Mongolia Aims to Join the SWF Ranks

In the far reaches of the south Gobi desert, a cluster of boxy, sky-blue buildings marks the entrance to the main shaft of the Oyu Tolgoi mine, the largest industrial project ever developed in Mongolia. Scheduled to open before the end of the year, the mine — a joint venture between the Mongolian government and Canada’s Turquoise Hill Resources, a subsidiary of global mining giant Rio Tinto — will tap the country’s vast reserves of copper and gold.

Oyu Tolgoi hasn’t produced an ounce of metal yet, but already the mine has begun to transform Mongolia’s economy. Ever since the mineral deposits were discovered in July 2001, geologists and mining experts have swarmed to this remote former Soviet satellite to assess the bounty that lies beneath its deserts and steppes. According to industry estimates, Mongolia’s mineral reserves may be worth as much as $1.5 trillion at current market prices. Capital spending alone at Oyu Tolgoi amounted to some $3 billion last year, an amount equal to 35 percent of the country’s gross domestic product. Once production gets under way, the mine is expected to produce 450,000 tons of copper and 330,000 ounces of gold a year, worth a total of nearly $4.1 billion at current prices.

对于一个人均收入为4,800美元的国家使其成为亚洲最贫困的人之一，肯定是受欢迎的财富。但这些矿物丰富的规模也对该国经济构成了大量风险。突然资源财富可以推动通货膨胀和汇率，并导致经济的整体竞争力下降，在20世纪60年代的荷兰的影响后，荷兰病的现象。新收入的激增也可以通过促进腐败和转移政府在物理和人力资本中投资足够的腐败来破坏经济和政治机构。

如果没有一个更灵活,协调政策response to its nascent commodities boom, Mongolia’s economy could overheat dangerously. Last year the country soared to the top of the global growth charts as its economy expanded at a blistering rate of 17.2 percent. The pace has remained torrid this year, with output surging at a rate of 16.7 percent in the first quarter, although it eased off in the second quarter to a slightly more sustainable 13.2 percent. The downside? Inflation has kept pace, hitting 16 percent in April before dropping back to 14.9 percent in August, a level still well above the Bank of Mongolia’s target of 10 percent.

“The economy is not in danger of overheating — it is overheating, although the temperature has cooled down a bit recently,” says Dale Choi, an Ulaanbaatar-based analyst at Origo Partners, a private equity firm headquartered in Beijing that advises investors on China and Mongolia. “But the government is still constantly being warned by the World Bank that it is spending too much and growing too fast.”

随着经济增长的速度，政府支出更快地扩大。根据世界银行发布的最新更新，2012年前四个月的政府支出比同一年的同期增长32％;单独资本支出翻了一番。与此同时，收入未能保持步伐，同时仅增长21％。因此，根据世界银行数据，4月份蒙古的财政赤字上涨至12个月内的GDP的4.2％，折扣了经济周期的起伏，折扣为6.1％。

然而，变化在空中，这可能使蒙古能够充分利用其最大的矿物丰富。2010年议会通过的财政稳定性法律应开始对政府的预算政策发挥一些急需的纪律。法律要求蒙古将结构赤字限制在2013年1月的2％的GDP中。它还创造了一个稳定基金，由采矿收入提供资金，旨在帮助政府缓解商品价格波动对蒙古族的影响。更重要的是，政府正在考虑创造一个主权财富基金，这些基金将保护该国的一些矿物意外收获的未来几代人。

蒙古正在展示智利建立的框架的新方法，这些方法已经利用其铜收入来创造稳定的稳定和主权财富基金。实施仍然是一个大问题标志，特别是在6月份蒙古议会选举的挥发性政治气氛中。但是，如果政府成功进行其计划，它可以锚定世代的经济。

“The first step is to establish a really prudent fiscal policy — especially in countries like Mongolia where you are likely to see these patterns of booms and busts, driven by commodities prices and budget expenditures, unless you have a really solid fiscal structure in place,” says Eric Parrado, a former manager of Chile’s stabilization and sovereign wealth funds who is advising Mongolia. If resource-rich countries can adopt and implement a disciplined policy approach, they can accumulate “real money in a sovereign wealth fund fueled by real revenue surpluses,” he adds. Without such discipline, however, “a fund is not a sovereign wealth fund in anything but name — it is just a fiscal instrument to pay for services, preexisting commitments or ring-fence money coming from a specific economic sector.”

