Unrest Increases Risks To Government's Policy-Making Ability

BMI View: We have downgraded Mongolia's short-term political risk rating to 68.3 from 70.4 on the back of growing downside risks to the government's ability to enact policy, as growing public unrest could sway the resolve of its minority coalition partners. We further caution that the growing distrust of the government's policies could be a boon for the opposition Mongolian People's Party in the next elections. Should the government fail to arrest the growth slowdown, policy continuity beyond the ruling Democratic Party's term (which will run up to 2016) will most likely be at risk.

Mongolia's ruling Democratic Party (DP) continues to make the right noises. Most recently, a stimulus bill as known as the '100-day action plan' was unveiled by Prime Minister Altankhuyag Norov at the start of May, under which he aims to reduce bureaucracy, reissue exploration licenses, develop two free economic zones and build transport infrastructure, in hopes of wooing foreign investors back. However, we see increasing political risk in Mongolia as the ruling party faces growing challenges which could possibly weaken its ability to pass legislation as well as the continuity of any policy it implements. This has led us to downgrade the country's short-term political rating from 70.4 to 68.3.

Growing Unrest May Sway Coalition Partners, Weakening DP's Mandate

Justice Coalition Key To Policy Passage
Mongolia - Seat Distribution In State Great Khural After 2012 Elections

BMI View: We have downgraded Mongolia's short-term political risk rating to 68.3 from 70.4 on the back of growing downside risks to the government's ability to enact policy, as growing public unrest could sway the resolve of its minority coalition partners. We further caution that the growing distrust of the government's policies could be a boon for the opposition Mongolian People's Party in the next elections. Should the government fail to arrest the growth slowdown, policy continuity beyond the ruling Democratic Party's term (which will run up to 2016) will most likely be at risk.

Mongolia's ruling Democratic Party (DP) continues to make the right noises. Most recently, a stimulus bill as known as the '100-day action plan' was unveiled by Prime Minister Altankhuyag Norov at the start of May, under which he aims to reduce bureaucracy, reissue exploration licenses, develop two free economic zones and build transport infrastructure, in hopes of wooing foreign investors back. However, we see increasing political risk in Mongolia as the ruling party faces growing challenges which could possibly weaken its ability to pass legislation as well as the continuity of any policy it implements. This has led us to downgrade the country's short-term political rating from 70.4 to 68.3.

Justice Coalition Key To Policy Passage
Mongolia - Seat Distribution In State Great Khural After 2012 Elections

Growing Unrest May Sway Coalition Partners, Weakening DP's Mandate

Despite the government's repeated attempts to put forward a resolute pro-business front, we note that growing unrest could weaken its ability to push through legislative changes needed to maintain its credibility with investors (for example, to clear up the discrepancies between various bills on the royalties and environmental obligations of foreign miners). Indeed, over Q214, several news agencies have reported of at least two occasions in which hundreds of citizens have gathered at the capital's Chinggis Khaan Square, protesting against the government's policies which they blame to have created the current environment of high inflation and declining incomes. While the protests themselves would not have any direct impact on the ruling party, we see growing risks that DP's coalition partners, namely the Justice Coalition (which consists of the Mongolian National Democratic Party [MNDP] and the Mongolian People's Revolutionary Party [MPRP]), could attempt to distance themselves from DP's policies. This could mean a move towards a less business-friendly and more populist stance in order to maintain its popularity with the people, and the DP could find itself without the support it needs to push key legislative changes through.

Increasing Distrust Could Fuel Opposition's Return To Power In 2016

Although legislative elections remain some time away, due only in 2016, we note that the increasingly vocal opposition Mongolian People's Party (MPP) could gain from the growing distrust in the ruling DP's policies among the people. Should its popularity rise and the party be returned to power, we believe that significant policy U-turns would be likely, possibly undoing any improvements in the business environment we have seen so far. For now, we have refrained from downgrading our outlook for the country's policy continuity, as we believe the government still has the time and ability to restart mining projects which would arrest the current slowdown in growth and help retain some support from voters.

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