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Mongolia: Market Profile

Picture: Mongolia factsheet
Picture: Mongolia factsheet

1. Overview

After a sharp slowdown during 2014-2016 driven by a fall in commodity prices and declining FDI, the Mongolian economy recovered strongly in 2017. By the first quarter of 2018, real GDP had grown by 6.1% year-on-year, buoyed by strong coal exports, a recovery of FDI, and improved business sentiment. The growth outlook remains positive, driven by large foreign direct investments in extractive industries. Despite the improving outlook, inflationary pressures are building, and structural challenges and limited export diversification remain and could amplify the vulnerability of the economy to commodity price or other shocks given its reliance on the mining sector (20% of GDP).

Sources: Fitch Solutions, World Bank

2. Major Economic/Political Events and Upcoming Elections

June 2016
Opposition Mongolian People's Party (MPP) scored a landslide victory in the parliamentary election, winning 65 out of 76 seats.

December 2016
Mongolia, China and Russia signed the Intergovernmental Agreement on International Road Transport along the Asian Highway Network, which gives each country traffic rights for road haulage operations in their respective territories.

February 2017
Mongolia reached an agreement with the IMF and other international partners worth more than USD5 billion on the proviso that it will strengthen its banking system and implement fiscal reforms.

July 2017
Khaltmaagiin Battulga was elected President.

September 2018
Officials from Mongolia and China met to discuss ways to enhance trade and economic cooperation between their respective countries, including the work of the Russian-Mongolian Intergovernmental Commission on Trade-Economic and Scientific-Technical Cooperation, which was building a Russia-Mongolia-China economic corridor in preparation for a free trade agreement (FTA) between Mongolia and the Eurasian Economic Union (EAEU).

September 2018
Mongolia's government extended a ban on migration from rural areas to Ulaanbaatar, introduced in 2017, until 2020 to try to reduce high levels of air pollution in the capital city. Officials were trying to design a programme to encourage migration back to the provinces.

Sources: BBC Country Profile – Timeline, Fitch Solutions, United Nations, The Guardian

3. Major Economic Indicators

Graph: Mongolia real GDP and inflation
Graph: Mongolia real GDP and inflation
Graph: Mongolia GDP by sector (2017)
Graph: Mongolia GDP by sector (2017)
Graph: Mongolia unemployment rate
Graph: Mongolia unemployment rate
Graph: Mongolia current account balance
Graph: Mongolia current account balance

e = estimate, f = forecast
Sources: IMF, World Bank, World Bank
Date last reviewed: November 21, 2018

4. External Trade

4.1 Merchandise Trade

Graph: Mongolia merchandise trade
Graph: Mongolia merchandise trade

Source: WTO
Date last reviewed: November 21, 2018

Graph: Mongolia major export commodities (2016)
Graph: Mongolia major export commodities (2016)
 
Graph: Mongolia major export markets (2016)
Graph: Mongolia major export markets (2016)
Graph: Mongolia major import commodities (2016)
Graph: Mongolia major import commodities (2016)
Graph: Mongolia major import markets (2016)
Graph: Mongolia major import markets (2016)

Note: 2017 direct data not yet available
Sources: Trade Map, Fitch Solutions
Date last reviewed: September 13, 2018

4.2 Trade in Services

Graph: Mongolia trade in services
Graph: Mongolia trade in services

Source: WTO
Date last reviewed: November 21, 2018

5. Trade Policies

  • Mongolia joined the World Trade Organization (WTO) in 1997 with equal rights to trade with many countries worldwide, and contributes to the decision-making in the rules of global trade and economic cooperation.

  • Mongolia currently has a 5.1% average tariff rate that applies to most imported goods. A zero tariff rate is applied to 49 other tariff lines, including live animals for breeding, information dissemination equipment, machines for information development, transistor diodes, and various types of medical equipment. Additionally, the seasonal import duty rate of 15% is applied on flour and vegetables to protect domestic producers between August 1 and April 1. Outside this period, the rate is 5%.

  • There are some goods that are prohibited in Mongolia, usually for health and safety reasons, including drugs/narcotics, devices, and equipment used to manufacture drugs/narcotics, narcotic plants, all types of spirits, and scrap metal. Highly toxic chemicals, organs and donor blood for medical purposes, guns, rifles, weapons, military equipment and devices and their spare parts, and explosives face high import and export restrictions in Mongolia.

