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Mongolia Country Risk Report Q4 2016

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

Core Views


The landslide victory by the Mongolian People's Party (MPP) in theJune 29 parliamentary elections will usher in a period of relativepolitical stability and improved policy coordination over the comingyears.Mongolia's real GDP growth is stabilising, and appears to be turningthe corner. Therefore, we are upgrading our 2016 real GDP growthto 3.0% (from 1.5% previously), and maintaining our 2017 forecastof 4.2%. Investment in the landlocked nation will recover amid improvedpolicymaking under the MPP-led government and the start ofthe second phase construction of the Oyu Tolgoi (OT) undergroundcopper and gold mine in H216. However, the landlocked economywill continue to face headwinds due to a cooling Chinese economy,which will prevent the Mongolian economy from growing at a fasterpace.We are cautious on the Mongolian togrog against the US dollar,and maintain our forecast for the unit to average MNT2,040/USDin 2016 and MNT2,088/USD in 2017. The currency's valuations areelevated, and the togrog is still vulnerable to shocks owing to its highlevel of external indebtedness and the central bank's weak externalliquidity position.We are paring back our dovish expectations due to the lack of easingbias by the Bank of Mongolia (BoM) at its July monetary policymeeting where it held its benchmark policy rate steady at 10.50%and signs of currency weakness. We are now forecasting the centralbank to cut interest rates by 50 basis points (bps) to 10.00% by end-2016 (versus 75bps previously). A muted inflationary environmentshould provide sufficient policy space for the central bank to attemptto provide continued support to the economy.Mongolia will continue to run fiscal deficits in the coming years asstructurally low commodity prices temper revenue growth while publicexpenditure growth remains elevated amid insufficient expenditurecutbacks due to the government's poor fiscal discipline. The countryis increasingly at risk of a credit event as Mongolia and its state-linkedentities are facing significant bond repayments beginning from 2017,and it is highly likely that the Mongolian government would have torefinance at significantly higher yields, if it were to be successful at it.



Major Forecast Changes

We have upgraded our 2016 real GDP growth forecast to 3.0% (from1.5% previously) as the country's real GDP growth appears to bestabilising and turning the corner. We expect investment to recoveras the second phase development of the OT mine begins in H216,as well as improved policy certainty.We have revised our forecast for the reported fiscal deficit as ashare of GDP to 8.0% in 2016 and 7.8% in 2017 (versus 6.7% forboth years previously) to reflect the sharp deterioration in Mongolia'sfiscal deficit in H116.We have pared back our dovish expectations, and now forecastingthe BoM to cut its 1-week central bank bill rate by 50bps to 10.00%by the end of 2016 (versus 75bps previously). At the same time, wealso downgraded our average 2016 headline consumer price inflationforecast to 2.5% y-o-y as price pressures have remained muted sofar in 2016. However, inflation will remain substantially lower thanthe central bank's target of 7.0% y-o-y in 2016, implying that thereis still room for the central bank to ease interest rates further.

Table Of Contents

Mongolia Country Risk Report Q4 2016
Executive Summary.. 5
Core Views...5
Major Forecast Changes 5
Key Risks.5
Chapter 1: Economic Outlook.. 7
SWOT Analysis... 7
BMI Economic Risk Index.. 7
Economic Growth Outlook 8
Turning Positive On Growth Outlook8
Mongolia's real GDP growth is stabilising, coming in at 3.0% y-o-y in Q116, versus 2.3% y-o-y in Q415. We are therefore upgrading
our 2016 real GDP growth forecast to 3.0 % (from 1.5% previously), and maintaining our 2017 forecast of 4.2%. Investment in the
landlocked nation will recover amid improved policymaking under the Mongolian People's Party (MPP)-led government, as well as the
start of the second phase construction of the Oyu Tolgoi (OT) underground copper and gold mine in H216.
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS..9
TABLE: PRIVATE CONSUMPTION FORECASTS..10
TABLE: GOVERNMENT CONSUMPTION FORECASTS...10
TABLE: FIXED INVESTMENT FORECASTS..10
TABLE: NET EXPORTS FORECASTS10
Fiscal Policy And Public Debt Outlook.. 11
Fiscal Vulnerabilities Not Yet Over..11
Mongolia's fiscal deficit worsened sharply in H116 - reaching MNT1.1trn, which was similar to the figure recorded for the whole of 2015
and we are revising our forecast for the reported fiscal deficit as a share of GDP to 8.0% in 2016 and 7.8% in 2017 (versus 6.7% for
both years previously) to reflect the deterioration. It is likely that the government will have to refinance their debt at much elevated yields
in order to sufficiently compensate investors for the high risk that they are undertaking.
Structural Fiscal Position 12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...13
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.13
Currency Forecast 14
MNT Still At Mercy Of Global Liquidity14
The Mongolian togrog is highly volatile and is facing depreciatory pressures despite an improvement in political environment due to
the landslide victory by the Mongolian People's Party (MPP) at the June parliamentary elections, as well as expected inflows from the
second phase development of the Oyu Tolgoi copper and gold mine starting from H216. Therefore, we maintain our cautious view on
the currency as valuations are elevated, and the togrog is still vulnerable to shocks owing to its high level of external indebtedness and
the central bank's weak external liquidity position.
TABLE: BMI CURRENCY FORECAST14
Outlook On External Position.. 15
TABLE: MAIN EXPORT and IMPORT PARTNERS16
TABLE: MAIN EXPORTS and IMPORTS16
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.16
Monetary Policy 17
Steady Interest Rates Unlikely To Last...17
We are paring back our dovish expectations due to the lack of easing bias by the Bank of Mongolia at its July monetary policy meeting
where it held its benchmark policy rate steady at 10.50%, as well as signs of currency weakness. We are now forecasting the central
bank to cut interest rates by 50bps to 10.00% by end-2016 (versus 75bps previously). A muted inflationary environment should provide
sufficient policy space for the central bank to attempt to provide continued support to the economy.
Monetary Policy Framework 18
TABLE: MONETARY POLICY FORECASTS.. 18
Chapter 2: 10-Year Forecast... 21
The Mongolian Economy To 2025... 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 2025
(at an annual average clip of 7.5%). That said, we do not expect the coming decade to be smooth sailing. Structural factors such as
the magnitude of investment spending, the potential for an unprecedented scale of money creation and a gradual erosion of the local
business environment, coupled with 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 3: Political Outlook... 25
SWOT Analysis. 25
BMI Political Risk Index... 25
Domestic Politics. 26
MPP Landslide Victory To Provide Political Stability26
The Mongolian People's Party (MPP)'s landslide victory in the Mongolian June 29 parliamentary elections will usher in a period of
relative political stability and improved policy coordination over the coming years.
TABLE: POLITICAL OVERVIEW.26
Long-Term Political Outlook... 28
Transforming Minerals Into Wealth.28
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.
Chapter 4: Operational Risk... 31
SWOT Analysis. 31
Operational Risk Index 31
Chapter 5: BMI Global Macro Outlook... 33
Global Macro Outlook.. 33
Brexit To Hit Global Growth.33
TABLE: GLOBAL ASSUMPTIONS..33
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %34
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...35
TABLE: MACROECONOMIC DATA and FORECASTS..37

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