Amid concerns over a deteriorating business climate, the Mongolian government has launched an overhaul of its foreign investment legislative framework. The new law, which took effect on November 1, paves the way for a friendlier market environment by lifting many of the investment restrictions rushed through parliament in May 2012, and establishes investment development agency Invest Mongolia Agency to liaise between government and investors.

Trust in political institutions is fading and foreign investment plummeting in Mongolia. After years of unprecedented, commodity-powered economic growth, excitement has given way to scepticism.

FDI inflows hit record levels in 2011 and 2012, when they reached $4.7bn and $4.4bn, respectively, according to figures from Mongolia's central bank. However, the limitations introduced in 2012 froze many deals and FDI was down 46.8% from January to August this year, with full 2013 inflows expected at around $2.5bn.

Removing barriers

In a push to get foreign investments back on track, the new FDI law opens up strategic sectors such as mining, telecommunications and banking. Foreign investors willing to invest in these key areas will not need political approval any more, with the exception of at least 50% state-backed companies. Additionally, the law removes any differentiation between foreign and domestic investors and introduces incentives to mitigate tax risk.

The law approval “is a key first step towards attracting back the foreign investors that Mongolia has lost over the past year and a half”, said a report by local real estate developer MAD Investment Solutions. 

Authorities have expressed optimism that investors will return.

“If the government and private investors strike an agreement on some of the big projects in the pipeline, FDI figures will fly. Then nobody will wonder if FDI reaches $10bn per year,” Invest Mongolia Agency's new head Sereeter Javkhlanbaatar said.

Untapped resources

Mongolia boasts largely untapped deposits of coal, copper, gold and uranium that combined might be worth some $1.3tn. FDI inflows will naturally go towards mining developments like Rio Tinto's multi-billion Oyu Tolgoi (OT) copper and gold mine. At the same time, the government has shown commitment to developing basic infrastructure such as power plants, roads and railways as well as the agriculture sector.

However, the gap between words and action has yet to be closed as many projects are still on the drawing board. In the meantime, the standoff between the government and Rio Tinto over OT phase II and confusion over 106 mining licences hit the headlines, making it clear that the new FDI law will not be enough to turn the tide by itself.

“All laws and regulations should be correlated and meet the same quality standards. We should improve the legislative framework as a whole,” Mr Javkhlanbaatar said.