BACK TO THE FUTURE

Key Challenges and Opportunities for Continued Growth in Mongolia

Randolph S. Koppa

President Trade and Development Bank of Mongolia

Mongolian Investment Summit Nov. 19, 2013

PATHWAY

• Review of past four years investment and

development

• Current investment issues being addressed

• Near term opportunities and needs

• Attracting the needed foreign capital

OCTOBER 2009: A PATH IS CHOSEN

• Signing of OT investment agreement

• Boost in Foreign investor sentiment

• Kick off of investment boom

• Race to the Future

TOTAL FINANCING INVESTMENT NEEDS AND

OPPORTUNITIES 2010 TO 2015

• Mine Development $ 12 bn. to $ 20 bn.

• Infrastructure $ 8 bn. to $ 12 bn.

• Urban development $ 6 bn. to $ 8 bn.

• Agriculture $ 1 bn. to $ 2 bn.

• Industry and Commerce $ 15 bn. to $ 20 bn.

• Environment $ 1 bn. to $ 2 bn.

• Social $ 1 bn. to $ 2 bn.

• Financial Sector $ 1 bn. to $ 2 bn.

Totals: $ 45 bn. to $ 68 bn.

POTENTIAL SOURCES OF FUNDS 2010-2015

• FDI $ 11 bn. to $ 14 bn.

• Domestic sources $ 12 bn. to $ 18 bn.

• Sovereign Borrowing $ 3 bn. to $ 6 bn.

• Foreign Capital Markets $ 11 bn. to $ 16 bn.

• IFI & Foreign bank Loans $ 7 bn. to $ 12 bn.

• Donors and NGOs $ 1 bn. to $ 2 bn.

Total $ 45 bn. to $ 68 bn.

12.7

5.5

2.1

63.5

0.5

4

2.2

12.5

3.9

104.5

1.50

2

4

6

8

10

12

14

16

18

20

FDI Domestic Sovereign Foreign

Cap.Mkts.

Foreign

Loans

Donors

Received Pending To go

PROGRESS TO DATE

GROWING GDP, DRIVEN BY INVESTMENT IN MINING

GDP GrowthGDP Growth(US$ bn)

Source: National Statistical Office of Mongolia

5.174.57

6.69

7.94

10.02

7.41

0

2

4

6

8

10

12

2008 2009 2010 2011 2012 3Q2013

GDP

POVERTY RATE DECLINING

NOT TO SOUND CLICHED, BUT…

• “If everything is so good, why am I feeling so

bad?”

• “The glass is half empty”

• “What have you done for me lately?”

EXPORT REVENUES EASE AS MARKET SOFTENS

2.5

1.9

2.9

4.8

4.4

3.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2008 2009 2010 2011 2012 3Q2013

Source: Bank of Mongolia, National Statistical Office of Mongolia; exchange rate of USD : MNT = 1655.44

Export SectorExport Sector

FOREIGN INVESTMENT DROPPING

Foreign Direct InvestmentForeign Direct Investment

Source: Bank of Mongolia, National Statistical Office of Mongolia; exchange rate of USD : MNT = 1655.44

0.81.0

1.6

5.3

3.8

2.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2008 2009 2010 2011 2012 3Q2013

CURRENT ACCOUNT DEFICIT

CAUSES OF MONGOLIA’S MALAISE

• Early growth based on ramp up of coking coal

production and OT build up. Infrastructure

lagged.

• China’s GDP growth slowdown from 10% levels to

7% levels changed commodity market dynamics.

• Populist and nationalistic rhetoric during

elections of 2012 and 2013 seemed to precipitate

some unfortunate legislative and other

government decisions seen as unfriendly to

investors, notably as related to OT.

AN A380 FILLED WITH US 100 DOLLAR BILLS

WILL IT BE THIS?

OR WILL THIS FOIL THE TAKE OFF?

MONGOLIA LOSES MARKET LEAD

CHINA DEMAND SLOWDOWN IMPACTS

COMMODITY COUNTRIES GDPs BY 2025

CHINA CAR PRODUCTION BOOMING

ELECTIONS AND ECONOMIC GROWTH

FIVE INTERDEPENDENT ISSUES

A FORM COPIED IN NATURE

WITH REGENERATIVE CAPABILITY

POWER

• Electricity, a 1500 MW need

• 20 % from clean renewable

energy sources such as wind

• USD 1.2 billion CHP5

proceeding on PPP BOT

• USD 2 billion of new projects in

development

• USD 2 billion more required in

near future

LIQUID ENERGY

• Need to reduce reliance on imports

• Mongolia has crude oil reserves and growing

production

• Coal to liquid and coal to gas projects in

development

• Coal shale has strong potential

• Potential to export energy or clean energy fuels

• Possible need USD 6 billion

LINKING TO THE MARKET

Size 1,040 km

Investment US$ 5.0 bn

Time frame 2012-2016

RAIL TRANSPORT

• Important 260 km link TT to border to be

completed end 2015. USD 200 million from Chinggis Bond as seed money.