Can Mongolia actually implement its ambitious sovereign wealth plans? The answer depends largely on the strength and accountability of the country’s young political institutions. The World Bank Governance Index, which rates countries on metrics ranging from political stability and rule of law to regulatory quality and corruption, ranks Mongolia well above resource-rich countries of the former Soviet Union, such as Azerbaijan and Turkmenistan, but places it far below governance role models like Chile and Norway.

The latest signals from the country’s fractious political scene are mixed. The Democratic Party (DP) of President Tsakhiagiin Elbegdorj won the greatest number of seats, displacing the Mongolian People’s Party (MPP), which had dominated the coalition government for the past four years. The DP agreed to form a new coalition with the Mongolian People’s Revolutionary Party (MPRP), a breakaway faction of the MPP led by former president Nambaryn Enkhbayar. But there is plenty of scope for disagreement behind the apparent consensus.

The MPRP has a well-deserved reputation for supporting greater resource nationalism, and Enkhbayar has repeatedly called for the renegotiation of mineral extraction rights — including the rights to Oyu Tolgoi. But Enkhbayar was arrested in April on charges of corruption; he has vigorously denied the charges, claiming they were politically motivated. In early August he was convicted and sentenced to four years in prison. The case didn’t derail the new coalition, but it remains to be seen whether the two parties can agree on the measures necessary to put in place a new sovereign wealth framework.

蒙古的压力经济需求解释了资源民族主义和高政府支出的吸引力。据亚洲开发银行库罗迪达亚洲开发银行总统，虽然该国出现了“繁荣的门槛”，但贫困人口近30％的人口占贫困人口的近30％，其中包括居住在乌兰巴塔尔的110万人口。

首都“超过一半的人口生活在traditional gers, or yurts, which lack any basic amenities,” says Alisher Ali, chairman of Eurasia Capital, an investment bank based in Ulaanbaatar. “The government needs to build at least 100,000 new housing units and supply them with infrastructure, including water and electricity, but that would require an undertaking of at least $5 billion — and the government doesn’t have $5 billion to spare right now.”

The political appeal of resource nationalism is also driven by rising national-security concerns, which are focused squarely on China. Fully 94 percent of Mongolia’s exports are sent to China, which has an almost insatiable appetite for the country’s copper and coal. In May parliament rushed through a vote to amend laws governing foreign-investor participation in resource development and set a cap on the ownership stakes held by foreign state–owned companies — a reaction sparked by the announcement in April that Turquoise Hill Resources would sell a stake of at least 56 percent in coal mining company SouthGobi Resources to the Aluminum Corp. of China, or Chalco. The deadline for the offer, potentially worth up to $1 billion, was July 5, but Chalco twice delayed and later abandoned the bid. The deal collapsed on September 3. Later that month 24 members of parliament sent a letter to the newly elected prime minister, Norovyn Altankhuyag, demanding that he reopen discussions with Turquoise Hill — and by extension, Rio Tinto — and challenge the company’s 65 percent stake in Oyu Tolgoi.

激烈的战争背后的蒙古的政治parties, however, officials at the Ministry of Finance and the Bank of Mongolia have been quietly working since 2009 to prepare the country’s economic infrastructure for the coming mining boom.

The Fiscal Stability Law aims to insulate the economy from the boom and bust cycle of commodity prices by setting up a strict fiscal policy framework. It also created a Fiscal Stability Fund to help mitigate the effects of commodity-price volatility on the government budget. Much like Chile’s Economic and Social Stabilization Fund, on which it was modeled in part, the fund is designed to accumulate reserves when commodity prices are strong and mining revenue is high and then be drawn on to supplement the government budget when prices fall.

According to Bazarsuren Batjargal, who until the end of July served as director general of the Fiscal Policy Department of the Finance ministry, the fund already holds some assets (figures aren’t readily available but the World Bank estimates it at 2 percent of GDP, or about $170 million). With the implementation of the new fiscal rules, which mandate greater savings, the fund could approach $700 million in assets next year, he says.

In addition to the stabilization fund, the government has been preparing legislation for the creation of a national pension reserve fund, akin to Chile’s $4 billion Pension Reserve Fund and Norway’s mammoth $612 billion Government Pension Fund Global.

