Mongolia’s economic fairytale faces reality check

Mongolia’s economic fairytale faces reality check

Mongolia’s fairytale economic boom is developing cracks. The failure of the country’s fifth-largest bank and delays to the development of its giant copper mine underscores fears that its growth potential is built on shaky foundations. Yet greater economic realism may ultimately be welcome.

The surprise insolvency of Savings Bank, which controlled about 8 percent of Mongolia’s banking assets, has rattled the country’s economic cheerleaders. The central bank closed down the lender and transferred its deposits to a state-owned rival after it ran up bad loans worth $109 million — more than twice its capital, according to Fitch Ratings.  Some of these loans appear to have been made to Just Group, controlling corporate shareholder in Savings Bank, despite regulations designed to limit such exposures.

The failure has raised doubts about the central bank’s grip on Mongolia’s financial system. Total bank loans expanded by 40 percent between May 2012 and June 2013 and about 30 percent of these loans are denominated in foreign currencies. A sustained slide in the Mongolian currency, which is already down 9 percent against the dollar this year, could leave local borrowers facing a squeeze.

The country’s ability to exploit its commodity wealth is also running into headwinds. The London-listed mining giant Rio Tinto said on July 29 that work on Oyu Tolgoi, a vast copper mine, was being delayed after the Mongolian government told it that project financing would require parliamentary approval. Any prolonged delays would undermine government finances. Last year the International Monetary Fund estimated that Oyu Tolgoi and Mongolia’s Tavan Tolgoi coal mine, would generate combined export income of $2 billion in 2013, rising to $7 billion by 2020.

Optimism about Mongolia’s resources and its proximity to China helped the country raise $1.5 billion from the bond markets last year – its first such issue.  Since then falling commodity prices, China’s slowdown and the emerging market selloff have undermined the bullishness. Five-year bonds now trade at 93 percent of face value. Yet if the correction prompts Mongolia to take a more prudent long-term view of its undoubted commodity wealth, the recent reality check may ultimately prove healthy.

Rio Tinto Gets Green Light Again in Mongolia

Left hand, meet right hand. The two of you ought to know what the other’s doing.

Just days after Rio Tinto (NYSE: RIO  ) put expansion plans for its massive Oyu Tolgoi project in Mongolia on hold after being told approval of the plans would need parliament’s assent — and that wouldn’t happen anytime soon because it was in summer recess — the prime minister said the miner doesn’t need the governing body’s imprimatur and the work can proceed as scheduled.

Shares of Rio Tinto’s subsidiary Turquoise Hill Resources(NYSE: TRQ  ) were crushed by the original decision. Turquoise owns two-thirds of the copper mine and its stock tumbled 28% after its parent announced that it was putting the $5 billion underground expansion on the back burner until it could get some resolution on the outstanding “22 points of dispute” it has with the government.

When the prime minister said the project still has the green light and that his cabinet needn’t be involved, Turquoise stock jumped more than 10% on Thursday and followed that with another near-8% gain yesterday. Shares of the miner now sit just 10% below where they were when the imbroglio began.

Oyu Tolgoi is one of the five largest copper projects in the world, and Rio Tinto expects it to produce between 75,000 and 85,000 tonnes of copper concentrates this year. Over the life of the mine, it’s anticipated that it will annually produce more than 1.2 billion pounds of copper, 650,000 ounces of gold, and 3 million ounces of silver. Shipments to China began last month after several delays imposed by Mongolia, and analysts predict that if the project gets fully financed and hits peak production, it could boost the country’s economy by 35% by 2020.

No doubt the Mongolian government is looking after its own investment. It owns the other 34% stake in the project, and despite some saber-rattling at times about taking a majority stake in the mine and increasing the profits it siphons off, it wants the copper concentrates flowing from Oyu Tolgoi just as much as its partners.

Although the government says the expansion can go as planned, Rio Tinto hasn’t yet made a decision as to whether it will or not and the rebound in Turquoise Hill’s shares may be a bit premature.

