Mongolia sees return to 17% growth next year

Mongolia sees return to 17% growth next year

But much of that optimism is centred on positive outcome over Oyu Tolgoi expansion

Mongolia’s economy is set to return to strong growth next year, the Asian Nation's central bank governor said Tuesday.

Central bank head Naidansuren Zoljargal said gross domestic product could expand as much as 17% next year from around 11% this year according to WSJ Online.

Foreign direct investment in the country dropped 49% to September 2013 compared to last year which already marked a 17% year-on-year decline, the value of the currency, the tugrik, is down more than 20% this year, inflation has returned to double digits and the Mongolian central bank's off-balance sheet spending is burning through foreign reserves as foreign debts balloon to 55% of GDP.

Changes to Mongolia's 2012 Strategic Entities Foreign Investment Law (SEFIL) came into force at the start of the month and is designed to turn around a slowdown in its economy which was the world's fastest growing at the start of the decade and a steep fall-off in foreign investment.

While the new investment law has been universally hailed as a positive step the number one issue that has to be resolved before investor confidence will return to the country is the future of the massive Oyu Tolgoi copper-gold mine.

Oyu Tolgoi which could have final bill of as much as $14 billion is 34% owned by the Mongolian government with Rio Tinto-controlled Turquoise Hill (TSE:TRQ) owning the rest.

Talks over Oyu Tolgoi's expansion and the reworking of the initial 2009 deal which first unleashed the Mongolian investment boom, have dragged on for the better part of a year. Both sides provided fresh faces for the Oyu Tolgoi board in September to break the impasse.

Vancouver-based Turquoise Hill last week suspended work on the $5.1 billion underground expansion of Oyu Tolgoi saying it will move forward with a $2.4 billion rights offering, as talks on financing arrangements with the Mongolian government including a World Bank-led $4.5 billion debt package – the largest in the history of mining – have gone nowhere.

The rights offering will help the company repay a bridge loan and a $1.8 billion interim funding facility.

In a press release yesterday from the company that holds Mongolia's share of the mine, representatives stated that the government "is flexibly available to prioritize and continue the discussions on terms and conditions of the project financing separate from any other issues."

The disputes are centred on costs with Rio's management fees and the Mongolian government's share of funding of surrounding infrastructure proving particular sticking points.

Production at Oyu Tolgoi's open pit began this year and the mine is now operating at nameplate capacity of 100,000 tonnes of ore processed per day.

The giant copper mine is set to contribute as much as a third of the nation's economy if the underground expansion goes through.

Construction workers in the capital Ulan Bator where almost a third of the population now lives by Al-Jazeera.