The light at the end of the tunnel
Not all is well with Mongolia (AZIA). Growth in the economy has tumbled with commodity prices, which account for over 90% of its export earnings. The economy’s GDP grew at just 1% in 2016 due to, a) commodity price decline, and b) slowdown in China demand for copper (JJC) (CPER) and coal (KOL). Meanwhile, the nation’s debt has been burgeoning, reaching $23 billion as of 4Q16.
At a time when Mongolia’s banks threaten an economic crash, Hong Kong-based Asia Frontier Capital is invested in the region. Thomas Hugger, chief executive officer, and founder of Asia Frontier Capital, a firm dedicated to investing in the Asian frontier markets (FRN) (FM), has maintained portfolio exposure to Mongolia for many years. “We see the light at the end of the tunnel,” Hugger recently told Frontera.
Hugger spoke about three key reasons for his belief in this frontier market’s long-term prospects.
1. Copper price recovery
Following a five-year slide (2011-2016), copper prices finally began to recover in early 2016. Over the past one year, the shiny metal’s price has surged 28.7%, with mining giants such as Anglo American (NGLOY), BHP Billiton (BHP), Glencore (GLNCY), and Rio Tinto (RIO), expecting it to rise further as excess supply seems to have come off the market. Moreover, the government initiated stimulus programs in China; which consumes 40% of world copper; have also contributed to the metal’s resurgence. Copper ore accounts for 42% of Mongolian exports.
Mongolia is ranked 12th in the world for copper reserves. The south Gobi Desert alone has an estimated of 35 million tons of copper. UK-based Central Asia Metals (CAML.L) and Rio Tinto (RIO), Canada-based Entrée Gold Inc. (EGI), Turquoise Hill Resources Ltd. (TRQ), and Kincora Copper Ltd (KCC) are among the foreign mining companies engaged in copper mining in Mongolia.
2. Coal price recovery
Coal, Mongolia’s number 2 export (14% of exports), has followed a similar trajectory; a five-year slide followed by a quick recovery through 2016 and continuing. Australian thermal coal has recorded a whopping 68.8% price gain over the past 1 year alone. Foreign companies engaged in coal mining in Mongolia include Australia-based Aspire Mining Limited (ASPXF) and Hong Kong-based Mongolia Energy Corporation Limited (MOAEF).
3. Foreign exchange influx
Hugger also expects the spat over Rio Tinto’s (RIO) $5.3 billion Oyu Tolgoi copper and gold mine in Mongolia to resolve soon. Rio Tinto would then be investing a lot into the second phase of the Oyu Tolgoi mine, thereby opening up a huge additional source of foreign exchange for the nation.
$440 million support extended by the IMF
The economy has recently been able to secure a $440 million loan package from the International Monetary Fund (IMF) to ease the country’s balance-of-payment pressures and support it’s government’s looming debt repayments. “The Asian Development Bank, the World Bank and bilateral partners including Japan and Korea are expected to provide up to another $3 billion in budget and project support, while the People’s Bank of China is expected to extend its 15 yuan billion ($2.2 billion) swap line with the Bank of Mongolia for at least another three years,” the IMF said in a statement on Sunday.
The package is thus, a part of the $5.5 billion bailout envisaged for this frontier market. According to Citigroup, we may see Mongolia tapping the international markets pursuant to the IMF deal.