Rio is in the midst of selling off non-core assets and earlier this year posted its first-ever loss of $3 billion. In June it sold U.S.-based nickel-and-copper mining assets to Lundin Mining for $325 million, it sold Palabora Copper in South Africa last month to a consortium of Chinese companies, and it just agreed to sell its 80% stake in an Australian copper and gold mine to China Molybdenum for $820 million. While it wants to sell its diamonds business, too, there’s not much of a market at the moment for it, apparently, and it’s withdrawn those plans for the time being.

Being able to conserve cash by delaying Oyu Tolgoi’s expansion may not necessarily be an undesirable outcome at the moment, even though it will be counting on the copper shipments from it in the future.

Coal resource and reserve upgrade for Ovoot Coking Coal Project – Aspire Mining 1 day 7 hours

Aspire Mining Limited announced that it has received an updated JORC Code (2004) Compliant Open Pit Coal Resource statement from Xstract Mining Consultants Pty Ltd for its 100% owned Ovoot Coking Coal Project.

Highlight;
1. Resource re modelling completed by Aspire using all quality data from the 2012 drilling program and data from adjacent operating Mogoin Gol Mine;
2. Ovoot Open PitJORC Code (2004} Coal Resources have increased by 103%, or 23.7 MT to 253.1 MT. Underground JORC Code (2004) Coal Resources remain unchanged at 27.9MT bringing the total Coal Resources for the Ovoot Project to 281 MT{197 MT Measured, 72.3 MT Indicated, 11.8 MT Inferred);
3. Ovoot Project Probable Coal Reserve tonnes is increased by 34 MT to 255 MT ROM at a total moisture of 2%;
4. Probable Marketable Coal Reserve (JORC Code 2004), increased by 8 MT to 188 MT at a product moisture of 95%;
5. ROM Strip Ratio improved from 9.1:1 as estimated in the Pre feasibility study, to 7.7:1; and
6. The Ovoot Project is confirmed as Mongolia’s second largest Coking Coal Reserve.

During the Mongolian winter, an extensive geological structural and seam reinterprelation of the Ovoot Open Pit Coal Resource area was undertaken by Aspire’s geological team. The reinterpretation of the Ovoot Project’s geology has resulted in improved seam correlation and reduction in the number of seam PLY’s comprising the Upper, Lower and OVB seams. The improved consistency of the coal seams and structural interpretation gives increased confidence in the deposit and allows additional tonnage to be included in the geological model. A total of 96% of Ovoot Project Coal Resources are now classified in the Measured and Indicated categories.

The key issues that enabled the update of the geological interpretation consisted of the following:
1. Cross sectional and drill hole information from a total of 73 holes taken from the neighbouring Mogoin Gol Mine, was obtained under a data sharing and cooperation agreement and incorporated into the geological model. The additional information enabled better seam correlation with greater confidence.

2. Quality results obtained from the bulk sampling program undertaken using an Ovoot Project indicative coal sample taken from the Mo go in Gol Mine under the same cooperation agreement confirmed quality found across the deposit in the drill holes. The quality results, together with the revision of the geological structural model, were the two main factors that allowed for a better understanding of the Ovoot Project deposit. Slight quality differences between the Upper and Lower seams was a key factor in the seam identification.

3. Two additional geotechnical drill holes (GT01 and GT02) that intersected the Upper seam in key areas were added to the geological model. This helped to confirm the Upper seam thickness in the southern portion of the deposit.

With the improved understanding of the Coal Resource discussed above, Aspire has completed various yield and ash studies within each of the seams. Unique by-pass and wash yield relationships have been determined for each of the seams using the complete test work data set. This has confirmed the ability to mine individual cuts within each of the seams with portions of the coal from both the Upper and Lower seams bypassing the washing process. Details of the results ofthe study demonstrating this can be found in an internal document Ovoot Open Cut Coal Quality and Resource Yield dated July 2013, authored by Aspire.

Mr David Paull MD of Aspire said that “The increased understanding of the Ovoot Coking Coal deposit and the larger Reserves base increases the economic value ofthe Ovoot Project. The Resource model is now robust and the size of the prize well quantified. Initial production will be targeting the Upper seam where yields are greater than 80%, and which now benefit from the lower strip ratio. While there remains substantial exploration upside at the Ovoot Project, our focus now turns to assisting the Government of Mongolia in establishing the Northern Railways Ovoot to Erdenet railway.”

