RESEARCH NOTE

July 22, 2016

July 22, 2016

MONGOLIAN PEOPLES PARTY LANDSLIDE VICTORY

BEST OUTCOME FOR INVESTOR SENTIMENT
A landslide victory by the Mongolian Peoples Party (MPP) in Mongolias
Parliamentary Election could be the best outcome for Mongolian
economy and investment sentiment. As MPP has a reputation for
stronger leadership, structure, and discipline, compared to factionridden Democratic Party, investors should take notice for stability. The
election outcome marks a moment investors have been waiting for in
Mongolia.
For the 7th time since democracy, citizens of Mongolia went to the polls for
the highest state legislative body, the Parliament or State Great Khural on
June 29. Mongolian Peoples Party (MPP) was seen to be favorite ahead of
the election, but no one even MPP itself, imagined such big victory with 65
seats out of 76 seats (85.5%). MPPs victory is seen as part as an expression
of Mongolians frustration with the economic woes under outgoing Democratic
Party (DP) rule. PM Saikhanbileg Chimed and the Parliament Speaker
Enkhbold Zandaakhuu both lost their seats. The economic growth shrank from
17.5 percent in 2011 to 2.3 percent last year due to political instability and
perceived hostility toward foreign investors combined with falling commodity
prices. The IMF projected 0.4 percent GDP growth for Mongolia in 2016. The
lives of citizens have deteriorated and they wanted change.
MPP Chairman Enkhbold Miyegombo said in a speech following election
result: The people of Mongolia have put their trust in the MPP. We understand
there is a huge responsibility behind this trust. We will work hard to improve
the current economic situation and falling reputation of Mongolia in the
international arena.
Figure 1. MPP wins 65 seats in 2016 vs. 27 in 2012
MPRP, 1
DP, 9
MPP, 27
DP, 33

Independent, 3
CWGP, 2
MNDP, 3

MPRP, 8

MPP, 65

Source: Mongolias General Election Committee (GEC), Golomt Securities

Independent, 1

July 22, 2016

Plurality voting system

has one very important
advantage, and that
is to create favorable
condition for a stable
government.

Just in less than two months prior election, the two big parties, DP and MPP,
hastily amended the election law to be simple plurality vote in 76 electoral
districts, putting small and new parties at a disadvantage. In 2012 elections,
Mongolia used a mixed majoritarianproportional system, according to which
one third or 28 of the 76 seats in Parliament are elected proportionally by
parties shares of the vote and the remaining 48 were chosen by voting for
individual candidates from 48 electoral districts. Mongolian political pundits
were saying that the ruling party or the DP should benefit most from the simple
plurality voting system but the MPP proved them wrong. With about 47% of
the total votes cast, DP gets only 9 seats, whereas MPP gained just over
50% of the total votes cast to win 65 seats or 85.5% of total seats. Mongolian
Peoples Revolutionary Party (MPRP) claimed 1 seat and one independent
candidate claimed seat in the Parliament. Soon-to-be ex-Minister of Mongolia
M.Enkhsaikhan said after the election outcome Plurality voting system has
one very important advantage, and that is to create favorable condition for a
stable government.
There were no reports of major glitches or disputes and the voters were quite
happy with quickly reported results. Another good thing is an increase of
overall turnout. Voter turnout has been steadily declining since 1992, however
voter turnout reached 72% this year vs 65% in 2012.
Figure 2. Voter turnout has been declining since 1992
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

1992

1996

2000

2004

2008

2012

2016

Source: GEC, Golomt Securities

July 22, 2016

Despite violation claims by DP and MPRP leaders, new parliament members

took their oaths at the Parliament House on July 5th with the General Election
Committee and the President approval. It is worth to note that it is the first
time since 2000 all 76 parliament members took oaths at the first parliament
meeting without any major dispute. The process was peaceful compared to
past elections. In 2012, 72 parliamentarians out of 76 took their oaths at the
first parliament session as the remaining electoral districts had disputes, while
in 2008, post-election tragic riot left 5 people dead.
With this super-duper-majority, the next four years will be all about MPP. All
the cabinet members will be appointed from MPP.
With this super-dupermajority, the next four
years will be all about
MPP...It is a very efficient
system, if used correctly
of course.

