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Tom Holland

Australia used to be called 'the lucky country', largely because of its abundance of natural resources.
These days Mongolia has usurped the title. Thanks to its geology, Mongolia boasts massive deposits of copper, coal, iron ore, uranium and tungsten.
What's more, the world's biggest buyer of minerals - China - is right on Mongolia's doorstep.
With China now consuming a third of the world's output of commodities, Mongolia is looking forward to a bonanza of resource revenues that politicians firmly expect will transform the country's economy beyond all recognition.
It's already happening. The development of the 7.4 billion tonne coal deposit at Tavan Tolgoi has seen Mongolia displace Australia as China's largest supplier of coking coal, with its share of China's imports soaring to 45 per cent, up from 11 per cent just three years ago.
With investment pouring in to this and other projects, last year Mongolia's gross domestic product shot up by 17 per cent.
Most observers expect the trend to continue. Global mining giant Rio Tinto is investing US$7 billion in its Oyu Tolgoi copper mine and processing plant, which when fully operational is forecast to add a third to Mongolia's GDP.
The government in Ulan Bator, however, isn't prepared to wait for the windfall. It's already begun disbursing the expected earnings. Last year government spending rose 56 per cent, driven largely by a 59 per cent increase in subsidies.
This year the government plans to ramp up spending on subsidies by another third. Meanwhile Ulan Bator is handing out 1 million tugriks of shares in the Tavan Tolgoi project, worth HK$5,800, to each citizen.
Unfortunately, there's a catch. Government revenues aren't keeping pace. According to analysts at Fitch Ratings, the Mongolian government's budget deficit over the 12 months to May amounted to 7.6 per cent of the country's GDP.
To put that into perspective, that's a bigger deficit than Spain is expected to run this year, and roughly the same size as Greece's forecast budgetary black hole.
Such a big deficit wouldn't matter very much if the government could be sure of booking the future mining revenues it expects.
Yet, developing Mongolia's mining sector might prove difficult, despite the country's wealth of natural resources.
Anxious to ensure that China doesn't come to completely dominate the land-locked country's economy, as the Soviet Union used to, the government in Ulan Bator passed a law in May capping foreign ownership of new mining projects at 49 per cent.
The new law was passed in response to a bid by the Aluminium Corporation of China, or Chalco, to acquire a 58 per cent stake in Hong Kong-listed SouthGobi Resources, operator of the Ovoot Tolgoi coal mine, from Canada's Ivanhoe Mines. 
For now the deal is stalled in the face of Ulan Bator's political opposition, although Chalco remains keen.
According to mining industry analyst Michael Komesaroff at Urandaline Investments, however, 'this investment ceiling looks to be a longer term brake on expanding Mongolia's mining capacity'.
That poses a problem. Developing mines requires a huge commitment of capital. If foreign companies are unable to exert control over their investments, they will hold back from the market, especially now that China's demand growth appears to be slowing.
In other words, it looks as if Mongolia's resource sector may fail to yield the huge returns the government is anticipating.
For a country facing a mounting fiscal deficit, and in which credit growth is running at 44 per cent in year-on-year terms, with inflation touching 15 per cent, that's dangerous.
Mongolia was hoping income from resources would transform its economy. Right now it looks as if unrealistic expectations may have inflated a boom that is on the verge of turning to a bust. That's the sort of luck any economy can do without.



Mongolia cursed with too much resource luck