- Amendments to the Strategic Entities Foreign
Investment Law are less significant than what’s
been widely reported;
- Private companies will not be exempt from an
approval process altogether, but must now obtain approvals
from the cabinet instead of parliament;
- Continuing uncertainty over the Sefil and the
corresponding investment freeze due to lack of regulations
could affect the stability of the banking
- Investors are beginning to look to other
resources-rich frontiers where it is easier to do
Mongolia’s amendments to its controversial
foreign investment law may not make a difference to investors
looking to enter the market.
It has been widely reported that mendments to the deeply
unpopular Strategic Entities Foreign Investment Law (Sefil)
eliminates approval for private investment.
But lawyers told IFLR that the amendments represent
minor changes rather than a complete overhaul. Further, a lack
of clarity in the Sefil is beginning to prompt investors to
look to other resource-rich frontiers in which it is easier to
MahoneyLiotta’s Darin Hoffman said that the
official text of the amendment has yet to be published, but
changes to article 4.7 are narrow in scope and have limited
benefit for investors.
He clarified that the amendment only eliminates the
requirement for non-state-owned entities (SOEs) and entities
without state ownership to obtain parliamentary approval for
investments above MNT 100 billion ($71,000) in business
entities operating in sectors of strategic importance, such as
resources, media and communications, and banking and
But full cabinet approval for transactions involving private
sector investment is still required – the same as
"This has always been seen as one of the major impediments
brought on by Sefil," he said. "It is in sharp contrast to
reports that the Sefil was amended to no longer apply to
private sector investments – that reporting is in
"The high hurdle for potential state-owned foreign companies
effectively blocked investment inflows from China, which is by
far Mongolia’s biggest importer of its mineral
resources and nearly 90% of its total exports," analysts stated
in an article titled Mongolia’s Amended
Foreign Investment Law Credit Positive in
today’s issue of Moody’s Credit
Further, analysts noted that the vagueness of the law and
absence of implementing regulations has prevented planned and
new investments from moving forward.
The effective halt on inbound investment has had a
substantial effect on the stability of Mongolia’s
first report on Mongolia’s banking sector, the
agency gave the sector a negative outlook. But it maintained
stable bank ratings outlooks for the four Mongolian banks it
rates; all four banks are rated B1.
The report summary said that its outlook reflects the
challenges that banks face in managing what will likely be a
period of rapid loan growth in an economy that is increasingly
exposed to commodity-driven boom-bust cycles.
"Further underpinning our negative banking system outlook
are structural features, such as high loan concentrations, weak
risk-monitoring systems and the developing nature of the
regulatory framework," the report added.
Moody’s analyst and report author Hyun Hee Park
told IFLR that Mongolian banks experienced 73%
year-on-year loans growth in 2011 and 24% growth in 2012. These
paces, if attained, will likely offset even the strong internal
capital generated by their earnings in 2013.
However she noted that fresh additional capital from
external sources will be needed in the coming one to three
years. "An uncertain process of the Sefil risks fresh capital
injection from foreign investors," she added.
She highlighted the banks’ loan book
composition chart (below), in which the mining sector
represents 12.4% of total bank exposure. That number does not
include ancillary industries related to mining, such as
transportation, construction and wholesale and retail
|EXHIBIT 4: Loan Book Composition
as of September 2012
|Source: Bank of
Mongolia Loan Report
Note: Loans to Individuals include small business loans
and personal loans.
If there is a decrease in foreign investment in this sector, it
will hurt the banking system indirectly but will not be
material in the near future; there may be an indirect impact
with time lag, she added.
"However, if a prolonged decrease in foreign investment in
mining sector adversely affects the cash flows of companies in
this sector and undermines their credit positions, it could
heighten credit stress in this sector and could hurt
banks’ asset quality," she said.
Further, uncertainty regarding the Sefil is discouraging
foreign banks from considering investing in Mongolian
Park said that one of the positive aspects of the Mongolian
banking system is that foreign investors remain interested in
investing in Mongolia banks given their high mid-to-long-term
Foreign investors had started to become active in the
banking sector before the Sefil was passed. Goldman Sachs
Group’s investment to acquire a 4.8% stake in the
Trade and Development Bank of Mongolia is an example.
"Once the details and processes of the foreign investment
law are disclosed – and if they are positive
– it will be good for Mongolian banks," Park said.
What to expect
Hoffman told IFLR that prime minister N.
Altankhuyag and the Ministry of Economic Development seem
committed to proposing new and improved legislation to create a
more workable foreign investment regime in Mongolia.
"Sources indicate a draft has been proposed that has more
reasonable controls on foreign investment," he added.
But the lack of resolution regarding the Sefil may damage
Mongolia’s ability to repay its debt. The
Moody’s article on the Sefil noted that a
particular credit risk is the threat to the
government’s debt repayment capacity from a
restrictive and unpredictable credit regime.
It said that the Sefil, coupled with the
government’s efforts to renegotiate its investment
agreement with the owners of the Oyu Tolgoi project, which only
became effective in March 2010, jeopardises future budgetary
revenues from the mining sector.
The revenue is necessary to repay the
government’s external debt. Further the article
noted that last year alone, the government took on $5.5 billion
in direct and guaranteed global capital market debt
obligations, equal to about 55% of GDP in 2012, $2 billion of
which has been drawn down so far.
"The rise in external debt compared with current account
export, income and service receipts has been sharp, to 252% in
2012 from about 64% in 2008," it said.
Further, some of the investors that left Mongolia may not
Gibson Dunn partner John Viverito and of
counsel Myles Hankin are seeing natural resources
investment move from Mongolia to other jurisdictions due to the
lack of an investor friendly environment.
"We’re seeing a fair number of African deals
coming through, and a couple of people who do business in other
frontier markets around the world have said that
it’s easier to do business legally in the Congo
and many other African countries than it is in Mongolia," the
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