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Mongolia Country Risk Report Q3 2016

  • May 2016
  • -
  • Business Monitor International
  • -
  • 37 pages

Core Views Parliamentary elections are scheduled to take place on June 29 2016, and we expect neither the ruling Democratic Party nor the opposition Mongolian People's Party to win a convincing mandate. Post-elections, the land-locked nation's business environment is likely to remain challenging as policymakers struggle to balance the interests of the public and foreign investors, particularly in the mining sector. Mongolia's real GDP growth will decelerate to 1.5% in 2016 as net exports will act as a drag while political uncertainty will keep investors cautious. However, we expect a recovery in 2017, and forecast real GDP growth to average 7.4% over the next decade as investment recovers due to the second phase expansion of the Oyu Tolgoi (OT) copper and gold mine, which is estimated to commence in the middle of 2016. However, the landlocked economy will continue to face headwinds due to a cooling Chinese economy, which will prevent the Mongolian economy from growing at a faster pace. We are cautious on the Mongolian togrog against the US dollar, and forecast the unit to average MNT2,044/USD in 2016 and MNT2,088/ USD in 2017. The country's widening current account deficit and signs of increasing external vulnerability will put downside pressure on its currency. However, the return of foreign inflows due to the second phase development of the Oyu Tolgoi gold and copper mine will prevent any excessive weakness.

Following the Bank of Mongolia (BoM)'s decision to cut its 1-week central bank bill rate by 150bps to 10.50% at its May 5 monetary policy meeting, we forecast the central bank to reduce interest rates by another 75bps to 9.75% by end-2016. Mongolia's headline consumer price inflation will remain below the central bank's target of 7.0% despite bottoming commodity prices and growth in monetary aggregates. Therefore, there is still room for the central bank to ease monetary policy further as it attempts to support the sluggish domestic economy. Mongolia will continue to run fiscal deficits in the coming years as structurally low commodity prices temper revenue growth while public expenditure growth remains elevated amid insufficient expenditure cutbacks due to the government's poor fiscal discipline. The country is increasingly at risk of a credit event as Mongolia and its state-linked entities are facing significant bond repayments beginning from 2017, and it is highly likely that the government would have to refinance at significantly higher yields, if it were to be successful at it. Major Forecast Changes We have downgraded our 2016 real GDP growth forecast to 1.5% (from 3.2% previously) as the economy continues to face external headwinds and heightened political uncertainty ahead of the parliamentary elections (to be held on June 29) that will likely weigh on investment in the first half of the year. We have revised our average 2016 currency forecast to a stronger MNT2,040/USD (versus MNT2,150/USD previously) amid a return of global risk appetite, and against a backdrop of US dollar weakness since the start of 2016. That said, we hold a cautious outlook on the Mongolian togrog as the country's widening current account deficit due to a pick-up in imports and subdued export growth amid continued elevated external indebtedness will put downside pressure on the currency.

Table Of Contents

Mongolia Country Risk Report Q3 2016
Executive Summary 5
Core Views5
Major Forecast Changes 5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Growth Downgrade Amid External Headwinds And Political Uncertainties8
Mongolia's real GDP expanded at its slowest pace in six years in 2015, coming in at 24%, amid external headwinds and doubledigit
contraction in investment for a second consecutive year We are downgrading our 2016 real GDP forecast to 15% (versus
32% previously) as net exports will act as a drag while political uncertainty will keep investors cautious That said, the second phase
development of the Oyu Tolgoi copper and gold mine is likely to proceed in the middle of 2016 and construction will be ramped up from
2017, informing our positive outlook over the coming years
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS9
TABLE: PRIVATE CONSUMPTION FORECASTS 9
TABLE: GOVERNMENT CONSUMPTION FORECASTS 10
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS 10
Fiscal Policy 11
High Bond Yield Issuance Highlights Fiscal Vulnerabilities11
The Mongolian government raised USD500,000 from international fixed income markets on March 29 at an elevated yield of 10875%,
reflecting the land-locked nation's still precarious twin fiscal and current account deficit position With respect to its fiscal deficit, we
forecast the reported figure to widen to 67% of GDP in 2016 and 2017 (versus 50% in 2015) owing to weak revenue collection and
insufficient expenditure cutbacks due to the government's poor fiscal discipline
TABLE: 2021 COUPON RATE PRICED SIGNIFICANTLY HIGHER THAN PREVIOUS ISSUANCES 11
Structural Fiscal Position 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES13
Exchange Rate Outlook 13
MNT: Benefiting From USD Weakness, But Still Vulnerable To Shocks13
The Mongolian togrog has appreciated amid a return of global risk appetite, and against a backdrop of US dollar weakness, we are
revising our average 2016 forecast on the currency stronger to MNT2,040 /USD (from MNT2,150/USD previously) However, we remain
cautious on the togrog as valuations are still expensive, and the currency is still at the mercy of foreign investors given its widening
current account deficit and weak external liquidity position
TABLE: BMI CURRENCY FORECAST14
Outlook On External Position 16
TABLE: MAIN EXPORT and IMPORT PARTNERS16
TABLE: MAIN EXPORTS and IMPORTS16
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE16
Monetary Policy 17
Rate Cut Cycle Not Yet Over17
Following the Bank of Mongolia's decision to cut its 1-week central bank bill rate by 150bps to 1050% at its May 5 monetary policy
meeting, we forecast the central bank to reduce interest rates by another 75bps to 975% by end-2016 Mongolia's headline consumer
price inflation will remain below the central bank's target of 70% despite bottoming commodity prices and growth in monetary
aggregates Therefore, there is still room for the central bank to ease monetary policy further as it attempts to support the sluggish
domestic economy
Monetary Policy Framework 18
Chapter 2: 10-Year Forecast 21
The Mongolian Economy To 2025 21
Fierce But Volatile Growth In Store21
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 ec onomies globally through to 2025 (at
an annual average clip of 74%) 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 FORECASTS21
Chapter 3: Political Outlook 25
SWOT Analysis 25
BMI Political Risk Index 25
Domestic Politics 26
Election Preview: Coalition Government Likely26
Neither the ruling Democratic Party nor the opposition Mongolian People's Party are likely to win a convincing mandate in the June 29
parliamentary elections Post-elections, the business environment is likely to remain challenging as policymakers struggle to balance the
interests of the public and foreign investors, particularly in the mining sector
TABLE: POLITICAL OVERVIEW26
Long-Term Political Outlook 28
Transforming Minerals Into Wealth28
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 the 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 4: Operational Risk 31
SWOT Analysis 31
Operational Risk Index 31
Chapter 5: BMI Global Macro Outlook 33
Global Macro Outlook 33
Tentative Stability,But New Risks Emerging33
TABLE: GLOBAL ASSUMPTIONS33
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %34
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %35
TABLE: MACROECONOMIC DATA and FORECASTS37

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