Mongolia - The land of Chinggis Khan: A Surprising Economy

Views on Mongolia of Gaurav Bhatia, a M.A.D. Intern from HKUST MBA over the summer 2011 period.
A surprising trip from an HKUST MBA in a land filled with opportunities.

The journey of two and a half months in Ulaanbaatar-Mongolia has been interesting and the experience has been amazing. Its pity that it is coming to an end so soon as there are ample opportunities in this country and still many things to learn. I still remember the day when I had accepted the offer of doing Internship in company called M.A.D. Investment Solutions and everyone warned me by saying no one goes to that country and that too for a company which had weird name. But few close friends were supportive about the decision and felt that it would be a good learning experience and 2-2.5 months is not a big time to loose much.

I took the plunge but the journey started on a bumpy road with issues in getting Mongolian Visa. But somehow the visa issue was sorted and I was ready to fly to ‘Mongolia – The Land of Great Chinggis Khan’. The flight to Ulaanbaatar(UB) was also not that great but finally when the plane was about to land in UB there were lights spread all over the ground and I thought for the first time it seems an interesting place. And soon plane crossed the lights and entered a tunnel of darkness and it made me confused and finally when I landed at the international Aiport in Ulaanbaatar it did not appear to be international by any means. The airport was a 2 room compound with a one duty free shop and I realized that this country lacked infrastructure as per international standards. The customs and immigration procedures did not take that long but the airport looked chaotic.

The journey to Ulaanbaatar which started on bumpy road continued further on the bumpy roads of the city with little life seen at midnight in the city. I finally landed up in an apartment in the centre of the city and was excited but at the same time nervous & also ready to experience the Frontier market the very next morning in office. The first look of the city traffic at 9 AM in the morning while going to office clearly indicated that it was definitely an emerging economy and the images of india around 10 years back appeared in front of me. Th traffic was chaotic and there were traffic jams everywhere but looking at the traffic chaos and the big SUVs & expensive cars on the road, I never felt that I was in country which is upcoming economy. The feeling was mixed about the economic conditions in the country and it appeared that everyone was rich and could afford to flaunt big cars but overall no one was following any rules & did not even care of pedestrians walking on the roads.

The work at office seemed interesting and the potential of this country started unveiling as I started exploring the city and read through news about the recent developments taking in the frontier market. The Mongolian Stock Exchange was too small in comparison to any other Stock exchange of the world and trading volumes were barely few thousands a day to sometimes a few hundred thousands but it was predicted to grow in few years & LSE is assisting it. The returns from the MSE were close to 70% in one year and there was no other market in the world that offered such high returns in a year’s timeframe. As the office work started picking up and I got more and more involved in the day to day work & got exposed to wealthy investors from across the globe. All the investors were uncertain of potential of the developed world but were upbeat about the success story of Mongolia which as per them was riding on huge natural resources reserves.

As I started moving around the city the huge opportunities of investments caught my eye and I could see the opportunities everywhere e.g. infrastructure, transportation, health, retail, FMCG, construction, IT, Services business, Financial services. The meetings with one of US billionaire for a real estate luxury apartment project further strengthened the faith in success story of Mongolia. The US billionaire had interests in the mining and real estate sector of Mongolia and was searching more investment opportunities in Mongolia and had great ideas to implement which could bring higher returns for him. As the days and work started unfolding I met investors from Singapore & spoke to various investors who were ready to put in capital but found it difficult to find good investment opportunities. While working in the real estate sector I witnessed the hunger & competition for buying assets amongst wealthy locals, expats & investors. The real estate market is fast paced & if you don’t act fast then probably you may miss out on the opportunity. The residential market is hottest of all as the supply is less than the demand but whereas the office and retail space is high in supply and demand is much less.

