Economic studies
Mongolia

Mongolia

Population 3.2 million
GDP per capita 4,017 US$
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 5.3 6.9 6.5 5.4
Inflation (yearly average, %) 4.6 7.7 9.0 8.3
Budget balance (% GDP) -3.8 2.6 0.6 -0.9
Current account balance (% GDP) -10.1 -17.0 -14.4 -12.4
Public debt (% GDP) 84.6 73.3 73.0 71.0

(e): Estimate. (f): Forecast.

STRENGTHS

  • Development of colossal mining resources (coal, copper, gold) with investment reaching 40% of GDP
  • Strategic geographical position between China and Europe (Silk Road Development Project)
  • Potential for diversification of production, including agribusiness (livestock, dairy products, meat, cashmere) and tourism
  • Important donor support (4.8% of GDP in 2019)

WEAKNESSES

  • Small economy’s vulnerability to changes in commodity prices and Chinese demand
  • Internal political dissensions
  • Massive land degradation, 90% of the vast grasslands prone to desertification (frequent occurrence of dust storms)
  • Alarming level of corruption and fragile governance (justice, public expenditure, SOEs, mining licenses and procurement)
  • Risks associated with rising inequalities (28% living in poverty in 2018) due to less inclusive mining development

RISK ASSESSMENT

Mineral reliant growth challenged by prices and slowing demand from trade partners

Growth will remain strong but is likely to decelerate to 5.4% in 2020 due to slower export growth in the mining sector resulting from lower coal and copper prices. The economy is largely reliant on natural resources with their export making up 80% of total exports (copper 45% and coal 15%) and 48% of GDP, with most of it directed towards China, its largest trade partner. On top of it, the Oyu Tolgoi (OT) copper and gold mining project (66% owned by Rio Tinto’s subsidy Turquoise Hill and 34% by Mongolia) will not be able to support exports as it has been experiencing delays due to challenging ground conditions and renegotiations from the government. It is expected to be operational by June 2023, which increases costs and may affect business environment and investors’ confidence. Indeed, in the recent years, the bulk of foreign direct investment inflows have been in the mining industry, half with the OT project. In light of weaker copper prices along with delays in projects, inflows are expected to slow down. Public consumption is set to benefit from a relaxed fiscal policy in 2020 while private consumption is expected to be soft due to a sharp increase of the unemployment rate. Moreover, the OT project delay may weigh on disposable incomes (the largest private employer in Mongolia and over 90% of the workforce is Mongolian) and, therefore, consumption. Inflation will remain around the central bank’s 8% target, which is expected to tighten the monetary policy in order to ensure price stability and to curb rapid credit growth driven by rising household leverage. The banking industry is still at risk with several banks undercapitalized and with high shares of household loans, which account for 50% of total credit outstanding.

 

Improved fiscal situation and external sensitivity

Despite commitments and efforts (a 1% primary surplus is expected) to reduce fiscal deficit and debt as part of the IMF’s Extended Credit Facility program set up in 2017 (the sixth review is on hold due to delays in financial sector reforms, especially in bank recapitalization), the economy is still challenged by high debt levels that make it vulnerable to shocks through FDI, commodity prices and Chinese demand. Considering that 90% of the public debt is denominated in foreign currency, the country is vulnerable to an exchange rate depreciation. Given rising political pressures in the run-up to the 2020 elections, fiscal stance will continue to loosen in 2020 in order to reduce frustration among the population by launching social projects, increasing the minimum wage and implementing tax reforms to support business and investment.

The current account is expected to post its usual deficit. Trade balance will remain in surplus though it could decline slightly, as lower copper and coal prices would affect exports. Services and income balance will remain in deficit due to freight costs (one-third of the services deficit), repatriation of profits by mining investors and interest payments. Foreign exchange reserves rose and are covering 5 months of imports in 2019, but remain inadequate to buffer external shocks given Mongolia’s narrow economic base and exposure to climate disasters. Net negative international investment position remains high at -260% of GDP, due in particular to external debt (220% of GDP) of which 70% is private. Strong mining-related FDI inflows (over 10% of GDP) help to finance the current account deficit but political uncertainties over the elections could affect them.

 

Growing political uncertainty as parliamentary elections are approaching

The Mongolian People’s party has been dominating the unicameral parliament with 65 out of 76 seats since the parliament elections in June 2016. Having said this, recent corruption allegations and President Battalga’s unfulfilled promises are leading to a growing frustration among the population. Political uncertainty will likely persist in the run-up to the next parliamentary elections in June 2020. After the dismissal of the former Prime Minister Jargaltulga Erdenebat in 2017 on corruption allegations, the actual Prime Minister Ukhnaagiin Khürelsükh is not spared from these accusations, although none of them is threatening his economic and socially oriented agenda. Though growth has been robust, benefits have not translated into the population who is facing rising costs of living and an increase in unemployment rate that the government struggles to address. As the country is landlocked between Russia and China, it is keeping relations with its neighbours in good terms while seeking to diversify ties through the ‘Third Neighbour’ foreign policy, especially with India and the United States. In light of slower demand from China, this would benefit the country by reducing its economic dependence on China, which accounts for 88% of Mongolia’s exports.

 

Last update: February 2020

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