Policy directions become clearer. Political decisions might be made at MPPs

headquarter rather than the Parliament House. It is a very efficient system,
if used correctly of course. Policies and decisions can be implemented more
quickly and efficiently as they dont have to go through opposition views
every now and then which may halt progress. As a matter of fact, we have
seen things moving fast in Mongolia since MPP won the elections. They had
parliamentarians take oaths just within a week after Election Day and managed
to appoint Parliament Speaker and Prime Minister immediately, which could
take weeks, if not months, in the event that votes are equally divided into few
major parties.
But you dont want to repeat what DP did if you want to retain power. We
believe that the biggest mistake of the DP was possibly the internal fighting of
the party and the fact that they tend to stop listening to the views of the public.
Parliament should not forget that public and oppositions are watching them
MPP veteran Ts.Nyamdorj said after winning the election.
MPP now faces substantial challenges to overcome: economic growth at
6-year low; foreign direct investment at 9-year low; foreign trade turnover
at 5-year low; foreign exchange reserves at near 6-year low, the Mongolian
Stock Exchanges Top 20 index at near 6-year low and prices on the countrys
major commodity exports are depressed. The local currency MNT has lost
about 34% of its value since the last election 4 years ago. Last March MNT hit
its record low at 2,050.85 against USD.

July 22, 2016

Growth
Figure 3. Mongolia Real
GDPGDP
growth
at 6-year low

Figure 4. Mongolia
FDI atFDI,
9-year
low, mln USD
Mongolia
million USD
5,000

17.5

4,000

12.3

11.7

3,000

7.9

2,000

6.1
2.3

`09
(1.3)

`10

`11

`12

`13

`14

`15

1,000

`07

`08

`09

`10

`11

`12

`13

`14

Source: National Statistical Office of Mongolia, Golomt Securities

Source: Bank of Mongolia, Golomt Securities

Figure 5. Foreign trade turnover at 5-y low, mln USD

Figure 6. FX reserves at near 6-y low, mln USD

`15

8,000

4,200

7,000
Export

6,000

Import

5,000
4,000

3,400

2,600

3,000
2,000

1,800

1,000
0

`10

`11

`12

`13

`14

`15

Source: NSO, Golomt Securities

Figure 6. MSE Top 20 index trading at near 6-year low

35,000

1,000

2011

2012

2013

2014

2015

2016

Source: Bank of Mongolia, Golomt Securities

Figure 7. MNT depreciated 34% since last election

2,100
2,000

30,000

1,900

25,000

1,800

20,000

1,700

15,000

1,600
1,500

10,000
5,000

1,400
1,300
1,200

2012/06 2012/10 2013/02 2013/06 2013/10 2014/02 2014/06 2014/10 2015/02 2015/06 2015/10 2016/02 2016/06

Source: Mongolian Stock Exchange, Golomt Securities

Source: Bank of Mongolia, Golomt Securities

July 22, 2016

How markets have reacted to Mongolian election results?

Mongolian bonds jumped on the election results. The $500 million sovereign
bonds due 2021 rose 4.8% to 111.25 since election outcome, while the
$1 billion sovereign bonds due 2020 surged 9.8% to 90.99 so far. The $500
million bonds of Trade & Development Bank of Mongolia due 2020 added
6.7% to 103.73 since election results.
Figure 8. Mongol 2021 bonds, 1-year

Mongolian bonds jumped

on the election results

Source: Bloomberg

Figure 9. Mongol 2022 bonds, 1-year

Source: Bloomberg

Figure 10. TDBM 2020 bonds, 1-year

Source: Bloomberg

July 22, 2016

According to the statement made by former PM Ch.Saikhanbileg last April,

total debt of Mongolia reached US$ 21.6 billion at the end of 2015. 22.9%
of the debt accounted for international payments of the Government and
Development Bank of Mongolia. The Government sold US$ 1.5 billion
sovereign debt known as Chinggis bonds in 2012 to finance infrastructure
projects and to promote local industries.
According to MPPs election campaign, they will negotiate rescheduling or
refinancing arrangements with lenders, and decrease debt pressure on state
budget step by step.
Figure 11. Mongolia debts

