 2016. As a result, many assumed that the ruling party would be given the benefit of the doubt and be reelected. However, it appears that too much damage was done to the psyche of the Mongolian electorate, and whatever changes were made were too little too late.

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So the question is, will the new government make a difference? Well, it depends if the incoming government reverts to its center-left ideology. If it does, then I recommend investors stay clear. Only time will tell. Either way rebuilding state finances and reviving an economy so heavily reliant upon mining of coal, copper, and gold will not happen overnight.

Peter Kohli, CEO of emerging market specialist DMS Funds.

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