• Feasibility studies for link for TT to Sainshand and north to Chinese and Russian connections

proceeding

• Aspire Mines in NW Mongolia seeking USD 1.3

billion for a 547 km 22mtpa line from Ovoot to Erdenet.

• Total funding needs: USD 6 to 8 billion

ROAD

• ADB funded link to Chinese border

completed

• Chinggis Bond proceeds: USD 380

million applied to rural roads

• Chinggis Bond proceeds: USD 200

million for urban streets, mainly in

UB

• USD 1 to USD 2 billion more needed

WATER

• Perhaps THE critical resource

• Although more is being discovered, potential

shortages loom for UB and the South Gobi mine areas.

• Transmission lines from northern rivers being pursued as an option

• Water efficient management system investments needed.

• Needs potentially USD 1 to 2 billion

URBAN DEVELOPMENT

• Significant construction of housing in the past four

years

• 37054 new units completed in UB alone

• Estimated investment over USD 4 billion

• Approximately 30000 units and construction

• However, 184,000, or 60 % of households in UB are in

ger areas without connected heat and utilities.

• USD 7 billion of housing development still needed in

UB, plus USD 3 billion in other towns next five years;

further USD 10 billion will still be needed beyond that.

INDUSTRIAL DEVELOPMENT

• There has been roundly USD 5 billion in

industrial, agribusiness and commercial sector funding of capital expenditure and expansion

but much more is needed such as for building materials, and value added agri products.

• A major new area is the value added minerals processing such as planned at Sainshand

• Coal to liquid and gas provides another major

initiative for import substitution and export.

• Potential need is from USD 15 to 25 billion.

SOCIAL AND ENVIRONMENTAL

• Investment lagging behind in medical and

educational.

• Environmental protection and green

development in energy, mining and industry is

a priority.

• Funding potential of USD 5 billion

FINANCIAL SECTOR

• USD 1.5 billion in outside funding attracted

• USD 5 billion may be needed in outside

funding of Tier 1 and Tier 2 capital, loan

growth, and mortgage backed securities

MINING SECTOR

• Over USD 10 billion in FDI past four years

• Considerable debt also raised

• OT phase 2 will be USD 4 to USD 5 billion

• Unlimited potential depending on markets

and investment climate

• Estimated range from USD 15 to USD 25 billion

TOTAL POTENTIAL INVESTMENT NEEDS AND

OPPORTUNITIES 2014 THROUGH 2018

• Mining USD 15 bn. to USD 25 bn.

• Infrastructure USD 11 bn. to USD 17 bn.

• Urban Development USD 7 bn. to USD 10 bn.

• Business Capex USD 15 bn. to USD 25 bn.

• Social & Environmental USD 3 bn. to USD 5 bn.

• Financial Sector USD 4 bn. to USD 5 bn.

• Totals USD 55 bn. to USD 87 bn.

POTENTIAL SOURCES OF FUNDS 2014 THROUGH 2018

• FDI USD 14 bn. to USD 24 bn.

• Domestic sources USD 19 bn. to USD 28 bn.

• Sovereign Borrowing USD 4 bn. to USD 6 bn.

• Foreign Capital Markets USD 8 bn. to USD 13 bn.

• IFI & Foreign bank Loans USD 9 bn. to USD 14 bn.

• Donors and NGOs USD 1 bn. to USD 2 bn.

• Totals USD 55 bn. to USD 87 bn.

DOMESTIC SOURCES NOT ENOUGH

• Budget capital spending to 20% of GDP

• Domestic government depth to 20% in GDP

• Bank CAPEX lending to 25% of total loans

• Business CAPEX investment grows to 20% of GDP

• MSE market cap grows from 12 % to 40 % of bank

debt as in other emerging markets

• Domestic debt market grows as pension and

other funds accumulate reserves

FOREIGN PARTICIPATION CRITICAL

• Domestic sources are limited by debt to GDP and other norms and financial sector capacity.

• Foreign investors and lenders want not only good prospects, but stable investment laws, sound fiscal and monetary management, a strengthening legal environment, and continuous demonstration of open and fair treatment by the government.

• Trust still needs to be restored.

• Government pro private sector and pro foreign investment policies and strategies being propounded

CONCLUSION

• Mongolia is facing a new reality

• Slower growth in China is a given

• A new strategy requires developing both

mining and industrialization in parallel

• Funding needs thus are higher

• Foreign investments from all neighbors is key

• The third neighbor policy for investment must

be affirmed

BACK TO THE FUTURE

• Need to go back to get to the future

• Back to a strong third neighbor policy

• We have to get back on track

• We have to go Back to the Future

Thank you for your attention!

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Tel: 976-11-31 99 43

Fax: 976-11-31 24 18

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