Mongolia is perhaps the country hardest hit by the global commodities collapse. Still, it came as something of a surprise when the opposition won the election yesterday. The FT reports:
The Mongolian People’s party has won a landslide victory in parliamentary elections, returning to power after a four-year gap that has seen a steep economic downturn.
The outgoing grand coalition led by the Democratic party improved investment terms for foreign miners but failed to implement austerity measures. Instead Mongolia’s debt has soared amid a fall in revenues and foreign direct investment.
Mongolia is one of the countries worst-hit by the global drop in prices for copper and coal — its two main exports. Falling national revenues have been compounded by rising public and private debt and fears of growing dependence on China, its neighbour to the south. Next year about $2bn in public and private debt matures, as well as a $2.3bn currency swap with the People’s Bank of China. So far the government has refused to publicly discuss the idea of a bailout.
During the China boom, Mongolia’s economy was fueled by raw materials exports. Now, as China slows and prices have fallen, things aren’t going so well. It’s classic resource curse story: an undiversified economy that did not invest during good times to weather the bad is now having to face a new reality.
Mongolia has lots of other problems to boot. Lack of rule of law has dissuaded foreign firms from doing business. In an effort to compensate, the outgoing government gave favorable terms to Rio Tinto in a major gold and copper mining contract. But, perhaps because officials were bribed and also likely out of a fear of scaring off foreign firms, Mongolia hasn’t been collecting taxes from Rio Tinto and other mining companies who do business in the country. That failure has exacerbated a preexisting budget shortfall.
Meanwhile, expanded civil service wage raises and cash handouts, intended to placate dissatisfied constituents, have only widened the revenue hole. As a result of the financial woes, Mongolians have become extremely dependent on China to stay afloat. Fears of becoming a slave to China’s whims have led some politicians to seek out alternative trading partners like Japan. But Beijing is still a powerful influence in Mongolia, and some fear that it may impose stringent debt repayment terms.
Mongolia isn’t somewhere that you usually read about in the headlines, but the problems it’s facing—and the inept policy responses it has pursued—are ones we should get used to hearing about. Today’s emerging markets face challenges that development successes like the “Asian Tigers” did not have to worry about thirty years ago: weaker consumer demand in Western markets, automation in everything from factories to mining, and the economic stagnation of Japan and now perhaps China. Even if Mongolia pulls through its short-term woes, that won’t be enough to ensure a prosperous future.
The well-worn road of economic development isn’t as smooth as it used to be, and there are reasons to fear that, in 2016, it ultimately leads to a dead end.