Sunday, May 26, 2013

Mongolia: a bright spot in a dim global economy

Mongolia: a bright spot in a dim global economy

Why is this graph important?

When most of the world’s economies are facing slowing growth, and Europe a likely recession, Mongolia emerges as one of the few countries that will grow at a staggering pace. In 2011, we expect its economy
to have grown 11.6% year over year, higher than 2010's 6.4% and its highest annual rate in 21 years.
Traditionally, Mongolia was a herding and agricultural economy, but after the discovery of its vast
mineral wealth, the economy has been catapulted into a major mining hub. The wealth of coal, copper,
gold, silver and other minerals source 80% of Mongolia's yearly exports; as new supply comes on
stream, this share is expected to grow to 95%. Not only is Mongolia a resource‐rich country, it is
geographically well‐situated; sandwiched between the largest countries in the world, Mongolia has
China, the biggest consumer of commodities, as its neighbor. Soon, Mongolia will be one of the top five
producers of copper in the world; its largest foreign investment project, the Oyu Tolgoi gold and copper
mine, will propel the growth of Mongolia's economy into above 20% annual growth in 2013. Over the
next few years, the country will need to rapidly develop its infrastructure, financial sector, real estate
and other industries to meet the growing needs of a nation on the path to becoming one of the richest
in the world (in per capita terms). This bright future, however, is not without serious potential risks that
stem from an overly rapid growth driven by resource‐exploitation. Indeed, Mongolia is highly
susceptible to the "resource curse", also known as the Dutch Disease: a country's wealth in resources
can stagnate the development of other industries that are independent of commodities; in addition,
rapidly rising wealth and large exports push up inflation and make the national currency very expensive.

What does the indicator tell us?

Gross domestic Product (GDP) is the sum of the values of all final goods and services produced by a
country, in a given time period. The values depend on the quantities (volume) of the goods produced and their prices. Real GDP is a measure that holds prices constant and takes out the affects of inflation
or deflation. GDP can be measured by sector output. The three main sectors are the primary (raw
materials and basic industries such as agriculture, mining, etc); secondary (manufacturing, pment,
tourism, etc.). Mongolia's economy used to be predominantly agriculture, but with the mininrocessing,
construction, etc.); and tertiary (the services industry such as retail, transportation, entertaing boom
both extraction and the industries that support mining (such as transportation, processing, etc.) quickly
took up the biggest shares in the economy.

What are the economic and financial implications?

Mongolia's economic potential is enormous; the International Monetary Fund forecasts an average
growth of 14% for the next five years. Mining has opened the doors for investments in many of the
economy's sectors that are still quite underdeveloped. In a time when the developed economies are
treading water, Mongolia is receiving massive foreign investment inflows and is developing bilateral ties
with countries like Kuwait and other GCC members to foster economic links. In this bright horizon,
however, risks are looming. Because mining is so significant, it has become a source of political tension.
Mongolia's democratic government will undergo elections in 2012 and populist movements have been
pledging the nationalization of mining projects that had been promised to be open to foreign
investment. This can hinder the flow of investments into the country. There is a lot of doubt as to
whether the government will be committed to spending wisely; it has already engaged in monetary
handouts to the rich and poor alike. Although the government is trying to use its wealth wisely by
creating a fund that will stabilize economic growth against the volatility of the commodity markets, it
still faces the major task of steering Mongolia's rapid growth and avoiding asset bubbles and high
inflation. The dependence on Chinese demand is also risky. China has a growing domestic economy, but
it is still susceptible to rapid declines in foreign demand, especially from the West. The adverse effects
would directly transfer to Mongolia. The nature of the mining industry, however, allows a certain level
of stability, as investments in mines take several years of development and orders for resources tend to
be large. Mongolia is a land of opportunity, but investors must be aware of the possible land mines
along the way.

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