  • Licence requirements: Mongolia also requires a licence for importing and exporting certain food and agricultural products that are defined as critical to national security. Strategic goods as defined in the Law on Food, include liquid and powdered milk; cattle, goat, camel and sheep meats; flour and potable water. The licensing of the above products is based on an open tender for any given year.

Sources: WTO – Trade Policy Review, Fitch Solutions

6. Trade Agreements

6.1 Trade Updates

In 2012, Mongolia began negotiations with Japan for a FTA between the two countries, which was ultimately signed in July 2014. The Japan-Mongolia FTA covers all of Mongolia's exports to Japan and 96% of Japanese exports, which has greatly facilitated the trade of raw materials from the former country and hi-tech products from the latter.

6.2 Multinational Trade Agreements

Active

  1. Japan-Mongolia Economic Partnership Agreement (EPA): The deal was entered into on February 10, 2015, but entered into force on June 7, 2016, with a view of liberalising and facilitating the flows of trades and investments and to create a regulatory framework for further cooperation on the improvement of the business environment between the two countries. The EPA promises room for growth and the chance to balance a trade relationship that is currently skewed towards Japanese exports.

Under Negotiation

  1. China: In 2016, China accounted for over 79% and 31% of Mongolian exports and imports, respectively. An FTA would cement trade ties between the two nations.

  2. Russia: Mongolia is creating transport infrastructure between Russia, Mongolia and China. Trade volumes between Russia and Mongolia increased greatly in 2017 and again in the first half of 2018.

  3. South Korea: Mongolia would benefit from trade preference in terms of tariff exemption or reduction under a trade agreement with South Korea that would allow Mongolia to export its abundance of primary commodities and foster investment from South Korea, thus building a base for industrial diversification and value addition in the country.

  4. Mongolia-EAEU: According to the European Commission, Mongolia was considering seeking membership in the EAEU, which entered into force in January 2015 and ends its implementation period in 2025. At present, the EAEU consists of Russia, Kazakhstan, Kyrgyzstan, Armenia and Belarus.

Sources: WTO Regional Trade Agreements database, Xinhuanet

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Mongolia FDI stock
Graph: Mongolia FDI stock
Graph: Mongolia FDI flow
Graph: Mongolia FDI flow

Source: UNCTAD
Date last reviewed: November 21, 2018

7.2 Foreign Direct Investment Policy

  1. Foreign businesses benefit from very few restrictions on the repatriation of capital, which pertain to taxes. Although all business transactions in the country must be settled in the local currency, prices are often quoted in foreign currencies, predominantly the United States dollar.

  2. Foreigners may invest with a minimum of USD100,000 cash or the equivalent value of the capital material. In both law and practice, foreigners may own 100% of any registered business, except those listed as areas of strategic importance. These include mining, banking, finance and media, information and communications. However, the legislation does not clearly define which businesses are included in each category, therefore those potentially affected are advised to get legal advice.

  3. Foreign ownership: The government of Mongolia passed a law in May 2012 that was meant to limit the participation of foreign firms in strategic sectors, such as mining, by restricting foreign ownership to 49% and requiring government approval for foreign equity purchases in sectors, such as banking and finance, mining and communications. Dubbed the Strategic Entities Foreign Investment Law (SEFIL), the regulation sought to limit the ability of foreigners to create a monopoly or alter market prices for Mongolian exports.

  4. Government approval: As a result of the above law, an amendment was passed in April 2013 to exempt privately owned foreign companies from the law. However, all foreign state-owned enterprises (SOEs) are still obliged to obtain the approval of Mongolia's cabinet to buy equity in a Mongolian firm. For purchases of stakes of more than 49%, the approval of parliament will also be required.

  5. The government of Mongolia has been eager to promote FDI in priority sectors, including agriculture, the exploration of oil and gas, coal, iron ore, and other minerals, construction, fur and leather processing, and food and timber production, among others. To attract investors, the state has begun reforming the legal environment, while providing tax incentives to foreigners.

  6. Foreign companies that export over 50% of production are eligible to receive corporate income tax (CIT) exemption for the first three years of their investment, in addition to 50% tax relief in the following three years. Moreover, foreign investment directed to power and thermal plants and their highways, airways, railways, and engineering construction, among other sectors, are eligible for 10 years of tax exemption and 50% tax relief for the five subsequent years. Additionally, investors in oil and goal, chemical production, metallurgy, machinery and electronics receive five years of tax exemption and 50% tax relief in the following five years.