Source: Bloomberg, Golomt Securities

TRQ shares, a
benchmark Mongolian
equity, have climbed
7.5% to C$4.60 since the
election

Shares of Turquoise Hill Resources (NYSE, NASDAQ & TSX: TRQ), a

benchmark Mongolian equity, have climbed 7.5% to C$4.57 on the Toronto
Stock Exchange since the election. TRQ, whose primary operation is its
66% interest in the massive Oyu Tolgoi copper-gold-silver mine, located 80
kilometers (50 miles) north of the Chinese border, is expected to account for
about 30% of Mongolias economy when it is fully operational in 2020.
Figure 12. TRQ stock chart, 1-year

Source: Bloomberg, Golomt Securities

The local stock market, measured by the MSE Top 20 index, also soared 5.2%
to 12,772.81 points since election results.
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July 22, 2016

Now what can MPP, who was opposition during the past 4 years, do? What
policies, that would affect business and investment environment, did they
include in their electoral campaigns and action plans?
MPP ran campaigns under the motto We will serve and develop together or
Together we can save the nation from poverty, recover from economic crisis,
free our country from debt, fix state failure, and create a wealthy and powerful
Mongolia.
According to MPPs action plan, they promise to form a professional
government to overcome economic difficulties and to stabilize the economy
in the short-term.
MPPs policy on mining sector
MPP announced that
they will work to increase
foreign investment in
the mining sector, create
favorable investment
environment and reduce
state involvement in the
sector.

To produce and export value-added mining products, and to create

favorable economic and legal environment to invite global mining giants.

To create proper legal environment and to approve law on wealth funds

to distribute revenue from the mining sector equally to current and future
generations.

To keep the states involvement in mining projects at a proper level and to

prefer policies to collect taxes and royalties.

In short, the MPP announced that they will work to increase foreign investment
in the mining sector, create favorable investment environment and reduce
state involvement in the sector.
MPPs policy on industry

To promote copper industry based on copper mines such as Oyu Tolgoi,

Erdenet, and Tsagaan Suvarga and to promote washing and deep
processing of coal based on the Tavantolgoi deposit.

To decrease state involvement in business environment and to stop state

competition with private sector.

July 22, 2016

MPPs policy on infrastructure

To establish Thermal Power Plant V in Ulaanbaatar, and power plants of

Tavantolgoi, Baganuur, Booroljuut and Tevshiin Gobi.

To start project of power plant based on Shivee Ovoo coal deposit for
export purpose.

To complete railway projects of Ukhaa Khudag Gashuunsukhait and

Nariinsukhait-Shiveekhuren.

New Government structure

Prime Minister has the exclusive power to select his cabinet. President
Ts.Elbegdorj underlined the importance of forming professional cabinet and
advised to comprise skilled, ethical and reliable professionals.
On July 19, PM J.Erdenebat proposed a new government structure to the
President for discussion. Even though the President Ts.Elbegdorj did not
really favor the new cabinet structure, PM went ahead and submitted the draft
bill to the Parliament.
The new proposed government will have 16 ministers, as opposed to the 19
ministers of the previous administration, and 13 ministries, as opposed to the
15 ministries of previous administration.
The Steering Committee of the MPP held its meeting on July 21 and selected
the new ministers of the cabinet. The proposed Ministries and ministers are:
1. Ministry of Environment and Tourism - D.Oyunkhorol
2. Ministry of Foreign Affairs - Ts.Munkh-Orgil
3. Ministry of Finance - B.Choijilsuren
4. Ministry of Justice and Domestic Affairs - S.Byambatsogt
5. Ministry of Labor and Social Welfare - N.Nomtoibayar
6. Ministry of Defense - B.Bat-Erdene
7. Ministry of Construction and Urban Development - G.Unurbolor
8. Ministry of Education, Culture and Sports - J.Batsuuri
9. Ministry of Road and Transportation - D.Ganbat
10. Ministry of Mining and Heavy Industry - Ts.Dashdorj
11. Ministry of Food, Agriculture and Light Industry - Ts.Anandbazar
12. Ministry of Energy - D.Tsengel
13. Ministry of Health - J.Tsolmon
U.Khurelsukh will be the Deputy PM and J.Munkhbat will be the Head of
Government Office.
There could be more discussions on the proposed ministers and cabinet
structure over the next week, because the President has sent a letter to PM,
requesting to discuss the government structure once again.
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July 22, 2016

