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  Mongolian Investment Banking Group LLC 8 April, 2013      
Weekly Mining and Political Analysis from MIBG in Ulaanbaatar
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Politics – An Interesting Start To The Spring Session

Legal – SEFIL To See Parliament Or To Be Replaced?

Economics – GOM Budget Ran Surplus In Feb While HDF Struggles To Collect Revenues

Economics – Mongol Bank Lowers Policy Rate By 1%

Securities – FRC To Support Foreign Institutional Investors

China – Potential Bird Flu Outbreak Threatens Economic Performance

Securities – Mongolian Market Cap Monitor


Politics – An Interesting Start To The Spring Session

The spring session of Parliament opened on the 5th of April. The morning session included a speech from the President that involved very strong commentary on the importance of the capital markets. This included an appeal to Mongolians regarding public ownership where he stated that the country's wealth should be managed through capital markets rather than Government ownership. President Elbegdorj also delivered strong words on corruption, bureaucratic "red tape", and the importance of democratic and free market values.

Members of both the MPP and MPRP left the Parliamentary hall during the Presidential speech in order to join the rally on Sukhbaatar Square which demanded the resignation of the cabinet pointing to decreased economic growth, inflation, and poverty. It is a common ritual in Mongolia's spring politics for demonstrations on the central square to take place. However,this year there were very few populist or anti-foreign investment slogans being chanted during the rally which may point to a growing understanding of the importance of FDI for Mongolia’s future.

At this time the MPRP held a separate press conference and told reporters of its intention to request the resignation of the Minister of Justice, Mr. Temuujin. The MPRP have demanded on a number of occasions that former President Enkhbayar, who is currently serving his prison sentence at a Government hospital, should be allowed to travel to a foreign country to seek medical attention as his illness is "undiagnosable" in Mongolia. We feel that Mr. Temuujin's popularity among the public is growing and if the MPRP submits an official request for the Minister's resignation, the likelihood that it would occur is very minimal.

Still, the Democratic Party will likely face some headwinds as one of its key figures and the Deputy Speaker of Parliament Mr. Bayartsogt was reported as having a Swiss bank account with a balance of more than $1 million USD. Shortly after the information was released by the International Consortium of Investigative Journalists and publicized by the Guardian, Mr. Bayartsogt held a press conference providing some clarity on the situation. He has admitted to the existence of the account but corrected the original report by saying that the account was inactive with a balance of 1,658 Euros. He said that he will be responsible for not including the account details on his income statement and expressed his readiness to accept a penalty that will be issued by Parliament. This may include his resignation as the Deputy Speaker of Parliament.


Legal – SEFIL To See Parliament Or To Be Replaced?

This week is expected to see Parliament sit on the announced revisions to the Strategic Entities Foreign Investment Law (SEFIL). The changes that we have previously announced will result in the law regulating only the activities of foreign State Owned Enterprises (SOEs) and will exclude private companies and investors. However, we have since heard that the legislation may be scrapped completely.

Close sources to MIBG have informed us that the Ministry of Economic Development is preparing its own legislation that will aim to govern all investment into the country. While we have yet to see a Draft of this law we have been told that it will strongly embrace free market principles and will be more open to foreign investment than recent legislation.

While this is still a rumor that we have not been unable to confirm with the Government we would not be surprised if such a brash move was made. That said, the changes that have been announced by the Prime Minister do suggest that SEFIL could be amicable to investors. If the amended SEFIL were to be passed it could help stabilize the legislative risks currently being perceived by investors and would act as a catalyst for deals to be completed.


Economics – GOM Budget Ran Surplus In Feb While HDF Struggles To Collect Revenues

Parliament approved the Government of Mongolia's 2013 fiscal budget with projected revenues of 7,256.4 Billion MNT (5.18 Billion USD) and expenditures of 7,442.9 Billion MNT (5.31 Billion USD). In February collected revenues reached 97.1% of the monthly budget while spending reached 60.5%, as reported by the Ministry of Finance. This resulted in a surplus of 83.8 Billion MNT (59.9 Million USD). Similar performance occurred in January, whichalso saw a surplus of 72.4 Billion MNT (51.7 Million USD).

One item that drew our attention was the performance of the Human Development Fund's (HDF) February revenue where 21.3 Billion MNT (15.2 Million USD) was collected. This represents a shortfall of 45.5% over planned revenues. The Ministry of Finance has explained that thisshortage is connected to the 13.5 Billion MNT (9.6 Million USD) shortfall in minerals royalties as well as the 4.2 Billion MNT (3 Million USD) shortfall in progressive minerals royalty revenue.


Economics – Mongol Bank Lowers Policy Rate By 1%

On April 5th the Mongol Bank announced that it is lowering its policy rate by 1.00% to 11.50%. It appears that the Mongol Bank is looking to play a leading role in reviving the economy, specifically the real estate sector. Previously the central bank lowered the rate 0.75% to 12.50% on January 25th of this year, which was again aimed at controlling inflation.

The newly formed Monetary Policy Council has voiced its concerns over decreasing foreign trade as well as decreasing foreign direct investments into the country. Foreign trade has fallen by 10% YoY during the first two months of 2013 as foreign investment fell by more than 40% as we have reported previously.

Even though foreign direct investment will be the most important factor for the economic growth of the country we feel that Mongol Bank is taking aggressive measures to try and sustain the increasing FDI that has been experienced for the past 3 years.

Following various meetings and roundtable discussions that MIBG has participated in we feel that Mongol Bank may also play a key role in the country's real estate sector. The Mongol Bank appears to be positioning themselves to purchase mortgage loan packages from the country's commercial banks through Mongolian Mortgage Corporation. However, as the Mongol Bank uses various tactics to keep the country's economic growth moving forward by providing a trouble free financial sector it is in the lawmakers’ hands to revive the key driver of the Mongolian economy- foreign direct investment.


