The Government of Mongolia approved a new Investment Law and a new Investment Fund Law last week. Both pieces of legislation should prove essential in further developing the domestic capital market and in attracting foreign capital back to Mongolia. While this may seem like old news, questions still remain. The Government has yet to release the final draft of the law that was accepted by Parliament. Speculation is already building as to what the law will exactly look like and to what extent changes have been made. Sources close to the issue have suggested that amendments could total anywhere from 50 to 75 based on the original draft that was reviewed in May of this year.
If the key issues facing foreign investors have been resolved we believe that the new legislation will provide an incredible foundation for economic growth. In reviews that MIBG has previously conducted we have outlined those issues and the changes that the draft legislation has proposed in order to resolve these concerns.
The key changes that we have discussed previously include:
1. Removal of all discrimination against foreign investors
2. Provision of economic and legal stability
3. Removal of “Sectors of Strategic Importance”
4. Defining foreign investors as private and State Owned
5. Provision of tax stability for investments
6. Introduction of a Mongolian investment agency
We feel that as long as these changes have been upheld by Parliament the legislation will provide the catalyst that the economy requires to regain its luster. Needless to say, the past two years have been devastating for the Mongolian economy – with a 42% drop in foreign direct investments and a 23% fall in the currency, 2013 has been troubling for foreign and domestic companies alike.
Unfortunately, this cycle is not entirely new to Mongolia. In fact it is very similar to the period ending in 2009 when the Government of Mongolia repealed the Windfall Profit Tax of 2006. During that time the Government introduced the highest windfall profit tax in the world and watched as foreign investment and mining companies left the country. Similar to today, the changes that were made to key legislation provided a strong foundation for future growth. The outcome was the beginning of the largest economic expansion in the nation’s history and a resurgence of Mongolia’s exploration and mining industry.
While predicting the start of a boom cycle in a frontier market seems fatal, we do feel that most signs are pointing in that direction. The legislative environment and the financial constraints on the Government of Mongolia are ideally positioned for a major upswing and depressed prices across both publicly listed and private entities are providing lucrative. While the conditions are obviously different to those that we saw in 2009 we feel that a similar growth period is right around the corner.