KEY CHALLENGES AND OPPORTUNITIES FOR CONTINUED GROWTH IN MONGOLIA

Mongolia Projects and Investment SummitHong Kong November 18, 2014

Randolph S. Koppa, President, Trade and Development Bank of Mongolia

RECENT DEVELOPMENTS IN MONGOLIA

Best described by the classic Spaghetti

Western film

THE GOOD (BLONDIE)

THE BAD (ANGEL EYES)

THE UGLY (TUCO THE RAT)

THE GOOD, THE BAD AND THE UGLY

Has entered into our common lexicon to mean:

• Good: Progress and upsides

• Bad: Obstacles and downsides, outside causes

• Ugly: Things that could have been done better, but were not

HOW DOES THIS DESCRIBE MONGOLIA NOW?

THE GOOD

POSITIVE DEVELOPMENTS

• Exports running at record levels, $ 4.6 billionfor first 10 months of 2014, up 30%, thanks toOT sales of $ 1 billion through September.

• Imports are down 16 % as lower levels ofcapital goods are brought in.

• The result is a trade surplus of $131 million,compared to a $ 1.86 billion deficit last year.

• Pressure on foreign exchange reserves easing.

EXPORTS EXPAND,IMPORTS CONTRACT

As of September 2014, Mongolia traded with 129 countries globally.

Source: National Statistical Office of Mongolia and Bank of Mongolia 9

Export, by countryImport, by country

Value2012

US$mm

2013US$mm

3Q2013US$mm

3Q2014US$mm

YoY*

Change

External trade turnover 11,123.1 10,627.4 7,923.2 8,068.1 1.8%

Export 4,384.7 4,272.7 3,097.8 4,021.8 29.8%

Import 6,738.4 6,354.7 4,825.4 4,046.2 (16.1%)

*YoY: Year on year change calculation is based on the change between 3Q2013 and 3Q2014

33.4%

29.4%

4.9%

7.3%

6.5%

3.1%

15.5%China

Russia

USA

Japan

Korea

Germany

Other

89.6%

5.6%

1.1%

0.8% 0.6%0.3%

0.3%1.7%

China

United Kingdom

Russia

Italy

Denmark

USA

Germany

Others

LED BY COPPER AND OIL

Source: National Statistical Office of Mongolia

FX Rate: 1,396.37 MNT/USD as of 2011; 1392.1 MNT/USD as of 2012; 1,654.1 MNT/USD as of 2013; 1,840.5 MNT/USD as of September 2014 10

mm Mt/brl 2011 2012 2013 3Q2014 YoY Change

Coal 21.3 20.9 18.4 13.5 (18.6%)

Copper concentrate 0.6 0.6 0.6 0.9 106.0%

Iron Ore 5.8 6.4 6.7 4.2 (11.3%)

Crude Oil 2.6 3.6 5.2 5.1 42.9%

Value 2011

(YoY change, value)

2012

(YoY change, value)

2013

(YoY change, value)

3Q2014

(YoY change, value)