Mongolia’s decision to model its fiscal rules and sovereign funds on Chile’s example was no accident. In searching for advice and assistance, the Ministry of Finance turned to Parrado, one of the chief architects of Chile’s sovereign funds and manager of those funds, as international financial coordinator for Chile’s Ministry of Finance, for three years ending in 2010.

With copper prices soaring in 2006, Chilean lawmakers passed a Fiscal Responsibility Act that created two funds: the Economic and Social Stabilization Fund, designed to provide budgetary support if copper prices tumble, and the Pension Reserve Fund. The law was controversial at first, with some lawmakers arguing that the government should use its mining revenues to reduce economic inequality in the present, but the global financial crisis silenced most of the critics. The government drew down about $9.2 billion from the stabilization fund during the crisis to support the budget and the economy, as the global economy plunged into recession in late 2008.

Today the two funds hold a total of $16.6 billion, or 6.7 percent of GDP. Managed by the Chilean central bank under a mandate from the Finance ministry, the funds are invested in sovereign bonds — mostly U.S. Treasuries and German Bunds — and money market instruments. Between April 2007 and December 2010, the stabilization fund produced an annualized return of 5.5 percent and the pension fund achieved an annualized return of 5.4 percent.

Parrado, a professor of economics and finance at Adolfo Ibáñez University in Santiago, co-founded economic consulting firm SCL Partners, which is affiliated with New York-based GlobalSource Partners, and advises a number of resource-rich countries, including Colombia, Nigeria and Panama, as well as Mongolia. He spent several weeks over the summer in Ulaanbaatar working with officials from the Finance ministry, central bank and parliament to help them draft legislation that would dedicate a percentage of excess mining royalties and revenue toward a future pension reserve fund. If that legislation is approved by parliament in the spring, which seems probable, it will pave the way for a potentially dramatic reallocation of the coming decade’s much-anticipated mining revenue.

The political impetus in Mongolia to create a proper sovereign wealth fund reflects growing awareness of the limitations of the country’s existing Human Development Fund. This fund, which was opened in November 2009, is financed by the prepayment of royalties from the Oyu Tolgoi mine. The fund is used to provide pension, health, housing and educational benefits to the Mongolian people.

2011年，每个符合条件的公民从HDF收到每月21,000名蒙古·古格里克（约15美元）的现金讲义。该基金还为学生提供了学费支持。总体而言，根据欧洲银行重建和发展的“管理蒙古资源繁荣”的工作文件，发展基金去年去年减少了大约5.8亿美元。令人担忧的是，这些分布与基金的基础投资绩效无关，但只需根据政府和竞争政党的酌情决定，不挑剔的政党毫无疑问，试图通过承诺更大的现金讲义来抵达选民的咖喱伙伴。

“Every citizen in the country is issued a Human Development record book,” says Origo Partners’ Choi. “You can literally walk into a bank, which delivers the money, and pick up cash — and it’s not uncommon to see huge lines of people lining up on a certain day to get their payout.”

根据Batjargal的情况，如果批准并实施新的养老金储备金基金的立法，它基本上将获得目前为HDF专门被指定的收入部分。“人类发展基金将毕业并成为多用途基金 - 它将不再存在于目前的形式，”他说。“我们在政府资产和负债上起草了一项新法律，其中我们阐述了这些新主权财富基金的主要原则，包括将有效取代HDF和新养老金储备基金的基金，这可能被称为未来养老金改革基金。“

No timeline has yet been set for the ratification of the new sovereign wealth fund platform, but the Democratic Party is already beginning to clarify its position on Mongolia’s future fiscal policies by putting forward an action plan designed to reduce the budget deficit, curtail inflation and reassure foreign investors. Whether the government actually adheres to its groundbreaking Fiscal Stability Law remains to be seen. Mongolia has something of a reputation for passing admirable laws and then failing to implement them fully, according to Alicia Campi, a former diplomat who is president of the U.S.-Mongolia Advisory Group, a consultancy that focuses on cross-border business projects. But the government’s plans are promising. If it follows in Chile’s footsteps — and tilts the fiscal balance toward greater prudence while preserving mineral wealth for future generations — Mongolia’s economy and people stand to benefit.