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Mongolia Business Forecast Report Q3 2014

  • May 2014
  • -
  • Business Monitor International
  • -
  • 26 pages

Core Views

The commencement of copper exports from the Oyu Tolgoi (OT) mine represents a huge milestone for Mongolia; one which will have significant implications for the country's macroeconomic prospects in 2014 and beyond, in terms of both economic growth and foreign investor sentiment. With earlier agreement deadlines missed while operation and pricing problems weigh on exports, we have downgraded our real GDP forecast for 2014 to 9.8%. Our core scenario remains for an agreement for the OT expansion to be reached by end Q314. The various shocks in Q114 (missing of the March 2014 deadline for the OT project, and rumours that Golmot bank may have contravene some loan agreements) left the foreign investors fleeing Mongolian assets. The Togrog has thus declined by more than 10% in value since the end of 2013, and we believe that fundamental and technical factors continue to suggest that the currency will remain on a depreciatory trend for 2014.

Headline inflation is now firmly in double-digit territories, stoked by the Togrog's depreciation and the government's housing stimulus. We maintain that the Bank of Mongolia (BoM) will have to tighten rates in 2014. Our projection for 100 basis points (bps) worth of interest rate hikes in Q414, which will raise the BoM's key rate to 11.50%, should help ease the inflationary pressures. The Mongolian government continues to make considerable expenditure through the Development Bank of Mongolia (DBM),
which is operating off-budget. We remain doubtful about whether the authorities will be able to keep within the 4% of GDP structural deficit limit mandated by the Fiscal Stability Law (FSL) in 2014, and note that the government is facing increasing political and social pressure to further increase its fiscal spending to offset the impact from the weakening economy. This presents risks to the country's long-term fiscal sustainability, especially if the mining projects are not brought online.

Major Forecast Changes

We have downgrade our real GDP forecast for 2014 to 9.8% from 11.5% as the OT expansion plans have not been agreed on or finalised. Moreover, there have been production problems at the currently operationally portion of the OT mine and weak coal prices have weighed on export growth for 2014.

Table Of Contents

Mongolia Business Forecast Report Q3 2014
Executive Summary . 5
Core Views 5
Major Forecast Changes ..5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis .. 7
BMI Political Risk Ratings .. 7
Domestic Politics . 8
Unrest Increases Risks To Government's Policy-Making Ability ..8
We have downgraded Mongolia's short-term political risk rating to 68.3 from 70.4 on the back of growing downside risks to the
government's ability to enact policy, as growing public unrest could sway the resolve of its minority coalition partners. We further caution
that the growing distrust of the government's policies could be a boon for the opposition Mongolian People's Party in the next elections.
Should the government fail to arrest the growth slowdown, policy continuity beyond the ruling Democratic Party's term (which will run up
to 2016) will most likely be at risk.
Long-Term Political Outlook . 9
Transforming Minerals Into Wealth ..9
The Mongolian government will face major domestic challenges over the coming decade as the country's mining boom takes off, and it
seeks to strike a balance between distributing the revenues in a way that is acceptable to the population, while avoiding stoking inflation.
Moreover, we believe it will face a tough task in managing the social change that the mining boom will create, including immigration and
the growing gap between rich and poor. In foreign policy, the government's chief priority will remain avoiding falling too much under the
influence of neighbours Russia and China, though we believe the latter in particular will prove almost impossible.
Chapter 2: Economic Outlook . 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity . 14
Downgrading Growth On Oyu Tolgoi Delays And Export Headwinds .14
We have downgraded our real GDP forecast for Mongolia, now expecting economic activity to expand at a slower pace of 9.8% in 2014,
compared with 11.5% in 2013. Firstly, delays in the commencement of the next expansion phase of the Oyu Tolgoi mine will weigh on
investment growth. Secondly, production hiccups and weak pricing power will weigh on export growth. Moreover, we highlight further
downside risks to growth as the government's efforts to increase housing construction and investment could weaken the quality of
banking assets, and possibly result in another banking crisis.
TABLE: Economic Activity .14
Fiscal Policy .. 15
Fiscal Sustainability At Risk ..15
Even as the Mongolian government is likely to see its fiscal revenues grow as foreign investors return, we highlight that longer term
fiscal sustainability is at risk. This comes as the government continues to prioritise short-term growth over long-term development, which
may in turn lead to a build-up in macro-imbalances.
TABLE: Fiscal Policy ..16
Monetary Policy .. 17
BoM To Hold Rates Until Disputes Resolved ..17
We believe that the ongoing economic slowdown has made it increasingly difficult for the Bank of Mongolia (BoM) to dampen inflation in
line with its end-2014 target of 8.0%. However, given that we expect the government to resolve its disputes with various foreign miners,
which we believe will lift the overall outlook for the economy, we maintain our expectations for the central bank to hike rates by 100
basis points to 11.50% by end-2014.
TABLE: Monetary Policy 17
Balance Of Payments .. 18
MNT: Inflation And Investor Concerns Warrant Bearish Outlook 18
TABLE: Current Account ..19
Chapter 3: 10-Year Forecast . 21
The Mongolian Economy To 2023 21
Fierce But Volatile Growth In Store 21
At face value, Mongolia's long-term economic prospects appear nothing short of formidable, such is the size of untapped natural
resource wealth in the country, and we expect the country to remain one of the fastest-growing economies globally through to 2022 (at
an annual average clip of 8. 9%). That said, we do not expect the coming decade to be smooth sailing. Structural factors such as the
magnitude of investment spending, the unprecedented scale of money creation, a gradual erosion of the local business environment,
and question marks over the sustainability of long-term Chinese commodity demand all point to a more volatile growth trajectory for
Mongolia in the years ahead.
TABLE: Long-Term Macroeconomic Forecasts .21
Chapter 4: Business Environment 23
SWOT Analysis 23
BMI Business Environment Risk Ratings .. 23
Chapter 5: BMI Global Assumptions .. 25
Global Outlook . 25
Growth Increasingly Polarised ..25
Table: Global Assumptions ..25
Tab le: Developed States , Rea l GDP Growt H, % 26
Tab le: Emerging Mar kets , Rea l GDP Growth , % ..27

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