German national Robert Schoellhammer was appointed Country Director of the Asian Development Bank (ADB) for Mongolia in 2011. He joined ADB in 2000 as a Project Economist in the East and Central Asia Department (ECRD). He managed ADB’s operations in the education and social security sectors in Mongolia, and the Kyrgyz Republic.
Prior to joining ADB, Mr. Schoellhammer worked at the African Development Bank and as a European Commission adviser to the Ukrainian Cabinet of Ministers and Ministry of Defense. From 1992 to 1994, Mr. Schoellhammer worked as a lecturer in English and Economics at the Institute for Administration and Management Development in Mongolia, during which time he worked on the establishment of Mongolia’s first MBA program, and conducted a major survey of rural poverty in 1992, in conjunction with the Government of Mongolia’s Poverty Alleviation Program.
Mr. Schoellhammer holds a Bachelors degree in Development Economics from the University of East Anglia, United Kingdom and a Masters degree in Agriculture from the University of Aberdeen, UK.
Q: What is your opinion on the dollar hike? Do you think it will continue or will it go down? What is the main cause of the depreciation of the tugrug?
A: We have seen this in a lot of other Asian countries. It started last year when we saw drops in many Asian currencies. If we look at Asia Pacific as a whole, it’s become much more problematic keeping money in emerging economies.
There are many reasons for that. It started with a discussion of tapering in the US. Interest rates were super low and stock prices were falling. Emerging markets then became attractive. You can put things at a higher rate. Mongolia benefited from that and other Asian countries benefited from that. If you look at the last year, you will have seen the old economies coming back. The US is growing back. The Japanese stock market has increased. The Euro economy increased. The UK economy is exceeding IMF predictions. All of a sudden, emerging markets have a lot more competition for capital. That’s one of the factors that has affected Mongolia. It has become a much more competitive situation on the whole.
If we look specifically at Mongolia, a lot of it is related to foreign direct investment. It depends so much on the faith of one or two projects. What we’ve seen recently is that the foreign direct investment has reduced and with that, a country doesn’t have the influx of foreign exchange to finance its imports. But from ADB’s point of view, this is something that I think really underscores the urgent need for diversifying the economy because when I came to Mongolia three years ago, the talk was all about mining.
What we now see is that you really can’t build an economy on one sector. It’s risky especially in extractive industries. You’re very vulnerable to commodity prices going up or down. The market is all international. There are a lot of different factors there. The conclusion is really the need for diversification. If you look at the tugrug, to some extent, there is some correction. The tugrug became very strong because of mining. To some extent, the correction can be a benefit to Mongolia to make it more competitive for exports. With the depreciation, imports become more expensive and that will make domestic products more competitive. The question is: Can Mongolia’s export industry take advantage of Mongolia’s low tugrug value? But there is a blockage. Mongolia has 17 livestock per person. We see fantastic potential to redevelop its agriculture sector. But regulations and skills need to be settled out.
Q: You say, current depreciation can have good impacts on local producers who export especially in agriculture and the tourism sector. But for a country with very little local production, would depreciation transpire to crisis?
A: You know very well the concept of Dutch Disease. With all of this capital coming in, it really changed the value of the local currency to the detriment of non-extractive industries. I think what we are seeing here is a correction. Even now, Mongolia imports a lot of milk. If you have foreign currency, you’re going to use foreign currency. If you go to a Mongolian supermarket, it’s full of imported products. Clearly in a cold climate like this one, you can’t produce everything, but when you see things such as imported milk and imported dairy, you’ve really got to wonder. The main damaging thing is uncertainty. If you’re going to invest and your revenue is in tugrug, you want to know what the amount is. The key thing is certainty. Currencies do fluctuate. It’s when they fluctuate too much is what makes it hard to keep certainty.
Q: Some say the current depreciation of the Mongolian currency is the true color of the tugrug. If it’s the true color of Mongolian currency, do you think it’s at the right level where Mongolia currency should stay?
A: Whoever you’ll ask, you’ll get a different answer. If you’re a tourist about to go abroad, you want a strong currency. No one wants to show up with a weak currency. If you’re an exporter, you want to be competitive. However, you always want to find the perfect balance. Mongolia’s importing, but it’s also exporting. We don’t have these wild swings in foreign investment. Foreign direct investment is very important, but it’s also important to realize that Mongolia is very different in terms of FDI because it’s very lumpy.
Foreign direct investment is related to few mining projects. We do hope those projects will succeed, but at the same time, those few lumpy projects cannot be a proxy for the whole economy. What has happened too much is that there has been too much focus from the international investment community and the national investment community in landing these huge projects. Mega-projects are very difficult. I would not build an investment strategy for a country on occasionally landing a large project. A theory that I have heard a lot is that Mongolia is struggling because it’s a land-locked country.