Mongolia says parliament approval not needed for Oyu Tolgoi financing

Rio Tinto does not need to seek Mongolian parliamentary approval for a $4 billion financing package to fund development of an underground mine at the Oyu Tolgoi copper project, Mongolia’s prime minister said.

“Parliament has already made the decision and signed their agreement,” Prime Minister Norov Altankhuyag said at a weekly press briefing on Thursday.

“Cabinet doesn’t have to be involved. All issues can be discussed and decided at the board of directors’ level,” he added.

Rio Tinto on Monday put all work on the underground expansion of the Oyu Tolgoi mine on hold, saying it had been advised that project financing provisionally secured for the project would need to be approved by parliament.

It expected the process would take some months to work through as parliament was on summer recess.

Rio Tinto and the Mongolian government have had a bumpy relationship over the politically sensitive project, which started exporting copper earlier in July following two last-minute hiccups in securing government approval.

www.reuters.com  Aug 2, 2013

Oyu Tolgoi is 66 percent owned by Rio Tinto’s Turquoise Hill unit, and 34 percent owned by the Mongolian government.

Turquoise Hill shares slumped as much as 28 percent after Rio’s announcement on Monday, but partly recovered on Thursday to be down 16 percent from last Friday’s close.

The Mongolian government has raised concerns about the cost of the expansion project and the potential that rising costs will delay when it starts receiving its share of profit from the mine.

The expansion is designed to take production to 425,000 tonnes of copper and 460,000 ounces of gold a year.

Altankhuyag told the briefing that any question over costs for the underground expansion, which is expected to cost more than $5 billion, should be resolved at the board level.

“The only issue is that the financing issue has not been thoroughly discussed at the board level. It’s just a matter of a technicality,” he said. “Otherwise, there is no serious conflict with Oyu Tolgoi at all.”

Rio did not immediately reply to requests for comment.

Production at the open pit mine and export of copper concentrate is continuing.

Cashmere Fashions Squeezing Central Asia’s Big Mammals

Growing demand for cashmere affects mammals, like snow leopards, a world away.

The global craving for cashmere is creating an unlikely group of “fashion victims”—snow leopards living half a world away from chic shops doing a brisk business in stylish sweaters and other garments.

A new study by the Wildlife Conservation Society (WCS) and the Snow Leopard Trust suggests that the booming trade in cashmere is causing Central Asia’s goat herders to expand their stock in search of increased profits.

This creates a welcome economic boost, but an array of rare or endangered species like snow leopards, Bactrian camels, and Tibetan antelope are paying the price. Wild habitat is shrinking dramatically, and the animals are increasingly coming into conflict with humans and their livestock. (Related:“Snow Leopards Need To Be Protected … But How?”)

Ninety percent of the world’s cashmere comes from the goat herds roaming the open spaces of China and Mongolia. And those herds are growing to meet demand. According to the study, Mongolia’s herds alone have surged from five million in 1990 to almost 14 million by 2010.

“Herders want to have good lives. They like to make money just like the rest of us do,” said study co-author Joel Berger, of the WCS and the University of Montana. “Anybody in their shoes would be thinking the same way,” he added. “So we’re going to have to work with them and with the garment industry to think this through and try to find a better way.”

Food Fight

When goat herds devour local plants, many native herbivores are left without their own sources of food, said study co-author Charudutt Mishra of the Snow Leopard Trust. “The number of snow leopards that an area can support goes down as the wild ungulate populations decline. [Then] a greater proportion of the snow leopard’s dietary needs are met by preying on livestock, which results in local communities killing them in retaliation.” (See pictures of snow leopards in Afghanistan.)

Eventually, Mishra said, growing herds of grazers could degrade the rangeland to such an extent that even the numbers of cashmere-producing goats it can support will decline.

Some of the species currently being impacted are iconic to the region but have little wiggle room. Only about 6,000 snow leopards remain in the wild. Bactrian camels, the world’s only remaining wild camel species, likely number less than a thousand individuals.

The critically endangered saiga antelope has been hunted so extensively in Kazakhstan during the past two decades that its population has plunged more than 95 percent. It has been a victim of demand for its horns, which are used in traditional Chinese medicines; however, a recent report by the Kazak government has reported a rebound.