Exports+65.6%

US$ 4.8 bn

- 9.0%

US$ 4.4 bn

-2.6%

US$ 4.3 bn

29.8%

US$ 4.0 bn

Coal+157.7%

US$ 2.3 bn

-16.3%

US$ 1.9 bn

-41.0%

US$ 1.1 bn

-19.0%

US$ 0.6 bn

Iron ore+73.9%

US$ 0.4 bn

+20.6%

US$ 0.5 bn

+22.9%

US$ 0.7 bn

-34.0%

US$ 0.3 bn

Copper

concentrate

+25.7%

US$ 0.9 bn

-13.4%

US$ 0.8 bn

+13.2%

US$ 0.9 bn

+148.0%

US$ 1.7 bn

Crude oil+63.9%

US$ 0.3 bn

+32.8%

US$ 0.3 bn

+53.4%

US$ 0.5 bn

+43.0%

US$ 0.5 bn

Export Volume

Export Value

OTHER POSITIVE DEVELOPMENTS

• GDP growth rate increased to 7% in Q3 2014

• For the year, Agriculture Sector is up 15%

• Industrial Sector is up 15%

• Overall mining sector is up 5%

• Inflation rate eased to 12.1% in October

• Budget revenues up 5%; but spending up 10%

MORE POSITIVE DEVELOPMENTS

• 8% mortgage program spurs housing sales

• Number of mortgage holders doubles to over60,000

• Road construction improves domestic transport

• New investment law passed

• Minerals law favorably revised

• Transport agreement with China; 45% lowerfreight rates, access to 8 ports

THE BAD

NEGATIVES AND OBSTACLES

• China GDP growth slowing to 7%

• Drop in coking coal and iron ore prices

• Global commodity prices dropping

• Delays in key infrastructure projects

• Legacy of past mistakes

THE UGLY

WHAT COULD HAVE BEENDONE BETTER

• Restoring foreign investors’ interest in Mongolia

• Resolving OT Phase 2 impasse

• Implementing and enforcing legislation

• Progress on key rail and power projects

• Use of proceeds of Chinggis Bond

EXPLANATIONS?

2014 LEGATUM PROSPERITY INDEX

• Mongolia tops list compared to all former USSR republics

• 52nd out of 142 ranked countries

• Measures include Economy, Entrepreneurship & Opportunity, Personal Freedom, Safety & Security, Health, Governance, Social Capital and Education

• 27 of top 30 countries are democracies

FLEDGLING DEMOCRACY

• Mongolia has been a democracy for almost 25 years.

• Changes of parliaments and governments have occurred through orderly elections and other procedures laid down in the constitution

• Another orderly change is underway

• Unfortunately, the democratic process is often messy and painstakingly slow, as elsewhere….

TAIWAN LEGISLATIVE YUAN DEBATE

ITALIAN PARLIAMENT DEBATE

TURKISH PARLIAMENT DEBATE

FISCAL CLIFF DEADLOCK NON DEBATE

INSTITUTIONAL AND LEGAL FRAMEWORK

• Many democratic countries can abide political impasses because of well established legal institutions, clear procedural frameworks for laws and well established bureaucracies managed by non partisan professional public servants.

• Unfortunately, Mongolia lags in these developments.

• Public servants are more private servants.

MEANWHILE, MEXICAN STANDOFF

AND ECONOMIC PROGRESS IS CHOKING

FROM 2010 AND 2012 STUDIES

Total financing and 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.

Total $ 45 bn. to $ 68 bn.

FROM 2010 AND 2012 STUDIES

Potential sources of funds 2010-2015

• FDI $ 11 bn. to $ 14bn.• 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.

13.5

9.5

2.6

7

4

0.8

4

0.5 8.5

3.4

9

4

0.70

2

4

6

8

10

12

14

16

18

20

FDI Domestic Sovereign Foreign Cap. Mkts Foreign Loans Donors

Received Pending OT financing To go

FALLING SHORT OF EARLIEST GOALS

Progress to date

AND GOALS GET MORE AMBITIOUS

Total potential investment needs and opportunities 2014 through 2018

• Mining $ 15 bn. to $ 25 bn.• Infrastructure $ 11 bn. to $ 17 bn.• Urban Development $ 7 bn. to $ 10 bn.• Business Capex $ 15 bn. to $ 25 bn.• Social & Environmental $ 3 bn. to $ 5 bn.• Financial Sector $ 4 bn. to $ 5 bn.

Totals $ 55 bn. to $ 87 bn.

NOT TO MENTION SUPERPROJECTS

• Coal to gas piped to China, $30 billion

• Transit Pipelines for Russian gas and oil products to China

• A second line for UB Railway

• A transit super highway

ARE THE GOALS ACHIEVABLE?

• In a slower GDP growth forecast, less external sovereign debt can be raised.

• Budget and domestic debt related expenditure growth will be curtailed

• Thus, unlikely more than 20% of needs can be from domestically generated funding

• Foreign lenders will be conservative

• The capital markets will be less accessible

TWO NEIGHBORS ARE ACTIVE

• China stands ready to provide funding

• Asia Infrastructure Investment Bank

• Silk Road Fund

• Russia as well

• Many of these initiatives could impact debt ceilings as well as have conditions restricting flexibility in dealing with third neighbors

THIRD NEIGHBORS AS WELL

• Japan, as Abenomics stimulates more foreign investment and funding

• US, with hoped approval of Transparency Agreement this session by the Mongolia Parliament, can get more commercially engaged

• Korea and EU countries and companies continue to support major infrastructure and higher tech projects

OTHER BRIGHT SIGNS

• OT Phase 2 decision to proceed with project financing will provide near term economic stimulus and send a good signal to Third Neighbor investors.