The city skyline is being developed all across and as of now Blue Sky towers in central business district stands out holding the tall flag of Mongolian uprising in the world. As one looks around, there are many residential & office buildings coming up all over the city which will be signify and highlight the social uprising of the locals and local companies. The government is also taking initiatives to build new projects to improve the living conditions for local people who live in ‘gers-nomad houses’ and has recently announced housing projects for them. Still around 40% of the total population lives in ger district and are deprived of basic housing amenities. All the big retail brands like Gucci, LVMH, Buberry have already set up their shops in Mongolia to tap in the growing rich locals and the big hotel chains like Shangi La, Best Westin are also building their properties faster to cater to the growing demands of the expat community. The economy which has been growing is set to grow much faster than any other economy in coming years as the coal mines under development start production in 2012 and this will reflect in the GDP figures. Mongolia still has 70-80% of its total natural reserves which are yet unexplored and as the country expands its mining industry the potential of growth is huge.

In last few years as China grew, Mongolia’s exports also grew as it exported its coal and metals to China. The Mongolian exports have gone up from 48% in 2004 to 73% in 2009 to China. Copper and Coal make up the majority (almost 60%) of the current exports from Mongolia and the other commodities being exported are Zinc, gold, iron ore & Molybdenum. There is no doubt that these commodities will always be in demand and even if there is recession still countries like China, India, Russia will be growing for next few years and the demand for these commodities will be there from these growing economies. So in that sense the growth of Mongolia is inevitable and these are some of the simple reasons why the high net worth individuals, fund managers, financial institutions, investors are all flocking Mongolia to tap in the opportunities which look lucrative.

The only foreseen big risk for the Mongolian economy seems to be the Dutch Disease which can affect the economy adversely in the long term. (In simple terms Dutch Disease means the over exploitation or over dependence of an economy on natural resources or large capital inflows which ruins the other sectors of economy and causes currency to appreciate drastically thus causing the country to loose its competitive advantage over others). Currently, the mongolian economy seems to move into this direction and it is highly likely that it may fall into the trap of Dutch Disease because Mongolia does not have any other sector apart from mining, on which it can rely on for economic upliftment or growth. The government will face an uphill task if it wants to develop other sectors in order to avoid the Dutch Disease but the strategic location of Mongolia in the middle of two growing economies Russia and China is going to be challenging especially when Mongolian economy is highly dependent on the two. In addition the adverse weather conditions is a challenge which does not give much of bandwidth to the country to develop some sectors e.g. education (as Australia has been doing), manufacturing( supply chain is going to be challenge), financial services( it will me more to cater internal needs rather than be a global hub as Singapore or Hong Kong). The overall infrastructure in Mongolia is outdated and not efficient enough to drive the manufacturing boom and situated next to China it cannot do so. In looking onto these factors it seems difficult and challenging for the government to take steps in the right direction to avoid the disease affecting the economy.

The growth story of Mongolia is relying on its mining sector and maybe upto some extent tourism sector (which is minimum as of now) but the country holds huge potential in terms of opportunities in all sectors and as the locals become rich the needs and demand for international standards would grow. The disparity in wages amongst locals also would increase but that can be addressed by the government by having sound economic policies so that lower class people also get opportunities to earn more and get prosper as their mining counterparts. In addition the government can utilize its natural landscapes and beauty to tap in more tourists to expand its economy and develop toursim and hospitality industry which as now in a nascent stage. But to achieve anything big the infrastructure has to be made worldclass and government needs to invest a huge capital over next few years to establish its supremacy over other countries in coming years.

There is no doubt that the Mongolian economy is set to grow for next 5-10 years and there is huge potential in the market currently which needs to be tapped at early stages rather than at latter stages as the returns to the investors will be accordingly beneficial. I leave this country at a juncture where it is still under USD 9 billion economy with a population of around 2.75 million with 50% concentrating in Ulaanbaatar but I’m sure that this economy is going to grow bigger and bigger in the coming years and I might be back to ‘Mongolia – The Land of Great Chinggis Khan’ someday to enhance my knowledge and experience and tap in all these opportunities.

Source : M.A.D. News

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