Sources: WTO – Trade Policy Review, Government sources, Fitch Solutions

7.3 Free Trade Zones And Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
Altanbulag, Zamyn-Uud, Tsagaan Nuur- Goods imported to free trade zones (FTZs) are not subject to value added tax (VAT), customs and excise taxes.

- If goods are to be transferred from the customs territory to the FTZs, there will also be no such taxes on those goods and any previously paid taxes will be reimbursed accordingly based on related documents.

- Buildings and facilities built and registered in FTZs are fully exempted from the immovable property tax. Financial pledges and government assistance are available to investment projects involving innovative technology. Entities using innovated and enhanced technology in their businesses shall be fully exempted from CIT for the first five years starting from when they first become profitable.

- Individuals and businesses may request a land ownership and usage right in FTZs through either project bid or auction. In addition, equipment imported for construction purposes may be exempt from customs duties and VAT. Zero VAT will apply on domestic goods to be transferred from custom territory to FTZs.

- In addition to purchases as per article 38.1.4 of Law on Custom Tax and Tariff which refers to goods for personal use, purchases in the FTZ up to MNT3 million made by passengers are exempt from VAT and customs when entered into the customs territory.

- Businesses operating to improve infrastructure, such as energy and heating sources, the pipeline network, clean water supply, wastewater sewage, road, railway, airport, and basic communication will be fully exempt from land payment for the first 10 years from the start of operations.

- Streamlined verification and registration processes. Foreign investors who have made investments in Mongolia, and their family members, are provided with multiple visas and residential permissions under the applicable laws of Mongolia.

- No VAT will apply on goods and services manufactured/provided and sold in FTZs by individuals and businesses registered in FTZs.

- Land lease and use for up to 60 years on the basis of a contract, with one extension of the contract duration for up to 40 years under the contract's primary conditions.

- Businesses that have invested USD500,000 or more in infrastructure, such as energy and heating sources, the pipeline network, clean water supply, wastewater sewage, road, railway, airport, and basic communication line shall receive CIT credit equal to 50% of their invested capital in FTZs. Businesses that invested USD300,000 or more in building warehouses, loading and unloading facilities, hotels, tourist camps, or manufacturers of export and import substituted goods in the FTZ shall receive CIT credit equal to 50% of their invested capital in the FTZ.

- After completing the development stage, businesses can use their accumulated tax losses, reflected on their income tax return, within five consecutive years.

- Businesses operating in the trade, tourism and hotel sectors are fully exempted from land ownership and usage right payment for the first five years from the operation start. This payment is further reduced up to 50% for the following three years.

- Foreign labour force quota ratio is not applicable for employing foreign individuals in the FTZ. Entities employing and providing income for foreign individuals are fully exempted from paying the fee for employing foreign employees.

- For FTZs established on border ports, citizens from bordering countries will be granted 30 days visa-free access to FTZs and citizens from non-bordering countries will be regulated according to the government's international agreements.

Sources: US Department of Commerce, Fitch Solutions

8. Taxation – 2018

NIL

9. Foreign Worker Requirements

9.1 Localisation Requirements

The Government of Mongolia sets a foreign worker quota (updated annually), for both locally owned and foreign invested companies operating in Mongolia. In 2017, the quota ranged from 10% to 75% depending on the industry sector and number of employees. For some sectors that are not directly mentioned in the resolution, the total number of foreign employees should not exceed 5% of the total headcount. In general, the quota is high for businesses seeking to import skilled labour as well as for businesses in mining and construction industries, whereas it is low for low skilled occupations, such as agriculture, fishing and hunting.

9.2 Visa/Travel Restrictions

Foreigners are required to have a Mongolian visa to enter the country. However, the Mongolian government has an open policy towards outside investment and the requirements for a work permit are comparatively less strict and the cost is relatively not high.

An organisation employing workers and specialists from abroad is required to pay a fee for employing a foreigner. Unless otherwise noted in trade agreements with specific countries, the fee must be paid on a monthly basis and is currently set at MNT280,800 (USD119). The fee is linked to a minimum concentration amount that is periodically updated and approved by the government. The revenue generated from this fee is used to fund government programmes designed to combat unemployment in Mongolia.