Wild yaks, gazelles, and many other rare and endangered species are also being affected, according the study published in the August issue of the journal Conservation Biology.

This isn’t the first time the demands of fashion have pushed animals to the brink or beyond.

During the late 19th century, decorative bird feathers began to adorn the hats or dresses of fashionable ladies. By 1918 the trade in wild bird plumes had decimated dozens of American species like the snowy egret. The U.S. Migratory Bird Treaty Act, passed in 1918, curbed the practice and later allowed some species to recover.

In cashmere’s case, fashion’s impact on wildlife is indirect and far less obvious. “Most people have no idea where their cashmere even comes from,” Berger said.

“This wasn’t something I thought of and then went to study,” he said. “I was studying saiga. I was studying yaks. And it started to become clear that these and other species had something in common—they were all being displaced from their primary habitats and coming into more conflicts with humans.”

Green Cashmere?

WCS and the Snow Leopard Trust hope to find solutions by working with the local people, the fashion industry, and Western cashmere consumers who drive demand to strike a sustainable balance that might work for all. “There aren’t any bad guys in this,” Berger said, “It’s just the way the system is built.”

The next step is to gather a group of eco-conscious people from the fashion industry to talk about this, he said. “Nobody wants to see massive changes to people’s livelihood.”

Promoting economic diversification could help, said Mishra, of the Snow Leopard Trust. Research by his team shows that people and communities with multiple sources of income tend to be more tolerant of predators like wolves and snow leopards. (Watch snow leopards being tagged in Afghanistan.)

They’ve also found that women tend to have more negative attitudes toward the predators. “It is critical that some of the programs pertaining to livelihood generation are specifically designed for women,” he said. “The Snow Leopard Enterprises program of the Snow Leopard Trust is one such example of working with women for snow leopard conservation and, through them, with the entire community.”

Mishra also believes that a system of sustainable, wildlife-friendly cashmere could be a key way fashionistas can have their cashmere and protect wildlife while herders continue to profit.

“Such a program must financially reward farmer communities who provide grazing space for wild ungulates by adjusting livestock density, and who are willing and able to coexist with snow leopards and wolves without persecuting them,” he said.

Pan Pacific Sees Copper Surplus at 5-Year High on China

World copper supply may outstrip demand in 2014 for the second straight year to a five-year high as mine output increases amid slowing demand from China, the world’s biggest user, according to Japan’s top producer.

Supply will exceed demand by 643,000 metric tons next year, the highest since 2009, compared with 143,000 tons this year, said Yoshihiro Nishiyama, senior executive officer in the marketing department at Tokyo-based Pan Pacific Copper Co.

Copper has lost 12 percent this year while inventories almost doubled as demand dropped amid slowing growth in China and Europe’s debt crisis. An increase in supply may further depress prices that entered a bear market this month, cutting costs for manufacturers including Sony Corp. (6758) and Honda Motor Co.

“The slowdown in China’s consumption growth is the key factor for the global surplus next year,” Nishiyama said in an interview yesterday. The country’s consumption will decline 2.5 percent next year, he said.

Copper for delivery in three months on the London Metal Exchange was at $6,955 a ton at 5:51 p.m. in Tokyo. Stockpiles monitored by the LME rose to 678,225 tons on June 24, the highest since 2003, and were at 610,725 tons today.

China’s leaders pledged at a Politburo meeting this week to maintain steady second-half growth while pressing on with economic reforms. Gross domestic product rose 7.5 percent in April-to-June from a year earlier, down from 7.7 percent in the first quarter, extending the longest streak of sub-8 percent expansion in at least two decades.

Goldman Sachs Group Inc. projects a surplus of 257,000 tons in 2013 and 392,000 tons in 2014, according to a July 24 report. Morgan Stanley forecast a deficit of 70,000 tons in 2013 and a surplus of 420,000 tons in 2014, according to a July 1 report.

Mine Output

New and expanding mine output including Oyu Tolgoi in Mongolia, Kamoto and Kov mines in theDemocratic Republic of Congo and Caserones, Collahuasi and Escondida in Chile, will add 742,000 tons in 2013 and 990,000 tons in 2014, Nishiyama said.