Who is the 29th PM of Mongolia Erdenebat Jargaltulga?

Within a week after the MPPs win, Parliament voted in Erdenebat Jargaltulga,
42, as the countrys 29th Prime Minister.
We will stay away from any populist political acts, and intend to establish a
professional, merit-based government. J.Erdenebat said in his acceptance
speech.
The focus will be on urgent stabilization of the economy, fiscal discipline
and support of businesses. We will need to cooperate with international and
regional financial institutions. he said.
PM J.Erdenebat helped
former PM
Ch.Saikhanbileg to
settle dispute between
Mongolia and Rio Tinto
last year

PM J.Erdenebat was Minister of Finance last year to help the former PM

Ch.Saikhanbileg to settle dispute between Mongolia and Rio Tinto over the
$5.4 billion underground expansion of the massive Oyu Tolgoi project.
He has been a Parliament member since 2012 and previously served as
provincial governor in Selenge province.
J.Erdenebat graduated the Institute of Trade and Industry in 1995 and has
masters degree in economics.
Some other facts about PM J.Erdenebat were mentioned here at UB Post.
Figure 13. 29th Prime Minister of Mongolia, Erdenebat Jargaltulga

Source: gogo.mn

July 22, 2016

Who is the new Parliament Speaker Enkhbold Miyegombo?

MPP Head Enkhbold Miyegombo received 66 votes out of 76 to become
the new Parliament Chairman. Some may be confused because the former
Speaker was Enkhbold too, Enkhbold Zandaakhuu.
Figure 14. MPP leader M.Enkhbold becomes Chairman of Parliament

The landslide victory

of the MPP makes
M.Enkhbold probably
the countrys most
powerful political figure...
He is one of the most
potential candidates for
the Presidential Election
next year

Source: news.mn

He became well-known political figure in Mongolia since his UB City Mayor

days in 1999-2005. He was elected as a Parliament member in 2005 reelection and re-elected for 3 times since then. He served as PM in 2006-2007,
Deputy PM in 2007-2012 and Deputy Speaker in 2012-2016. He led MPP
in 2005-2007 and re-elected as the party chairman in 2013. The landslide
victory of the party led by him makes M.Enkhbold probably the countrys most
powerful political figure.
It is a standard in Mongolia that if a party wins more than half of the seats in
Parliament, then its leader gets to become PM. However M.Enkhbold decided
to become Head of Parliament instead. Maybe it is best for both him and the
country, because he is one of the most potential candidates for the Presidential
Election next year and we dont want to see PM on another election campaign
or someone else to replace him in case he becomes President.
M.Enkhbold was actually the one who submitted the initial Oyu Tolgoi draft
investment agreement to the Parliament back in 2007, which was later
withdrawn back, when he was a PM.

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July 22, 2016

Following are some interesting facts of the newly formed Parliament:

Two very popular

extreme resource
nationalist MPs
S.Ganbaatar and
G.Uyanga both lost their
seats

Almost all DP leaders including former PMs Ch.Saikhanbileg and

N.Altankhuyag, former Parliament Speaker Z.Enkhbold, former Head of
Government Office S.Bayartsogt, and Head of Mongolian Democratic
Union Kh.Battulga, lost their seats.

