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Citigroup looks to bury the BRIC and N-11 labels in a recent research piece that indentifies rather ‘3G countries’, i.e. those currently holding the most promise as ‘global growth generators’ over the next four decades.  To this end, Brazil, Russia and South Africa among others get bumped to tier 2 status while eleven others are more elevated per the weighted index of six growth drivers (domestic savings/investment, demographics, health, institutions and policy, and trade openness), a testament in part admittedly to just how low a real per capita GDP base they currently sit at.  To that end, the authors reiterate, “it is possible to have high growth without high returns to investment and high returns to investment without high growth.”

“Bangladesh, China, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, Philippines, Sri Lanka and Vietnam are our 3G countries.  All of these countries are poor today and have decades of catch-up growth to look forward to.  Some of them (Nigeria, Mongolia, Iraq and Indonesia) also have large natural resource endowments that we hope will be more beneficial than they so often have been in the past. Iraq is recovering from numerous wars.  All but China have favourable demographics.”

Mongolia, for one, is seemingly everyone’s favorite emerging market du jour (or even, in fact, “the only game in town”) given its vast and untapped reserves of raw materials coupled with China’s insatiable appetite and proximity, as well as the MSE’s 121 percent rise in local currency terms in 2010 (the world’s top performer is also up 95.6% YTD in 2011).  Moreover, the recent LSE pact may not only create added liquidity–the FT noted in January that ‘in Ulan Bator, traders are already buzzing about the idea of a 24-hour exchange linked with London traders that could boost liquidity in the market’–but, per Eurasia Capital, also form the foundation for the further and much-needed development of domestic capital markets.  Said development can’t come soon enough according to some pundits.  Bloomberg noted Friday that the tugrik (MNT, pictured) has gained 15.4 percent against the dollar since Jan. 1 last year and 19.2 percent versus the euro, testament to the fact that the “art” of managing currency flows, per central bank Deputy Gov. N. Zoljargal, has [hitherto] been a study in futility.  As the MNT broke the 1300 level last year, for example, interventions lead to continued appreciation.  Eurasia notes, that 40% of foreign exchange holdings (which have increased 250x in the past 12 months) in the banking system are short-term deposits that are seeking to ‘benefit from short-term fluctuations [appreciation]’ of MNT.  This type of short-term investments is raising concerns over the stability of the banking sector when such deposits are withdrawn by the clients.”  A further catalyst comes from fiscal expansion: last year the World Bank warned that the 2011 budget’s “steep increase in government spending, together with a sharp rise in the fiscal deficit to 9.9% of GDP” would compound “existing inflationary pressures from the economic rebound and lack of spare capacity in the economy” and ultimately “add 15% inflation on top of existing inflation of around 10%, which may undermine confidence in the currency.”

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Back in June Batbayar Balgan, director general of the financial and economic policy department of Mongolia, spoke of the country’s plans to raise $500 million selling bonds in 2010, while the remainder of a planned $1.2 billion program would be sold according to market conditions.  Bloomberg notes that the government scaled back its plans for global bond sales after Europe’s debt crisis drove up borrowing costs, and that investment banks have been advising Mongolia to issue debt with maturities of 5 years to 10 years.  Per the country’s Finance Minister, Sangajav Bayartsogt, said securities may yield between 8 to 11 percent.

Mongolia is still a fringe play on commodities, and specifically copper, coking coal and uranium, though if the copper industry’s fundamentals in particular indeed shift, and the country’s stock market develops further (currently only 300 listed companies with a total market capitalization of only $1 billion, per the Mad Hedge Fund Trader) it will likely garner increased attention as a steadier play on risk amidst stabilizing cash flows and increased liquidity.  This should bode well for its debt.  Moreover, the “spillover” effect on GDP is likely to draw further capital stock investment and create a postive feedback loop for future, near-term growth levels.  Per the secular demand for copper (driven chiefly by China; see graph inset), analysts with Goldman Sachs recently wrote that “the combination of lower copper-exchange inventories, robust demand largely driven by emerging-market urbanization and a constrained copper-supply outlook will sustain copper deficits large enough to mostly deplete exchange inventories by the end of 2011.”  To that end, Barclays Capital agreed, writing to investors this month that it was “reiterating [a] long-held bullish call on copper as supply constraints in the copper industry have intensified due to a variety of issues including declining grades, increasingly difficult geology, and rising geopolitical risk in copper-rich regions of the world.”

Copper dropped for the first time in four days on Friday from a 27-month high, its rise during that time further fueled by the falling dollar.  Furthermore, The Macro Man, a London-based money manager, noted that Ivanhoe Mines’ (NYSE: IVN) Deputy Chairman and Director (one of two firms along with Rio Tinto slated to develop the world’s largest undeveloped copper resource, the Oyu Tolgoi mine in Mongolia ) Bob Friedland described Chiquicamata and other mature Chilean mines as “a little old lady in bed, waiting to die” during a recent conference, hinting at the very impending, structural changes in the supply chain explicitly highlighted by the major investment banks.  Even the IMF agrees, stating last week that “deteriorating mine productivity (copper and tin) and the impact of policies targeted at reducing the impact of metal smelting on the environment (lead) are among the most important constraints on supply.”

Marc Faber, the Swiss-born, Thai-based investor known affectionately to many as “Dr. Doom,” remarked to Bloomberg recently that Mongolia is “torn between two lovers – China and Russia,” and is a country with huge potential. “The country is incredibly resource rich, another Saudi Arabia, next to the largest population in the world.”

Earlier this month Mongolia was approved for a $229.2 million stand-by loan from the imf to help the country stabilize its economy. “Mongolia has been severely affected by the global financial crisis through a sharp reduction in the prices of its main mineral exports, notably copper,” said IMF Deputy Managing Director and Acting Chairman Takatoshi Kato. “The authorities are committed to restoring macroeconomic stability and putting in place the conditions for strong and equitable growth.”

Today, however, copper prices rose to its highest in almost six months in London based on speculation that demand from China, the world’s largest buyer of the metal, would decrease inventories. According to Bloomberg, China’s 4 trillion-yuan ($590 billion) economic-stimulus plan spurred the first increase in manufacturing in six months and a sixfold surge in bank lending in March. “Only 2% of global copper reserves are in China, and they can still expect a strong industrial boom for the next couple of years,” remarked one analyst.

Mark Mobius, an emerging market fund manager for Templeton Asset Management, concurs. “We continue to see countries such as China form alliances to secure the long-term provisions of commodities,” Mobius said. “While in the short-term, the country will be impacted by the recent correction in commodity prices, a long-term uptrend in commodity prices will benefit Mongolia.” Additionally, the country has attracted roughly $1 billion of private equity in the past 24 months, according to Robert Lepsoe, its honorary consul.

Mongolia’s MSE Top 20 Index has fallen 8.7% this year, compared with the 5.8% drop in the MSCI Asia Pacific Index.

JGW

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