World production of refined metal will increase 7 percent to 21.9 million tons in 2014 from 2013, while demand will grow 4.5 percent to 21.3 million tons, Nishiyama said. The output forecast included an estimated loss of 6 percent by supply disruptions, including the Garfield smelter in the U.S., the Tuticorin smelter in India and the Gresik smelter in Indonesia.

Output at Indonesia’s Gresik smelter is expected to decline by between 30,000 tons to 40,000 tons following an accident at the Grasberg mine in May, Nishiyama said.

Mongolia: Economy

Economic activity in Mongolia has traditionally been based on herding and agriculture, although development of extensive mineral deposits of copper, coal, molybdenum, tin, tungsten, and gold have emerged as a driver of industrial production. Soviet assistance, at its height one-third of GDP, disappeared almost overnight in 1990-91 at the time of the dismantlement of the U.S.S.R., leading to a very deep recession. Economic growth returned due to reform embracing free-market economics and extensive privatization of the formerly state-run economy. Severe winters and summer droughts in 2000-2001 and 2001-2002 resulted in massive livestock die-off and anemic GDP growth of 1.1% in 2000 and 1% in 2001. This was compounded by falling prices for Mongolia's primary-sector exports and widespread opposition to privatization. Growth improved to 4% in 2002, 5% in 2003, 10.6% in 2004, 6.2% in 2005, and 7.5% in 2006. Because of a boom in the mining sector, Mongolia had high growth rates in 2007 and 2008 (9.9% and 8.9%, respectively). Due to the severe 2009-2010 winter, Mongolia lost 9.7 million animals, or 22% of total livestock. This immediately affected meat prices, which increased twofold; GDP dropped 1.6% in 2009. Growth began anew in 2010, with GDP increasing 25.3% over 2009 as Mongolia emerged from the economic crisis. GDP growth in 2011 was expected to reach 16.4%. However, inflation continued to erode GDP gains, with an average rate of 12.6% expected in Mongolia at the end of 2011 and higher rates anticipated in 2012 as the government increases transfer and spending programs prior to the June 2012 parliamentary elections.

Besides mining (21.8% of GDP) and agriculture (16% of GDP), dominant industries in the composition of GDP are wholesale and retail trade and service, transportation and storage, and real estate activities. Mongolia's economy continues to be heavily influenced by its neighbors. For example, Mongolia purchases nearly all of its petroleum products from Russia. China is Mongolia's chief export partner and a main source of the "shadow," or "gray," economy. The gray--largely cash--economy is estimated to be at least one-third the size of the official economy, but actual size is difficult to quantify since the money does not pass through the hands of tax authorities or the banking sector. Remittances from Mongolians working abroad, both legally and illegally, constitute a sizeable portion. Money laundering is growing as an accompanying concern. Mongolia, which joined the World Trade Organization in 1997, is the only member of that organization to not be a participant in a regional trade organization. Mongolia seeks to expand its participation and integration into Asian regional economic and trade regimes.

Because of Mongolia's remoteness and natural beauty, the tourism sector offers potential for growth. Prior to the onset of the global economic crisis, spiking international commodity prices led to a surge of international interest in investing in Mongolia's minerals sector despite the absence of a policy environment firmly conducive to private investment; the end of the crisis brought a return of the attention of foreign investors. How effectively Mongolia mobilizes private international investment around its comparative advantages (mineral wealth, small population, and proximity to China and its burgeoning markets) will ultimately determine its success in sustaining rapid economic growth. Tax reforms enacted on January 1, 2007 and other mining policies helped government revenues jump 33% in 2007. Meanwhile, major amendments to the minerals law allowed the government to take an equity stake in major new mines. Major development slowed in late 2007 and early 2008 as Mongolia's parliament proved unwilling to move on major deals and declined to reform mining laws that observers said substantially varied from best practices. This frustrated many foreign and domestic investors and others who hoped to see Mongolia's promising mining sector grow rapidly. In 2009, sharp drops in commodity prices and the effects of the global financial crisis began to be felt in Mongolia's economy. The local currency dropped some 40% against the U.S. dollar, and two of the 16 commercial banks were taken into receivership, but a series of quick and effective moves, including a Stand-By Arrangement with the International Monetary Fund (IMF), helped maintain stability and kicked off a broad discussion on fiscal and financial reforms. That program concluded successfully in late 2010, but both the IMF and World Bank later criticized Mongolia for returning to potentially dangerous pro-cyclical policies in 2011, with fiscal spending likely to rise prior to the 2012 elections.