Nationals from many countries around the world can generally access Mongolia visa free, especially for stays less than 30 days. Business visitors must generally limit their activities, such as attending business meetings, negotiations, participating in exchange programmes, conferences, seminars or congresses and taking part in workshops on trade and economic questions.

Foreign employees must be sponsored by a local Mongolian company in order to obtain permits for the country and work legally.

There are different types of visas in Mongolia. Expatriates wishing to enter employment in Mongolia require a work permit from the Labour Office, an HG visa and a long-term residency permit. HG visas will be issued for as long as the work permit has been issued, up to a maximum of 12 months, with the possibility to extend each year.

A T visa is a special visa given to either an investor or a foreign executive director of a foreign company. A maximum of three may be issued per company - two for individual investors in a company and one for the executive director of the company. Like an HG visa holder, a T visa holder will need to register with immigration within seven days of arrival or face stiff penalties. T visas are valid for a year and can be renewed annually. The advantage of a T visa is that the holder does not need to have a work permit to work (or pay the associated workplace fee), and the T visa holder does not count against a company's quota of foreign workers. If the foreign invested Mongolian company has a corporate shareholder, that company is limited to a single T visa for the executive director.

Sources: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody'sB3 (Stable)18/01/2018
Standard & Poor'sB- (Stable)19/08/2016
Fitch Ratings
B (Stable)09/07/2018

Sources: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201620172018
Ease of Doing Business Index
56/18964/19062/190
Ease of Paying Taxes Index
91/18935/19062/190
Logistics Performance Index
108/160N/A130/160
Corruption Perception Index
87/176103/180N/A
IMD World Competitiveness58/6162/6362/63

Sources: World Bank, IMD, Transparency International

10.3 Fitch Solutions Risk Indices


World Ranking
201620172018
Economic Risk Index
166/202
Short-Term Economic Risk Score39.640.245
Long-Term Economic Risk Score36.83839.7
Political Risk Index
70/202
Short-Term Political Risk Score63.363.364.6
Long-Term Political Risk Score67.769.969.9
Operational Risk Index 
 89/201
Operational Risk Score51.851.751.3

Source: Fitch Solutions
Date last reviewed: November 21, 2018

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK
Despite Mongolia's large current account deficit and large net negative international investment position, we maintain our long-held view that the country's overall balance of payments position will remain sustainable over the coming years. Meanwhile, we believe that mining sector output capacity is set to soar in the coming years, as the ruling MPP government will likely seek long-term commitment from the international investment community by resolving outstanding issues with regards to major mining projects, and therefore a currency crisis should be avoided.

OPERATIONAL RISK
Mongolia offers an attractive proposition for investors, with an impressive growth rate, booming mining sector and reasonably well-educated labour force. Nonetheless, a number of key risks limit the market's overall appeal, not least the country's inadequate logistics infrastructure, which drives up the cost of doing business in Mongolia, as well as the high cost of carrying out operational procedures, poor access to long-term financing options and the country's diverse legal risks, particularly with regard to intellectual property rights. From a security perspective, Mongolia enjoys strong trade and diplomatic relations with its powerful neighbours and is not at a high risk of being the target of terrorist attacks. However, businesses will likely incur additional costs to protect their employees and physical assets from relatively high crime levels and corruption. Furthermore, Mongolia's status as a landlocked country acts as a huge barrier to trade, leaving the country heavily reliant on its neighbours Russia and China.

Source: Fitch Solutions
Date last reviewed: November 24, 2018

10.5 Fitch Solutions Political and Economic Risk Indices

Graph: Mongolia short term political risk index
Graph: Mongolia short term political risk index
Graph: Mongolia long term political risk index
Graph: Mongolia long term political risk index
Graph: Mongolia short term economic risk index
Graph: Mongolia short term economic risk index
Graph: Mongolia long term economic risk index
Graph: Mongolia long term economic risk index

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: November 21, 2018

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Mongolia Score51.357.852.440.954.1
East and Southeast Asia average55.256.555.754.054.4
East and Southeast Asia position (out of 18)12811139
Asia average48.750.647.746.350.1
Asia position (out of 35)139111815
Global average49.649.749.9
49.149.8
Global Position (out of 201)89458912685