• Investment during the next three years will position the mine to meet expected better market conditions then.

• GDP boost will be significant once expanded output is realized.

CHINA STEEL OUTLOOK KEY

• Steel demand in China is down in 2014 by 3% but production is running 5% ahead of 2013

• Domestic demand growth will stabilize at 4% per year as excess capacity and stocks reduce

• New plant openings will require higher quality coking coal

• China steel exports are increasing, 49 mt through July, up 37%

• China motor vehicle production is up almost 4% and on pace for almost 23 million vehicles in 2014

• Meanwhile, US and EU steel demand is up 2%

CHINA COKING COAL DEMAND

• China imported 44.34 mt during first 9 mos of 2014, down 19% from 2013

• Mongolia provided 10.75 mt, increasing its share to 24%; Australia steady at 20.87 mt

• China domestic sources increased production and stockpiles were worked down

• China will export 8 mt of coke this year

• Per the China Coal Industry Association, 70% of Chinese mines lose money

COKING COAL OUTLOOK

• Per Clyde Russell of Reuters, Chinese coking coal mine increases of production are not sustainable

• Therefore, more imports will be required

• Mongolian mines must weather the storm and be ready with product and infrastructure to provide competitive import alternatives, while making money doing so

• However, the heady days of high prices are over

OTHER SECTORS - REAL ESTATE

• Commercial property construction has boomed, but it will take two years to absorb current projects

• Residential construction continues with support form subsidized mortgages for small apartments while luxury developments appear to be running out of buyers

• Longer term, a lot of residential construction and related infrastructure is still needed

AGRIBUSINESS

• Russian promise to buy more meat can stimulate meat sector

• Further processing and quality improvements still require investment and expertise

• Import substitution with local production and processing continues to offer opportunities

• Growing awareness of Mongolia’s organic food potential

INFRASTRUCTURE

• Much has been spent on streets and roads, but much remains.

• There are many power plant projects under consideration, but none really underway

• Railway construction underway from TT to border, but financing not yet in place

GREEN ENVIRONMENT

• Increasing support for green growth rather than brown growth

• Many initiatives are being brought together

• Climate funds and the like have interest

• There will be many opportunities for energy efficient and sustainable solutions for housing, agriculture, water, energy, transport and other areas affecting daily life

SO , WHAT ARE THE NEXT STEPS?

• With many needs yet to be met, but with limited domestic funding sources and less than eager and ready pools of funds from foreign investors, what is the way through?

FOLLOWING THE THEME, THREE THINGS:

FOCUS

FOCUS ON ACHIEVABLE POSITIVES

• Resolve OT issues

• Finish TT to border rail

• Get power plant in UB and TT installed

• Clear way for issuance of new exploration and mining licenses

• Resolve TT management and finance

STARE DOWN THE BAD

OVERCOME THE EXTERNAL

• Commodity price cycles and competition will always exist

• Maintaining good fiscal discipline and debt management are key defenses

• Strong institutional frameworks help attract allies

• In bad times, prepare for better times

CONTROL THE UGLY

DO THINGS BETTER

• In government, focus on a closely knit core team with an inner cabinet

• Take the private out of public service

• Attract outsiders to the cabinet

• Professionalize the bureaucracy

• Reduce State involvement in running business

IN OTHER WORDS……..

HIRE A PROFESSIONAL

RESULTS?

• Mongolia may not become Qatar in 2020 as some predicted a few years ago

• However, Qatar in 2030 is not out of the question

BECAUSE….

THE SEA STAR CAN STILL GROW LEGSEven after shooting them off himself

AND THE A380 IS STILL LOADEDAwaiting the runway for the $15 billion takeoff

Thank you for your attention!

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Fax: 976-11-31 24 18

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