Running on empty Mongolia's economic crash.(ASIA)(Country overview)

A financial crisis that began with a collapse in the American housing market has enveloped a country where half the people live in tents. Facing a budget shortfall and rising inflation, Mongolia has taken on a series of direct loans from other countries, as well as a US$229.2 million loan from the IMF, accumulating total debts of nearly US$1 billion. Mongolia took on this debt to ease widespread economic pressure resulting from a deep recession. From bankers to nomads, the landlocked country's three million citizens are struggling to cope with the familiar symptoms of a recession: joblessness, illiquidity, and uncertainty. Mongolia's political system is also in flux; Tsakhiagiin Elbegdorj of the Democratic Party defeated incumbent Nambaryn Enkhbayar of the Revolutionary Party to win the presidency in May. Consequently, Mongolia's economic policy is the subject of close international attention. Mongolia's prospects of repaying its loans and achieving long-term economic stability hinge on the government's ability to expedite the approval of important mining contracts that could significantly increase the country's economic output.

Prior to the worldwide recession, Mongolia's star was rising fast. Increased international demand for luxury clothing helped to grow Mongolia's cashmere industry, increasing the income of the country's many nomadic goat herders. Meanwhile, the bubble in commodities had a twofold benefit: both raising the profits of Mongolia's mining sector and increasing the value of the country's massive untapped mineral resources. As a result, Mongolia experienced robust economic growth. In 2007, real GDP increased by 9.9 percent; in the first quarter of 2008, it increased by 10.2 percent. The impact of this growth was a highly improved standard of living. As wages and social benefits increased, per capita GDP skyrocketed, more than doubling from 2005 to 2008. A boom in construction soon followed, as Mongolians tapped into their newfound wealth.

When the economic crisis hit, however, Mongolia's rise took on the trajectory of a falling star. Like many countries around the world, Mongolia was financially overextended, growing too quickly and taking on too much debt. Faced with 34 percent inflation, the government had no choice but to raise interest rates, making it more difficult to obtain loans. As a 50 percent drop in cashmere prices and a similar collapse in the international market for minerals hit Mongolia's two largest industries, the many Mongolians who had taken out loans to expand their herds, or to buy air conditioning for their tents, found themselves unable to repay their debts and unable to obtain more credit.

Faced with the prospect of foreclosure, many Mongolians have been forced to sell their livestock to avoid defaulting on their debts; these sales have flooded the market, lowering the prices the sellers would normally receive. As these economic shocks trickle through other sectors of the economy, such as construction, Mongolia is experiencing a dramatic increase in poverty and unemployment. Many are growing hungry, while a wave of former herders looking for work in the cities may cause economic dislocation and social unrest.

Mongolia has one way out of this downward cycle of poverty: resource development. Vast unexplored reserves of gold, copper, coal, fluorite, and uranium continue to intrigue international investors. Chief among these untapped reserves is the Oyu Tolgoi mine, which includes one of the world's largest reservoirs of copper and gold. Tapping this mine alone could triple Mongolia's GDP; full development of the country's major reserves could represent a seismic shift in its economic fortunes.

Yet on mine after mine, despite an abundance of potential economic partners, Mongolia is making no progress. Despite a development deal with two international mining companies, approval for the Oyu Tolgoi mine has languished in the Mongolian parliament for years. Determined to create a revenue-sharing scheme that would set a precedent of diverting private mining income to the public, the government has dragged its feet on the issue, even as public pressure to approve the mine made it the key issue in the presidential election. Similar political deadlock has impeded the development of the massive Tavan Tolgoi cold mine, despite the interest of the world's largest coal producer.

Having won the presidency in a clean and fair election that contrasts strongly with last year's elections, which saw accusations of voting fraud and ensuing riots, Elbegdorj has the political capital to streamline the approval of important mining licenses in parliament. Whether he will use it, however, is uncertain. Elbegdorj's Democratic Party bears much of the responsibility for the political impasse over the Oyu Tolgoi deal, as they have held out for a higher share of the mine's profits to go to the public. Moreover, Elbegdorj has a long track record of populist rhetoric and well-documented suspicions of foreign businesses, both of which unnerve analysts and investors who wish to see the Oyu Tolgoi mining project and other deals approved as quickly as possible.

Even if Elbegdorj surprises his critics by fast tracking the deal in parliament, mining is not a panacea for Mongolia's short-term economic problems. It is difficult to transition quickly from an economy based on agriculture to one based on mining, and despite its promising reserves, Mongolia remains a difficult country for large international mining companies to conduct business. Poor infrastructure--including many unpaved roads and airstrips--and high levels of poverty are among the challenges that face companies wishing to recruit a workforce and start digging. And even when profits start flowing, it could take years to implement the large infrastructure projects and education initiatives necessary to improve standards of living for the general population over the long term.

There are some positive signs. Despite political difficulties, there is still abundant international interest in Mongolian mining concerns. And while inflation remains high at 12 percent, it is far off its peak, and the IMF has stated that Mongolia is on track to achieve its budgetary goals and pay off its IMF loans. Like the rest of the world, Mongolia likely faces a slow and painful process of recovery. But if and when its vast resources begin to pay off, it will be able to learn from its useful lesson on the dangers of growing too fast and too soon.

Print Get the Mag Weekly Updates