Securities – FRC To Support Foreign Institutional Investors

On February 6th 2013 the Financial Regulatory Commission (FRC) of Mongolia approved its operations plan for the securities market that will set the outlook for the next three years, up to 2016.

With the ending of the previous operational strategy, which managed the development of the market from 2009 to 2012 there were a number of key developments that were accomplished. These included the passing of a revised Company Law including drastic improvements on issues such as corporate governance, the rights and duties of majority and minority shareholders, as well as board and executive management responsibilities. Additionally, new legislation governing the use and management of Asset Backed Securities was also passed. In 2012, the Mongolian Stock Exchange in cooperation with the London Stock Exchange introduced the new Millennium IT Trading Platform and a T+3 clearing and settlement system. This developed was aimed at bringing the domestic market closer in line with common international standards.

As of November 1st 2012 the annual trading on the MSE increased by more than five times the turnover of 2009. While we do agree that many of the developments listed above have contributed to the professionalism of the market we would argue that the majority of this increase is a reflection of the economic conditions and the increased popularity in the Mongolian story that we have experienced over the past several years. Additionally, it is important to note that the Mongolian Securities Market plays a small role in the overall Mongolian financial sector. As of Dec 31st 2012 the total market cap of MSE listed companies reached 1.8 Trillion MNT, approximately 12.9% of the last years GDP. This represents 4.4% of the total financial market compared to the banking sector which is regulated by the Central Bank and controls 95.6%.

Needless to say, the Mongolian economy has grown rapidly since 2009 and even under the current global economic conditions we have seen international institutions such as the IMF projecting a GDP growth rate of 15.7 per cent in 2013.

Based on our review of the new operations strategy the FRC seems to be focused on increasing the market capitalization of the stock exchange while clarifying much needed legislation. This will include ongoing works towards the International Organization of Securities Commissions (IOSCO) Memorandum, delivery of the Draft Investment Fund Law, and a focused effort towards a supportive environment for foreign investors to invest in the domestic securities market. The FRC has stated that they will work diligently towards these goals and will intensify their cooperation with the related Government bodies in order to deliver the most efficient and supportive securities market environment for all investors.


China – Potential Bird Flu Outbreak Threatens Economic Performance

On Friday, Chinese officials announced the 6th death from the bird flu H7N9, which is escalating quickly following thefirst human death on March 31st. The Government has said that 21 people are infected including some in critical condition. Health authorities say that these individuals had direct contact with infected birds and that there is no evidence that the virus is passing from to human to human. The Chinese Center for Disease Control and Prevention is investigating the virus but what they fear most is that the virus might mutate in a way that enables infection to be passed between people.

The first bird flu in humans was detected in 1996 in China resulting in 360 deaths worldwide, most of which came after close contact with infected birds. In addition to the horrible loss of human life bird flu has had significant economic impacts across Asia in the past. In order to assess the potential damage that another serious outbreak of bird flu could cause we look at the measureable results of past experiences.

During the 2003-2004 outbreak the Asian poultry market was faced with the death and destruction of fowl that equaled to approximately 2 to 3 months of production. Those countries where the poultry sector contributes significantly to GDP were hit the worst. These includeThailand, China, Cambodia, and Vietnam where the poultry market directly contributes 0.5%, 1.3%, 1.5%, and 1.8% respectively. In addition to the local economic impact the share prices in global fast food restaurants such as KFC and McDonalds were also hit. KFC, due to their regional popularity and limited non-poultry offering suffered the most. With more than 1,000 outlets operating in 230 Chinese cities and 1,100 outlets located in Japan the company saw their sales fall by nearly 30%.

In addition to the direct impact on the poultry market the bird flu also had a significant affecton theAsian tourism sector. Asia’s largest tourist markets including Thailand, Malaysia, China, and Indonesia experienced significant losses. This was especially true in such destinations as Bali, Indonesia where 80% of the economy depends on tourism. Other sectors were also impacted during the outbreakdue to the overall economic slowdown and the significant increase in the price of seafood, fruits, and vegetables. If the current outbreak continues to worsen and infections continue to rise we expect that similar negative outcomeswill occur within the Chinese economy.

We have already started to see signs of a Chinese sell off on the local markets. Since the latest announcement increasing the death toll of the current outbreak stocks have started to suffer.This has mainly struck poultry and tourism related sectors with Air China andChina Southern Airlines Co declining 9.8% and 10.6% respectively. This represents the biggest sell off of China Southern since 2009. With border closures already being put into affect the situation seems set to worsen. Shanghai has halted the trading of birds in order to prevent the spread of the outbreak and both Vietnam and Mongolia have taken action by banning poultry and pork imports from China.

If the spread does continue China is likely to see further pressure put on the cooling of the economy. This presents a significant challenge for the new Government early in their tenure and could present an opportunity to demonstrate the level of transparency and honesty that is to be expected in the years to come. During the previous bird flu outbreak it was widely reported that the Government softened the numbers of those infected and dead in order to avoid further hysteria. This ultimately resulted in a loss in confidence and made the public reaction to the situation far worse than it should have been. Hopefully, the new Government will learn from the mistakes of their predecessors and will keep the public informed through transparent and honest practices.

  Mongolian Market Cap Monitor  
  The following charts depict the week-on-week change in market cap for the main juniors and producers involved in the Mongolian mining sector.  The data being used is based on the Friday close from the previous two weeks and is presented in USD.  

Weekly Change in Market Cap - Mongolian Juniors

Weekly Change in Market Cap - Mongolian Producers


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