In summer 2009 the government negotiated an “Investment Agreement” with Rio Tinto and Ivanhoe Mines to develop the Oyu Tolgoi copper and gold deposit. On August 25, 2009, parliament passed four laws--one repealing the windfall profits tax, one adjusting corporate tax structures to accommodate large-scale projects, and two involving infrastructure--necessary to allow the signing of the deal. The deal was concluded in a gala signing ceremony on October 6, 2009, and the agreement went into full legal force 6 months later, on April 6, 2010. Although certain parliamentarians called for elements of the agreement to be renegotiated in late 2011, the Mongolian Government stood by the original investment agreement.

Sources:

CIA World Factbook (January 2012)
U.S. Dept. of State Country Background Notes ( January 2012)

Mongolia: Risk Assessment

Country Rating¹

Rating: C

Business Climate Rating¹

Rating: C

Risk Assessment²

Continued growth but risk of overheating
Growth accelerated in 2011 thanks to higher raw material prices and to investment in the mining sector, in a country with immense deposits of gold, copper, coal and uranium. The signing of an investment agreement between the Canadian Ivanhoe Mines and the Anglo Australian Rio Tinto for the operation of Oyu Tolgoi (the world’s largest unexploited gold reserve) and the setting up of a consortium involving Chinese, Russian and American companies to operate Tavan Tolgoi (one of the biggest coal deposits) underline the strong interest of foreign investors for Mongolian mineral resources. This mining sector boom has sustained services and construction (especially infrastructures).
In 2012, the country is expected to experience continued strong growth driven by the strength of foreign direct investment in the mining sector. Moreover, the manufacturing sector, wholesale, retail and transport should continue to grow strongly. The main driver of activity will remain Chinese demand which accounts for 85% of Mongolian exports and stimulates investment in the raw materials and infrastructure sectors. However weaknesses remain. The instability of economic policies and the regulations towards foreign investors threaten to impede the necessary modernization of production capacity. Moreover, the economy remains extremely dependent on the price of minerals, which represent 81% of exports and 30% of GDP. It is, however, worth noting that the expected rises in production volume should enable the effect of a sharp price correction to be offset. Finally, cattle rearing and textiles suffer from a lack of competitiveness. Their growing difficulties could have serious social consequences. The clothing industry has been affected by the increased competition from Asian neighbors benefiting from cheap labor. Besides, subsistence agriculture focused on livestock remains extremely vulnerable to climatic shocks and disease. In this context inflation will remain very high in 2012 in a country where 35% of the population lives below the poverty threshold. The difficulties of these sectors will therefore keep up social tensions and the expansion of the mining sector will not be able to bring the necessary jobs increase.
Public sector finances remain shaky
The IMF Standby Arrangement of 2009 enabled an improvement in debt ratios. In respect of public finances, the budget is expected to be in deficit in 2012 because of the abolition of the 68% tax on mining profits and of salary increases. Nevertheless, it will be financed by large scale privatizations as for example that of Erdenes Tavan Tolgoi planned for 2012. Moreover, public debt is expected to decline thanks to the substantial dividends that the government is expected to receive from its participation in the Oyu Tolgoi project. However, uncertainties remain as to the cost of bank recapitalization which could weigh heavily on public finances.
In 2012, the current account deficit – although falling – is expected to remain substantial because of significant imports of the capital goods and oil necessary for the exploitation of mineral resources. Nevertheless the debt - essentially concessional - will remain manageable.  Moreover, foreign exchange reserves (9 months of imports in 2102) have reached a satisfactory level.
Tense political situation
The political instability due to internal dissension between the Mongolian People’s Party, which has a majority in Parliament, and the Democratic Party, which holds the presidency, continues to slow the pace of reforms. Besides, governance shortcomings (in particular, corruption and government inefficiency) constitute the country’s Achilles heel. Finally, the social risk bears watching because of growing inequalities.