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index

Graph: Mongolia vs global and regional averages
Graph: Mongolia vs global and regional averages
Country
Operational Risk
Labour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Singapore83.177.8
89.9
74.9
89.7
Hong Kong81.671.2
88.5
77.0
89.5
Taiwan73.366.4
74.3
73.4
79.2
South Korea70.963.5
67.5
79.6
73.1
Malaysia67.861.6
73.5
75.7
60.5
Macao62.864.2
66.9
52.0
68.0
Brunei61.462.8
57.2
55.0
70.6
Thailand58.956.7
65.2
68.4
45.2
Mainland China56.753.9
52.2
66.3
54.4
Vietnam53.752.6
55.5
55.6
51.3
Indonesia52.651.5
53.9
56.8
48.4
Mongolia51.357.8
52.4
40.9
54.1
Philippines43.151.3
47.3
42.4
31.3
Cambodia42.546.7
46.0
37.7
39.5
Laos38.344.2
38.0
34.2
36.7
North Korea33.149.6
20.3
31.5
30.8
Myanmar32.145.5
28.2
30.0
24.9
Timor-Leste30.140.5
26.6
21.0
32.5
Regional Averages55.256.555.754.054.4
Emerging Markets Averages46.848.047.545.7
46.0
Global Markets Averages49.649.749.9
49.1
49.8

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: November 21, 2018

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Mongolia

Graph: Major export commodities to Mongolia (2017)
Graph: Major export commodities to Mongolia (2017)
Graph: Major import commodities from Mongolia (2017)
Graph: Major import commodities from Mongolia (2017)

Note: Graph shows the main Hong Kong export to/import from Mongolia (by consignment)
Date last reviewed: November 21, 2018

Graph: Merchandise exports to Mongolia
Graph: Merchandise exports to Mongolia
Graph: Merchandise imports from Mongolia
Graph: Merchandise imports from Mongolia

Note: Graph shows Hong Kong exports to/imports from Mongolia (by consignment)
Exchange Rate HK$/US$, average
7.76 (2013)
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
Sources: Hong Kong Census and Statistics Department, Fitch Solutions
Date last reviewed: November 21, 2018


2017
Growth rate (%)
Number of Mongolian residents in Hong Kong28,2370.4

Sources: Hong Kong Tourism Board, Hong Kong Immigration Department


2017
Growth rate (%)
Number of Asia Pacific residents visiting Hong Kong54,482,5383.5
Number of East Asians residing in Hong Kong2,748,1901.6

Sources: Hong Kong Tourism Board, Fitch Solutions
Date last reviewed: November 21, 2018

11.2 Commercial Presence in Hong Kong


2016
Growth rate (%)
Number of Mongolian companies in Hong KongN/AN/A
- Regional headquarters
- Regional offices
- Local offices


11.3 Treaties and Agreements between Hong Kong and Mongolia

Mongolia and China have a Bilateral Investment Treaty (BIT), which came into force in November 1993.

Source: UNCTAD

11.4 Chamber of Commerce (or Related Organisations) in Hong Kong

The Mongolian Chamber of Commerce in Hong Kong
The Mongolian Chamber of Commerce in Hong Kong was founded in 2014.
Email: batzul@moncham.com
Tel: (852) 9844 8871

Consulate General of Mongolia in Hong Kong
Address: Unit 1203, 12/F, Tower 2, Lippo Centre, 89 Queensway Road, Admiralty, Hong Kong
Email: hongkong@mfa.gov.mn
Tel: (852) 2522 2400
Fax: (852) 2522 2405

Source: Consulate General of Mongolia in Hong Kong

11.5 Visa Requirements for Hong Kong Residents

Hong Kong residents do not require a visa if the duration of stay is less than 14 days. If the duration is longer than 14 days, a visa will be required. Diplomats/officials from mainland China do not require a visa when visiting Mongolia for a maximum of 30 days.

Visa Requirements for tourists:

  • Visa application
  • One photo
  • Copy of Hong Kong ID or Macao ID
  • Ticket booking confirmation
  • Hotel booking confirmation (or any confirmation letter from a travel agent)

For business visa:

  • Visa application
  • One photo
  • Copy of Hong Kong ID or Macao ID
  • Invitation letter
  • Approval from Mongolian side
  • Company cover letter
  • Ticket booking confirmation
  • Hotel booking confirmation

Source: Consulate General of Mongolia in Hong Kong

Content provided by Picture: Fitch Solutions – BMI Research
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