Author: Jonathan Gregson

Buoyed by strong demand for its commodities exports, Mongolia’s economy and its financial markets are beginning to show increasing strength.

It gets awful cold round this time of year in Mongolia. The temperature drops to 30 below freezing and stays down there until late March. By most reckonings, that makes Ulaanbaatar, home to the Mongolian Stock Exchange, the world’s coldest capital city.
This is certainly an unusual environment to find a stock market on which no fewer than 402 companies are listed, their shares traded by 26 accredited brokers and securities dealers. For Mongolia has just 2.5 million people spread across a country the size of Western Europe. More than a third of them are engaged in rearing livestock, so the national herd count is often a better indicator of economic performance than GDP figures.
But Mongolia’s economy is finally coming out of the cold. It is mineral-rich, and high prices on international commodities markets boosted by strong demand from neighboring China have more than doubled its export earnings this year, according to former finance minister and London ambassador Dalrain Davaasambu. “The copper mine at Erdenet is the fifth largest in the world,” he says. “Besides which we have huge reserves of coal and are expanding gold production.”
Foreign investment is pouring in— mainly direct investment in mining, although foreigners have also been buying into some of the most actively traded companies on the Mongolian Stock Exchange (MSE). A group of Korean investors recently acquired a 40% stake in Mongolia Telecom, and there is talk of foreign interests buying into hotels and tourism. Electronics and telecom companies are leading the way in the issuance of corporate bonds, which first began trading just three years ago, and the emerging bond market is likely to have a powerful influence on how major capital projects are financed in the future.
Yet visiting the Mongolian Stock Exchange is a very different experience from the larger and far more hectic Asian markets. It is housed inside an elegant pinkand- white neo-classical building that might equally be home to one of the smaller Baltic exchanges. Originally built back in the Soviet era as a theater, it stands in pride of place on the west side of Sükhbaatar Square, sandwiched between one of the country’s largest banks and Mongolia Telecom’s headquarters and looking across the square toward the bunker-like parliament buildings. Even in a country as vast and empty as Mongolia, location does matter: In downtown Ulaanbaatar you can’t get more central than this. Appearances can be deceptive, however.The exchange is open for trading just one hour a day, between 11am and noon, and even during that brief time span, things were scarcely hectic. On a normal trading day just a handful of dealers will be present, quietly taking orders on the telephone and executing the occasional trade. In fact, the MSE installed electronic dealing software six years ago, and it is now so quiet down on the dealing floor that it’s possible to hear the ticking of the obligatory clocks that register the local time in London,Tokyo and New York. “Yes, today things are quiet,” admits Dayanbilguun Danzan, director of BD Securities.“On a busy day there would be more than 20 brokers and dealers in here, but there have been many changes since I first started as a dealer in the 1990s.”Back then, Mongolia boasted the highest density of popular share ownership anywhere in the world. This came about following the collapse of the Soviet system when, eager to embrace free-market principles, the Mongolian government declared that ownership of state-owned enterprises should be transferred to workers and ordinary citizens, who were issued vouchers. It was to assist in this privatization process that the Mongolian Stock Exchange was established in 1992 so that companies could gain a public listing and their shares be traded on the secondary market.
In those pioneering days of capitalism— Mongolian-style—outriders would gallop across the steppes to their family’s encampment of felt-lined tents, clutching a wad of red or blue vouchers with a face value of maybe a hundred dollars. Upon entering the family ger they proudly announced:“ We are now shareholders in a copper mine and a cashmere factory!” Elderly relatives, who had no idea of what being a shareholder meant, smiled before returning to the daily chore of handchurning fresh butter. No surprise, then, that this top-down experiment in introducing popular capitalism was not a com- plete success.Many of the vouchers issued became worthless as companies went bankrupt after the new Russia pulled its aid budget and insisted that trade be conducted in hard currency rather than on a barter basis. The people’s brief honeymoon with the stock exchange was over.
What happened next, explains Ms Tsendmaa, the MSE’s director of listings and surveillance,was that “some individuals began collecting these coupons and so gained a majority shareholding in these companies. Most of them were Mongolian, though there were a few foreign investors.” The end result was similar to what happened in Russia, with a handful of oligarchs—many of them former Communist functionaries—gaining control of newly privatized assets at knockdown prices. Most of these companies are still listed. “From a peak of the 475 companies in 1991 there are now 402 left,” says Tsendmaa,“though maybe 80% of these are majority owned by private interests.” In some cases, she says, the pur- pose of the company has changed, and they are more like shell companies.


Not-so-fast forward: Mongolia’s progress toward free-market democracy has been slow, but in the sparsely populated country’s capital, Ulaanbaatar, change is starting to take hold

Bonds Begin to Eclipse Stocks
Market turnover is currently less than a third of what it was five years ago, and Tsendmaa believes that in the future the number of listed companies will drop.But share-trading volume does not tell the whole story. Nowadays the largest business is in trading government bonds, which started only four years back, while the fastest-growing market is in shortterm corporate bonds issued by market leaders such as MCS Electronics and Puma Group. Following international trends, the MSE has been reconstituted as an independent profit-making entity whose shares are quoted on the exchange. There has been an upward revision of broker-dealers’ minimum equity requirements, which has seen the number of market participants shrink by a third, though these are now more soundly based.The exchange’s chairman, Dulamsuren Doligsuren, explains how the country is hoping to attract more foreign investors. “The foreign investment law has been amended three times to attract foreign investors by exempting them from taxes in the first three to 10 years, depending on their activities and exporting amount, and this has resulted in an ascending volume of foreign investment,” he says. Indeed, the high prices being paid for copper, coal and other raw materials found in Mongolia have unleashed an influx of foreigners looking for new opportunities. The MSE is beginning to feel the benefits of this economic renaissance. “The growth in issuance of corporate bonds is a start,”says BDSec’s Dayanbilguun.“ In the future it is hoped to raise funds through IPOs.” After the failed experiment in ‘top-down’ popular capitalism, Mongolia’s capital markets can now grow from a firmer base with a broader appeal to foreign investors. It may feel cold in Ulaanbaatar right now, but spring is just around the corner. ■