Mongolia – The New Frontier for Equipment Finance

November 2013

A country that has been described as “the last frontier” and at the same time “the wealthiest country in the world for natural resources” is once again at a cross roads.

Trade with China represents more than half of Mongolia’s total external trade – China receives more than 90% of Mongolia’s exports. Mongolia purchases 95% of its petroleum products and a substantial amount of electric power from Russia, leaving it vulnerable to price increases. Due to severe winter weather in 2009-10, Mongolia lost 22% of its total livestock, and meat prices doubled. Inflation remained higher than 10% for much of 2010-12, due in part to higher food and fuel prices.

New investment legislation is expected to result in mainland firms pouring billions of dollars into key railway and highway projects Mongolia’s new law is expected to encourage billions of dollars of Chinese investments.

Without a doubt this is needed due to the slowing down of the economy in 2013 when a number of elements hit the economy at the same time. Namely the dispute between the Mongolian government and Rio Tinto’s, Oyu Tolgoi US$6.6 billion copper mine and at the same time a new government election. In addition to this the slowing Chinese economy saw trade reduced by 50% between the two counties.

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Oyu Tolgoi Mine

Around 90% of the Mongolia’s revenues come from mine-product exports. Falling prices for these exports have worsened the balance of payments and slowed the country’s growth even further. Saying that, Mongolia’s economy expanded 12.2% last year and 17% in 2011, when it topped world growth rankings, according to World Bank data. For comparison, other counties GDP growth 2012:

 

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Impact on Equipment Demand

Mongolia has planned US$50 billion of mega projects in the next 10 years, said road and transport minister Amarjargal Gansukh. “We are looking for investors in mining, energy and transport infrastructure.” (Speaking at the Mongolia Investment Summit in November in Hong Kong)

Construction had begun on 1,800 kilometres of railway costing US$5.2 billion, which was one-third of the planned national rail network, Gansukh said.

Other infrastructure projects are also underway which will have a substantial increase on the amount of equipment required in the country. These include the improvement of existing roads as well as new ones going to and from mine sites.

Another national requirement is for power as the mines require massive amounts on a day to day basis. Wind and solar power projects as well as new oil fields are helping with local employment.

In the midst of this surging demand for equipment on these projects is a new franchise with Hertz Equipment Rentals in Ulaanbaatar (the counties capital) Connaught Finance, in conjunction with The Mongolia Fund have raised US$50 million in private equity for the launch of this new company that is listed in USA.

Equipment Lessors in Mongolia

As with many emerging economies, there is a lack of legislation when it comes to equipment leasing. There is no registration for moveable assets in the country which obviously makes traditional banks uneasy. At the Mongolian Investment summit, Mr Norihiko Kato the CEO of Khan Bank (one of the largest banks) said that opportunities for leasing were with “non vanilla” type transactions. This on the surface appeared rather promising and pro active but when later asked about leasing of “yellow goods” he said it was all rather difficult if they did not know where they were going to be!

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(Paul Errington – CEO of Connaught Finance meets Khan Bank representative)

Other local banks such as Xac Bank and Xac Leasing appeared more interested in solutions rather than seeing obstacles which is very encouraging for this emerging market that has great potential for equipment leasing.

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