ADB doesn’t think so. Most of the richest countries such as Switzerland and Lichtenstein are land-locked countries. It’s an advantage in some respects. The key thing is how Mongolia can become a part of great economic opportunity. Can it do it through mining alone? Well mining is only one element. We hear about laws. Laws are only one part. You need those real companies producing real things. That is ultimately my conclusion about currency. There is some real great potential here. Mongolia can come up with great quality to export. Food is a great export. It’s in demand. If you look at China, there is a big shortage of lamb and beef. Mongolia has huge potential for beef exports and lamb and mutton exports.
The tugrug-dollar rate is getting lessened. It’s a reminder to diversify the economy. Make sure that the economy is not vulnerable to the outcomes of one or two big projects. Get it in from different economic sectors. Build up the exports.
Q: Currently, the latest information from Mongol Bank is that FDI decreased by 70% for the first half of 2014. If we look at the situation, some people call it a crisis. Do you think it is a crisis? On the other side, can some people can people call it a mental crisis?
A: I’ve worked on some financial crises before. A crisis is something that you don’t have to ask. If it’s a crisis, you’ll know immediately. A crisis is when you go the bank and you don’t get money. A crisis is quite obvious and we’re not in one. We have a lot of indicators to be worried about. You have to look at the real economy and differentiate between economic difficulties and economic crises.
Right now, I would say it is very difficult. I don’t think there is any doubt about that. For many sectors, it certainly is very difficult. When I worked here 20 years ago, I would say that’s a crisis. The GDP was about USD 300. Budget was about USD 150 million per year. The level of integration that Mongolia had with the rest of the world was minimal. There were even shortages with coal. That was a more worrying time than now. If you fast forward 20 years, Mongolia has some great companies and good economic ties and prospects. The level of integration at hand is much better. The key thing is to keep up that momentum.
Q: I think that there is a lesson to be learned. What would you say is the biggest moral of this situation?
A: The main thing is that there is risk with any sector. Let’s say a country will go into agriculture or mining. I don’t know any sector that doesn’t carry any risk. It goes with the saying; don’t put all eggs in one basket. Mongolia and many of its foreign partners have been focused on mining. A lot of foreign investors come in and put holes in the ground and export resources. This is not a sustainable model for development. If you put too much in one sector, you don’t pay attention to other sectors. If one sector fails, you need something else to fall back on. I think the main lesson is the need for diversification. Look at smaller land-locked countries. They’re all diversified. When one sector goes into turbulence, you have another one to fall back on.
Another lesson here is that Mongolia has had very fast growth which also brings high inflation. Inflation is bad. The higher the inflation, the more it kills the economy. Above all, for business you need certainty and predictability. I think what’s most important from ADB’s perspective is jobs. What really makes the biggest difference is jobs for people. In any country, you need to make sure that young people have good and sustainable jobs. Mining only provides 4% maximum of jobs. What about the remaining 96%? Focus on jobs. Diversify. Any one sector has substantial risks. If something goes wrong, there is going to be an extraordinary impact. In a few weeks time, I think the Chinese president is visiting. ADB is looking at this. Mongolia has coal. China has gas. It could be a very reliable business. I think that it’s good other sectors are being looked at.
Q: Is increasing interest rates going to limit national production?
A: I think when you put rates up, it will limit production, but again I think this is an experience not just for Mongolia, but for many other Asian countries. They focus on growth and creating higher GDPs, but that also created inflation. What’s the point of having growth if most of that growth is inflation? Inflation is really a killer. What’s highly important is don’t have an interest rate below inflation otherwise you’ll have a gradual erosion. Have an interest rate above inflation. All these things are linked. Investment is related to confidence. Confidence is related to many things including the legislative framework. Why invest if you don’t know what your revenue stream is going to be? I think it’s a good idea to increase the rates. That’s the nature of economics. Things work in different ways.
Q: Some say the current situation will cool off by the middle of next year. When do you think this situation will be better off?
A: It really depends on the decisions made by the private sector and government. It doesn’t all happen automatically. It is a result of collective decisions. With all the gloom around the investment framework, we were happy about the Concession Agreement made in June. Oyu Tolgoi will be important. Will coal and gas projects proceed? How fast will they proceed? This will all depend on decisions. It is something which I can’t really predict, but it is a situation that can be partially controlled. It’s a much more competitive environment now for emerging economies. If you are an investor, you have more choices. The expectation in many countries is that interest rates will rise. The key thing for emerging economies is to become more competitive. Work on the infrastructure. Work on the economy. Work on the legal environment. Diversify. The role of the government can be helped my international markets. There are so many interrelated things. Competitiveness will come from a good labor force. On the whole, the labor force is not that well-prepared. There is a lot that can be done – labor force, infrastructure and certainty in the legal policy environment. The opportunities are there and if the right decisions are made, there is no need for concern.
SOURCE: Mongolian Economy