Population 2.828 million
GDP 9.923 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
6.4 |
17.5 |
11.2 |
16.8 |
|
Inflation (yearly average) (%)
|
10.2 |
7.7 |
14.1 |
10.9 |
|
Budget balance (% GDP)
|
0.5 |
-4.8 |
-5.2 |
-2.4 |
|
Current account balance (% GDP)
|
-14.9 |
-31.8 |
-36.4 |
-24.1 |
|
Public debt (% GDP)
|
45.3 |
51.7 |
56.7 |
54.2 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Operations starting up at colossal mining resources
- Proximity of two economic giants, China and Russia, whose demand is very dynamic
- Foreign direct investment inflows
- Low external debt
WEAKNESSES
- The economy’s vulnerability to fluctuations in raw materials prices
- High poverty and unemployment rates
- Internal political dissension
- Alarming level of corruption
Risk assessment
Sustained growth but risk of overheating
Growth slowed in 2012 due to the slowdown in coal exports to China and in foreign direct investments, against a background of uncertainty over the regulatory framework. The adoption of a new law on foreign investments limiting their share to 49% of strategic industries in May 2012 and the conflict between the government and Rio Tinto, which holds 66% of the shares of in the Oyu Tolgoi project (one of the biggest gold and copper reserves in the world), over the tax rate imposed on the Anglo-Australian company, explain foreign investors’ loss of appetite.
Growth could accelerate in 2013, driven by the dynamism of the mining sector. The country has immense deposits of gold, copper, coal and uranium. Oyu Tolgoi will begin production from early 2013. Moreover, Tavan Tolgoi, one of the world’s larges coal deposits, partially exploited by China’s, Russia’s and U.S. mining companies, is set to increase production in 2013. This upsurge of the mining sector will sustain services (retail sales, transport) and construction, especially of infrastructures. The Chinese demand will continue to be the main driver of activity, accounting for 86% of Mongolian exports, and will stimulate investment in raw materials and infrastructure.
However, weaknesses remain. The instability of economic policies and regulations with regard to foreign investors could impede the necessary modernisation of production capacities. Moreover, the economy remains extremely dependent on the price of minerals, which represent 82% of exports and 30% of GDP. It is, however, to be noted that the expected rises in production volume are likely to enable the effect of sharp price corrections to be offset. Finally, cattle rearing and textiles suffer from a lack of competitiveness. Their growing difficulties could have serious social consequences. The textile industry has been affected by increased competition from Asian neighbours benefitting from a cheap labour market. Subsistence agriculture focusing on cattle rearing remains extremely vulnerable to climate shocks and pandemics. In this context, inflation will remain very high in 2013, despite the monetary policy tightening. With 35% of the population living below the poverty threshold, the difficulties of these sectors will lead to social tensions, especially since the expansion of the mining sector will not be able to bring the necessary increase in jobs.
Public finances is still weak
The improvement in debt ratios observed after the IMF’s 2009-2010 Standby Agreement has not lasted. As far as public finances are concerned, the fiscal balance went deeper into deficit due to the exponential growth in spending in an electoral context (50% rise in public sector wages, direct financial aid to households and increased capital spending). The fiscal deficit could fall slightly in 2013 due to tax increases on diesel, alcohol and tobacco decided in September 2012 and higher revenues linked to the mining sector. However, off-budget spending, especially by the Development Bank of Mongolia is expected to increase in 2013 because of the numerous infrastructure products launched (road construction, improvement of the rail network, etc.) and only partially funded by the 2012 international bond issue. Moreover, uncertainties remain as to the cost of recapitalising the banks, which could be a heavy burden on the public finances. In this context public debt will remain high, well above the emerging country average.
In 2013, the current deficit, though falling, is expected to remain substantial because of significant capital goods and oil imports necessary for beginning the exploitation of the mineral deposits. Nevertheless, the debt, essentially in the form of soft loans, will remain sustainable. However, the level of reserves remains weak (3 months of imports in 2013) rendering the country vulnerable to sharp capital outflows.
Tense political situation after June 2012 elections
The June 2012 legislative elections were won by the Democratic Party. As it did not win a majority of seats in the parliament, a coalition government bringing together the Democratic Party and two small populist parties had to be formed. In this context, political instability due to internal disagreements within the coalition - particularly over the presence of international companies in the mining sector, judged to be strategic - is expected to last. Moreover, shortcomings in governance (in particular corruption and government inefficiency) constitute the country’s Achilles’ heel. Finally, social risk needs watching because of growing inequalities and high inflation.