Strengths

• Production start-up of colossal mineral resources
• Proximity of two economic giants, China and Russia, whose demand is very strong
• Influx of foreign direct investment
• Limited foreign debt

Weaknesses

• Vulnerability of the economy to fluctuations in raw material prices
• High poverty and unemployment rates
• Domestic political dissension
• Alarming level of corruption

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¹Country and Business Climate Ratings courtesy of Coface (09/2012)

²Risk Assessment and methodology courtesy of Coface (09/2012).

Mongolia's major macro economic indicators

	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.

MIMF cuts GDP forecasts for Mongolia but still expects rapid economic growth over next two years

The International Monetary Fund (IMF) is forecasting the Mongolian economy to grow rapidly over the next two years but at a slightly lower rate than previously expected, the latest World Economic Outlook (WEO) released on Tuesday 16 April shows. GDP is now expected to grow by 14.0 per cent in 2013, revised down from the IMF’s previous forecast of 15.7 per cent in October last year. Economic growth in 2014 is expected to be around 11.6 per cent, slightly lower than the 11.8 per cent previously forecast. But the growth forecast for 2015 has improved to 7.6 per cent, up from 4.8 per cent forecast in October (see Chart 1).
Chart 1: GDP growth forecasts for Mongolia expected to be ‘smoother’

The forecasts for unemployment in Mongolia have remained unchanged. The unemployment rate is expected to be around 6 per cent in 2013, and is still expected to fall to 5.4 per cent in 2014. The IMF projects that unemployment will keep falling over the next four years as the Mongolian economy continues to expand and jobs are created. Inflation is expected to be a little lower than previously forecast, but will still be a problem for the Mongolian economy. The Consumer Price Index is forecast to grow by 11.1 per cent in 2013 (down from 11.6 per cent forecast in October), falling to around 9 per cent next year and 8 per cent in 2015 (see Chart 2).
Chart 2: Inflation forecast to remain high but expected to steadily decline








The IMF reports that global economic conditions have improved during the past six months. The global economy is forecast to grow by 3.3 percent in 2013, with growth expected to pick up to 4 per cent in 2014. Advanced economy policymakers have successfully defused two of the biggest short-term risks to global activity: the threat of a euro area breakup and a sharp fiscal contraction in the United States. Financial markets have rallied in response, and financial stability has improved.
But Olivier Blanchard, the IMF’s chief economist warns that, “We have moved from a two-speed recovery to a three-speed recovery”. On the one hand, growth in developing and emerging economies will remain robust. For example China, Mongolia’s biggest trading partner, is expected grow by 8.0 per cent in 2013 and 8.2 per cent in 2014. But in advanced economies there is a growing split between the performance of the United States and the euro area. Growth in the United States is forecast to be 1.9 percent in 2013 and 3.0 percent in 2014. In contrast, growth in the euro area is forecast to be –0.3 percent in 2013 and 1.1 percent in 2014.
The report underscores that policymakers cannot relax their efforts. In emerging market and developing economies such as Mongolia, the WEO highlights the need to tighten policies and rebuild fiscal buffers. The tightening should begin with monetary policy and, when needed, be supported with prudential measures to rein in budding excesses in financial sectors such as asset bubbles. Fiscal balances should also be restored. This will provide room for fiscal policy maneuvers should growth fall below trend in the future.
In advanced economies, the IMF argues that risks from high sovereign debt have generally limited the ability to implement expansionary fiscal policy. As such fiscal adjustment must progress gradually to limit damage to demand in the short term. Monetary policy must therefore remain supportive of private demand, while financial policies need to help improve the pass-through of monetary policy. The IMF notes that the United States and Japan have yet to design and implement comprehensive medium-term deficit-reduction plans. It warns this is an urgent requirement for Japan, given the significant risks from renewed fiscal stimulus combined with very high public debt levels. In the euro area economies, structural reforms to rebuild competitiveness and boost medium-term growth prospects are critical, as is further progress on architecture reforms to complete the economic union.