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Have Your Say Via SMS: Mongolia's Mobile Users Choose Industry Over Austerity

  • Blog post

  • 24 March 2015

In early February, the government of Mongolia went to the nation's mobile phone subscribers with a seemingly simple opinion poll. To stabilize the value of its declining currency, should Mongolia (1) advance the Oyu Tolgoi mine and other large-scale development projects, or (2) reduce expenditures and consumption, and instill economic discipline? As their economy faltered, citizens essentially faced a choice between foreign investment or austerity measures. "Let's decide together," the survey entreated potential respondents.

A country of just 3 million people, Mongolia has 3.3 million mobile phone subscribers—many have more than one carrier to tap different networks throughout the country. Some 11 percent of users, roughly 365,000 people, took part in the poll. Of those, a majority, 56.1 percent, favored resolving stalemates with key foreign investors. The other 43.9 percent voted to support austerity measures.

The survey's architect, Prime Minister Saikhanbileg Chimed, was appointed just three months ago. In his inauguration speech, he signaled that his government's top priority was the economy.

As the framing of the poll indicated, Mongolia's currency, the tugrug, is in steep decline. In 2014 alone, it depreciated 17.2 percent. In the past two years, it has fallen 39.7 percent against the US dollar. This decline, coupled with optimistic expansionary policies and Mongolia's dependence on Chinese imports, has led to double-digit inflation for the past three years running and consequent hardships for many. Gone are the days of economic growth at a breathtaking 17.5 percent, as the country saw in 2011. The 7.4 percent growth rate it expects for 2014—a good result for any country under normal circumstances—is perceived by many (especially politicians and the business community) as despairingly low, given the country's potential. Indeed, the poverty rate remains high at about 30 percent, and many businesses closed their doors in 2014 as the key sector, mining, suffered from low commodity prices and uncertainty around major projects. How could Mongolia's prospects sour in only four years' time?

A search for answers

A few answers lie in the policies that Mongolia implemented at the peak of its economic boom. The most notable was a cash handout program that supported children and newlyweds after the 2004 elections and continued as a universal cash handout after the 2008 elections. The concept won votes but became hard to finance, forcing the government to pledge future mining revenue to fund it. Another was a series of ambitious public investment programs that, after years of underinvestment, focused on social infrastructure with no immediate return. These were marred by political wrangling that sought to enrich electorate districts, not support projects that would benefit the entire economy.

Initially, funding for these projects came from Rio Tinto, the British-Australian company behind the massive Oyu Tolgoi copper and gold mine in southern Mongolia. The company agreed to pre-pay its tax upon signing the investment agreement in 2009, and early development of the mine brought a substantial influx of foreign currency and commerce. Additional funding came from pre-payments for the sale of coal to China from another massive project, Tavan Tolgoi. Furthermore, the government was busy selling bonds to foreign buyers. Its state coffers bulged as the elections of 2012 approached.

But then, things went suddenly awry. Government spending increased inflationary pressures. Initial construction at Oyu Tolgoi ended, and Mongolia found itself at odds with its largest investor, Rio Tinto, over the ballooning costs of the next phase of development. Pressed for a $5 billion injection, the government accused its corporate partner of tax avoidance, an allegation that the company denied. As a legal dispute ensued and development stalled, commodity prices fell, most notably coal. Other investors waited to see how Mongolia's dispute with Rio Tinto would unfold. Soon, the in-flow of foreign currency dried up, and the central bank's foreign reserves ran out.

A struggle to move projects

The reason, then, for the new prime minister's focus on the economy is clear. Saikhanbileg Chimed's advisors and lobby groups have pushed for a quick solution, but one hasn't surfaced. As foreign investment and investor confidence dwindles, and political and public pressure for better terms for the state mounts, there seem to be only two options—to move large projects but give big concessions to investors, risking political fallout; or fight for better deals with investors, risking insolvency and macroeconomic stability. It was at this difficult juncture that the government decided to poll the people to determine what next steps it should take.

With its prime location next to the behemoth Chinese commodity market, Mongolia seems perfectly poised to prosper from its mineral wealth. But the fledgling democracy is still relatively new to massive mining developments. Only in the late 1990s did it begin to issue exploration and mining licenses on a large scale—and it has been learning through trial and error ever since.

The 2009 investment agreement with Rio Tinto was seen as a landmark deal that would certainly lead to other large-scale investments. But cost overruns and dissatisfaction with perceived benefits, as discussed earlier, have only increased. Negative media coverage further worried foreign investors. A second ongoing deal, this one with a consortium led by China's Shenhua Group to expand the Tavan Tolgoi coal-mining project, could potentially stick Mongolia with costs to build transportation and other infrastructure to export coal to China. If negotiations drag on and coal prices remain low, Mongolia could lose its bargaining position.

Small-scale projects have brought challenges too, such as environmental and cultural protests at the Gatsuurt mine, run by Canada's Centerra Gold. At South Gobi Sands, a subsidiary of Rio Tinto-owned Turquoise Hill Resources (the same company that owns 66 percent of Oyu Tolgoi), three executives—an American and two Filipinos—were convicted of evading taxes and jailed, a further blow to investor confidence in Mongolia.

A way forward

Now that the poll is over, and the results are out, questions remain about their legitimacy. For example, critics argue that only 10 percent of eligible respondents voiced their opinion. They say that mobile users include teenagers and foreigners living in the country who would normally be ineligible to participate in a formal referendum. They also ask whether two options, which in fact could be complementary, were enough.

The government went to the people directly, and this could be a useful mechanism to solve important issues. It's the kind of democracy that many politicians and civil society groups have actively promoted. But this particular poll may not make the government's decision easier. The results may even diminish the country's bargaining power in dealing with foreign investors, who see Mongolia in a corner and desperate to move large mining projects as soon as is feasible. And the reasons for this, ironically, are the same as those that led them to organize a poll—low commodity prices and political pressure that will not abate but only increase before the parliamentary elections in June 2016.

Dorjdari Namkhaijantsan is NRGI's Mongolia manager.