Out of the total 76 parliament members, 39 are re-elected, whereas

remaining 37 are elected for the first time.

13 female parliamentarians are to represent Mongolia on the legislative

level for the first time in the history of Mongolia. The previous Parliament
had 11 female members. A former Financial Regulatory Committee
chairwoman Z.Narantuya is the only female DP MP in the new parliament,
while the rest are members of the MPP.

One seat went to the MPRP which gives MPRP head N.Enkhbayar hope
of running for the president next year, as according to the Constitution of
Mongolia, political parties that obtained seats in the Parliament are able to
nominate a candidate for President. But they say he is ineligible to run in
any election until late 2017.

Only one seat went to an independent this time compared to three seats
in 2012. That is a popular folk singer Javkhlan Samand, who has taken
up environmental issues. He can be a voice for resource nationalism
during his term. But two very popular extreme resource nationalist MPs
S.Ganbaatar and G.Uyanga have lost their seats.

Three state champion traditional wrestlers claimed seats in Parliament,

namely B.Bat-Erdene (re-elected), D.Sumiyabazar (re-elected) and
A.Sukhbat (elected for the first time).

29-year-old member of the MPP D.Gantulga became the youngest in

history to win a seat in the Mongolian parliament. He was elected from
Khentii Province.

G.Temuulen (MPP) is elected as a Parliament member for the first time.

He was known as one of the three members representing Mongolia on the
Board of Directors of Oyu Tolgoi LLC in 2013-2015. He was also deputy
CEO at Erdenes MGL and later appointed as deputy Mining Minister in
December 2014 when MPP joined DP cabinet.

Mr L.Eldev-Ochir (MPP) was also elected for the first time, after facing
a difficult political battle against the famous politician and one of the DP
leaders Kh.Battulga. L.Eldev-Ochir is known as one of the founders of
MCS Group. As of 2010 he owned 3% of MCS Holding which is the parent
company of MCS Group.

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July 22, 2016

In conclusion, it seems to us that mainly both Mongolians and foreign investors

are happy with the Mongolian election results. To sum up the reasons for
potential improvement in investor sentiment in Mongolia following the election
outcome:

Mongolia benchmark bonds and equities market responded positively to

the election outcome, a sign of growing investor confidence. Mongolias
$1 billion sovereign bonds due 2020 surged 8.29 points to 91.13 since
election results.

MPP has a reputation of stronger leadership, structure, and discipline,

compared to faction-ridden DP, which should guarantee a favorable
condition for a stable government.

Policy directions become clearer with the super-duper-majority. Policies

and decisions can be implemented more quickly and efficiently as they
dont have to go through opposition views every now and then which may
halt progress. It is a very efficient system, if used correctly of course. But
things wont be that smooth for MPP. They will have to face substantial
challenges to overcome as the economy is in bad shape.

The MPP is generally considered investor-friendly. The party was in

power when original OT investment agreement was signed in 2009. MPP
leader and new Parliament Chairman M.Enkhbold was actually the one
who submitted the initial OT draft investment agreement to the Parliament
back in 2007, which was later withdrawn back, when he was a PM. New
PM J.Erdenebat was Minister of Finance last year to help the former PM
Ch.Saikhanbileg to settle dispute between Mongolia and Rio Tinto over
the $5.4 billion underground expansion of the massive Oyu Tolgoi project.

According to MPPs electoral campaign, they will work to increase foreign

investment in the mining sector, create favorable investment environment
and reduce state involvement in the sector.

Optimism is also high for progress on some mega-projects such as

Tavantolgoi coal mine and railway projects which experienced difficulties
under DPs tenure. In their action plan MPP said: To promote copper
industry based on copper mines such as Oyu Tolgoi, Erdenet, and Tsagaan
Suvarga and to promote washing and deep processing of coal based
on Tavantolgoi deposit while decreasing state involvement in business
environment and ceasing state competition with private sector.

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July 22, 2016

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are the views of the analyst and are subject to change based on market and other conditions and factors. The information provided does not constitute investment advice or other recommendations and should not be relied on as such.
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