Foreign investors in Mongolia are playing a waiting game after this week's presidential election, hoping the new head of state will soon approve a major mining project that is key to jump-starting the economy.

Opposition Democratic Party (DP) candidate Tsakhiagiin Elbegdorj won the poll, promising to ensure that Mongolian citizens benefit more from the wealth lying underground.

The multi-billion-dollar question for investors now is whether the government will finally reach a deal on the massive Oyu Tolgoi copper and gold project with its potential developers, Ivanhoe Mines and Rio Tinto.

It's pivotal in the sense that it'll show that the country can move forward with agreements, with regulations, with infrastructure, said Mark Mobius, executive chairman of Templeton Asset Management.

That would be a benchmark for the country to demonstrate its ability to move ahead and to make decisions and work well with foreign investors, said Mobius, who was visiting the country to explore investment opportunities.

Oyu Tolgoi has turned into a bottleneck for overall investment as the government has trod carefully over an agreement it sees as a template for future mining projects.

Not wanting to give away too much, it has dragged out the talks for years. At the peak of mineral prices last year, it withdrew a deal it had previously struck with Ivanhoe in search of more favourable terms.

LODESTAR

The delays have held back other investors, who are looking to movement on Oyu Tolgoi as their cue to pour money into an economy battered by the fall in prices for exports such as copper.

Unemployment is rising, one major bank has failed and the government has had to turn to international lenders for help in plugging its fiscal shortfall. The International Monetary Fund is providing a $229 million loan.

A multi-billion-dollar mining project could make a big difference to an economy that generated less than $5 billion in gross domestic product last year.

Right now, without mining taking off, it's going to be very difficult to see how the economy will recover, said Arshad Sayed, the World Bank's country manager for Mongolia.

The economy grew by 8.9 percent in 2008 but growth is expected to slow to 2.7 percent this year, the World Bank says.

A start to Oyu Tolgoi or Tavan Tolgoi, a major coal deposit in the Gobi Desert, would help stimulate other industries from construction to transport and catering, said Sayed.

In some sense, this is the lodestar that you want to look forward to that will drive a number of things in that direction, he said.

Many foreign investors are concerned that Elbegdorj will seeks to renegotiate the deal to redeem his party's campaign pledge to improve people's livelihoods through wider public ownership of the country's mineral wealth.

Elbegdorj defeated incumbent Nambariin Enkhbayar of the ruling Mongolian People's Revolutionary Party (MPRP) in Sunday's poll.

It's overly simplistic to see the problem as just 'DP anti-mining, MPRP pro-mining'. But the election certainly further complicates an already difficult and uncertain outlook, said Andrew Gilholm, senior Northeast Asia analyst with consultancy Control Risks.

MORE CONSISTENT REGULATION

However, Sayed said the government was aware that the two major projects were important not only in and of themselves but as a way to signal to investors that Mongolia, wedged between China and Russia, remained a good place to do business.

I do think the differences have narrowed and that we are close to what would be a good deal on the table, he said.

With the presidential election over, that should be one less distraction from finalising the major agreements.

I don't think we will have to wait much longer to see a major breakthrough, said John Finigan, chief executive of Golomt Bank.

The banking sector is eager to see the influx of cash that the major mining investments would trigger, said Randolph Koppa, president of Trade and Development Bank.

In a small economy like this, any money that comes in can trickle down into the banks and help ease the relatively tight money situation we've been under for the last year, Koppa said.

One area where an Elbegdorj presidency might improve the business environment is his promise to reform the current system whereby the president can directly select top judges, Koppa said.

Bringing in greater checks and balances would help to make Mongolia's legal and regulatory framework more clear and consistent -- another top concern of foreign investors.

When you have an appointment process that is completely politicised, you have less assurance that there is going to be independence of decision, he said.

(Reporting by Jason Subler; Editing by Alan Wheatley)

(c) Copyright Thomson Reuters 2009.