On our recent flight from Beijing to Ulaanbaatar aboard Mongolia’s state-owned national airline (MIAT), we decided to take a break from last minute trip planning and research to flip through the inflight magazine. Overshadowing the pieces about the legacies of Genghis Khan’s descendants and the discovery of the first dinosaur fossils in the Gobi desert were long articles on diverse aspects of Mongolia’s economy.
To our surprise, the majority of the magazine read like a primer on Mongolia’s current business environment rather than a travel brochure. The prized metals and mining industry (natural resources account for ~90% of exports and 80%+ of foreign investment) was not mentioned. Instead, the rather niche set of topics offered a fascinating glimpse at how Mongolia would like to introduce itself to outsiders. From fintech for nomads to innovative forestry financing, the content was certainly not written with the average backpacker in mind. Needless to say, it kept us very entertained for the duration of our flight. In our first flash report from Mongolia, we share our initial insights on this nation's unique economy below:
Setting the scene: Mongolia, a landlocked nation of 3.5 million, is the least densely populated country on Earth. Thirty percent of the population is nomadic or semi-nomadic and lives in gers (aka yurts) spread across the vast Mongolian countryside. In 1990, as a result of the People’s Revolution, the nation began transitioning from a communist dictatorship to a democratic, market-based system. This granted citizens the right to own property and engage in business. It also triggered the privatization process which was quite messy. The impacts of which are still being felt today.
Plethora of second-generation, family-owned businesses: a budding opportunity?: The majority of businesses in Mongolia are family run. As many businesses were established in the years directly following the economic transition in the early 90s, a significant number are run by the second generation. The second generation often seeks an exit or passes managerial duties to another management team – both challenges in Mongolia given the lackluster exit environment and human capital constraints.
Opportunity: A sizable number of second-generation businesses owners are looking for an exit. Many of these businesses have been undermanaged resulting in stagnant growth creating a universe of businesses prime for revitalization.
In one of our meetings, we heard that many of these business owners are willing to accept a steep discount given lack of other options.
Innovative forestry financing – the Billion Tree Fund: In 2022, Mongolia’s commercial banks collaborated to establish “The Billion Tree Fund”, a national financing framework for the forestry sector. In this initiative, commercial banks contribute financial resources to support forestry projects. The fund aims to sustainably restore the forestry sector which was severely impaired by a flawed privatization initiative three decades ago.
The Billion Tree Fund measures success on both traditional financial and ecological metrics. A key metric includes number of seedlings planted with the goal of planting one billion trees. Financial opportunities come in the form of wood products manufacturing and high-quality seed collection.
Tree breeding and forestry organizations have trouble accessing traditional bank financing due to the need for collateral and repayment and interest rate terms which do not mesh well with the sector. Therefore, the Billion Tree Fund is working to create financial products to accommodate for the intricacies of forestry.
The fund selects projects through a rigorous 7-step process with the assistance of 20 industry experts. In the first year of the fund, it received 197 project proposals and selected 34.
This initiative highlights the nation's focus on ecology and sustainability in contrast to its large coal industry.
Fintech for nomads: A two page ad featured Zeely - an Ulaanbaatar-based fintech company striving to democratize financial services to a highly-nomadic and rural population where traditional loan terms (requiring steady income, conventional collateral, etc.) are less applicable. Instead of conventional financial metrics, Zeely mainly relies on “trustworthiness” which is determined via a four-minute psychological assessment. Loan amounts range from ~$5-$145. While we are not convinced that this is a great way to underwrite repayment risk, we commend the creativity employed to bring access to financing to such a unique population!
Growth of tourism: In 2014, Mongolia’s tourism sector accounted for 3.2% of GDP. By 2023, this figure grew to 10%.
Tourism is helping Mongolia to diversify away from boom-and-bust commodities. In 2020, 90% of Mongolia’s exports were natural resources.
Religious tourism (to see the many incredible Buddhist sites) is expected to see significant growth.
Fittingly, the last page of the magazine was an advertisement for the Mongolia Economic Forum coming up in July which we will be attending! We look forward to spending more time in this vast nation and sharing our findings.
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