BREAK UP OF COALITION GOVERNMENT HIGHLY UNLIKELY AS GAINS ARE FEW IF ANY FOR MPRP
December 10, 2012
Highlights of Events
§ Deputy Chairman of Mongolian People’s Revolutionary Party (‘MPRP’), D.Terbishdagva, currently also the Deputy Premier of the Cabinet, briefed local media last Wednesday that the MPRP will exit the recently formed Democratic Party (‘DP’) led coalition Government due to “a deepening political repression and discrimination against the MPRP and its members” including Chairman of the party N. Enkhbayar, “violations of human rights and civil liberties and other legal transgressions”, in particular, during recent local elections.
§ The MPRP Chairman N.Enkhbayar, who is currently in jail serving a corruption conviction, is one of the leading figures for the renegotiation of the existing Investment Agreement for Oyu Tolgoi, and was a President of Mongolia from 2005 to 2009 before his arrest in April this year. The MPRP is a senior partner in Justice Coalition (‘JC’), which itself is one of the minor members of the recently formed coalition Government after the June 2012 election. MP D.Terbishdagva’s statement comes following a recent meeting of the 21- member Executive Council of the MPRP.
§ Last Friday, the Supreme State Court of Mongolia dismissed certain parts of Mr. N.Enkhbayar’s conviction and reduced his prison term from 4 to 2.6 years. Prior to this decision, Secretary of the MPRP G.Byambasuren had informed that a favorable outcome to Chairman N.Enkhbayar’s appeal would result in the MPRP “reviewing its decision (to exit the coalition Government)”.
§ The MPRP was supposed to discuss and reach consensus regarding the issue with its junior partner in the JC, Mongolian National Democratic Party (‘MNDP’) and make the joint statement last Thursday. However, as of now, there is still no statement. The MNDP leadership continues to publicly and firmly state that the MNDP will not support the exit from the Government and will ask the MPRP ministers to remain in the Government.
§ Legal advisor of General Elections Committee of Mongolia, Mr. Odsuren, has commented to Origo Partners that in case of breakup of the JC, the MPRP and the MNDP will have to arrange among themselves the split of the seven JC party list seats. At the moment, there are four MNDP affiliated MP-s in the Parliament. Since one MNDP affiliated MP has joined the MPRP, MNDP affiliated MP G.Uyanga has said to the media recently that eleventh MP vacant seat from the Justice Coalition should be allocated to the MNDP. She also has commented that “some MPRP ministers have stated that even if they will exit from the Government, they will keep the coalition”.
§ Uncertainty that a minority party in the Mongolian Parliament's governing coalition could leave the Government sent the recently issued US$1.5b of Government of Mongolia “Chinggis Bonds” sharply lower on their first day of trading last Wednesday. According to Mr. Chuluunbat Ochirbat, deputy minister for economic development, Mongolia will look to issue more international debt in six to 12 months. Proceeds from the bond are to be invested into joint ventures with foreign investors to develop infrastructure such as railways, border-transit facilities and electricity production. Mr. Chuluunbat has said and the President of Mongolia has reiterated recently that Mongolia would want foreigners to put in $2-$3 for every dollar Mongolia contributes to develop these various infrastructure programmes.
§ Reports state the introduced May 2012 Foreign Investment Law is slated to be revised, with a draft amendments having been submitted to the Cabinet for review before going to Parliament. Similarly a new draft for the existing Minerals Law has also been drafted.
Origo Partners View
§ We view that the decision by the Executive Council of the MPRP was a high profile warning to, and pressure on, authorities by the MPRP and its Chairman N.Enkhbayar. The fact that MPRP ministers have not actually submitted their resignations indicates to us that this political action was aimed primarily to influence outcome of the court ruling and following the finalization of N.Enkhbayar’s case we expect the usual condemnation and possibly other political actions of protest from the MPRP, but not the actual exit from both the JC and coalition Government. In our view, a breakup of the current coalition government is highly unlikely due to various reasons elaborated in our analysis below.
§ Furthermore, a joint statement with MNDP has not materialized after the Supreme Court ruling possibly indicating the disagreement between the partners. In our view, with every single day passing the probability of the exit of the MPRP and break of the JC and the coalition Government is diminishing.
§ Despite a move towards the DP led government during recent local elections, we evaluate the recent comments from the MPRP as a political opportunism driven by a lack of dominant political leadership and unity from June’s elections, resulting in a fragmented and fractured ruling Coalition of political parties and agendas, as we have previously noted in our research. We continue to reiterate that similar to previous election cycles we expect consensus opinion on core issues to emerge with the policy to support progressive economic development rather than the current situation that is being continued to be largely politically motivated.
§ In our view, the recently oversubscribed US$1.5b bond offering, plans to issue subsequent Sovereign Bonds and attract further foreign capital for infrastructure joint ventures will increase visibility to, and expected reliance on, the Western capital markets, the terms of the later that will be highly dependent on political stability and policy. We note that this point is being continually stressed by a majority of Mongolia’s political and state establishment. Furthermore, we highlight Rio Tinto’s plans to secure US$3-4 billion of project financing for OT in 1H’13 with the proposed IPO of TT now expected 2H’13. According to OT estimates 80% of wealth generated from the mine will come from the yet unfunded underground operations in 2020.
§ In this regard, we also take notice of recent emphasis by Mongolian authorities on prudence and diligence in use of the proceeds from the bonds as “a responsibility of each Mongolian citizen starting from the President and ending with an average citizen”. And they should. Latest November 2012 YTD statistics illustrate they have lots of work to do. While ultra-luxury mobile phone manufacturer Vertu and Swiss private jet leasing company Vista Jet announced plans to establish themselves in Mongolia, inflation is up 14.1% yoy and money supply increased 15% yoy. Alarmingly, predecessors to NPLs (loan balances with late payments) increased 2.1 times yoy. Equilibrated General Government budget is showing deficit of 706 billion MNT. Mongolia has racked up record 2.24 billion USD trade deficit against its trade partners while exports declined 5.5 % yoy and imports increased 5.1% yoy
§ The Supreme Court ruling testifies that, overall, rule of law and independence of judicial branch from the executive branch is in effect in Mongolia and in our view proves that recent world record improvement in Mongolia’s ranking in Transparency International 2012 Corruption Perception Index from 120 to 94 is well deserved. However, we will not refuse certain degree of leniency (as the case in reduced prison term), special treatment for Mr. N.Enkhbayar on his medical condition (as the case now with Mr. N.Enkhbayar currently being treated in the hospital outside of prison system) and political pressure targeted to influence the judicial process.
Origo Partners Analysis
Exhibit 1: Mongolia’s ranking in 2012 Corruption Perceptions Index by Transparency International
In one year, Mongolia has jumped word record 26 places from 120 to 94 from 176 countries and territories.
(Source: Transparency International)
i. First barrier would be internal within the MPRP. We believe that the MPRP ministers themselves and other members of the Executive Council do not agree with evaluation of performance of the ministers as “failure to stop political repression” and that they are likely to be not in the support of the exit of the Government. In this respect, we agree with widespread acknowledgement of MPRP‘s internal party conflict between Enkhbayar loyalists and pragmatics with most notable being Finance Minister Chula who appear to be in favor of transforming the so called one-man party into more attractive to voters alternative political force to major two parties – the DP and Mongolian People’s Party.
ii. On the next barrier, level of Steering Committee of JC, we expect significant challenge of this decision by MPRP’s own partner in the Justice Coalition – the MNDP. Its leaders have been indeed remarkably outspoken regarding need for separation of executive and judicial branch, normalcy and stability of the Government.
Exhibit 2: Historical Chart of Mongolian Government Sovereign Bonds
Overall, the bonds have recovered from sharp decline on December 5 and remained flat since then.
Monday, December 10, 2012
BREAK UP OF COALITION GOVERNMENT HIGHLY UNLIKELY AS GAINS ARE FEW IF ANY FOR MPRP
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