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Mongolia Business Forecast Report Q4 2014

  • August 2014
  • -
  • Business Monitor International
  • -
  • 29 pages

Core Views
Persistent uncertainties clouding Mongolia's political and business environment outlook suggest that downside risks remain to our real 2014 and 2015 GDP forecast of 9.8% and 8.0% respectively. Our core scenario remains for an agreement for the Oyu Tolgoi (OT) mine expansion to be reached by end-2014 although we note downside risks of further delays that could mean that an agreement will only be reached after parliamentary elections in 2016. Indeed, rising domestic opposition from both within the ruling coalition and bureaucrats threatens to prevent the government from passing the legislative changes needed to restore investor confidence in the economy. The Togrog remains under immense depreciatory pressures, with the latest dispute between Rio Tinto and the Mongolian government (over alleged tax evasion) further weakening the unit in addition to the 10% losses it has suffered since the beginning of 2014. We believe that fundamental and technical factors continue to suggest that the currency will remain on a depreciatory trend for 2014, but expect the unit to see some respite when an agreement for the OT mine expansion is reached by end-2014.

Headline inflation is now firmly in double-digit territory, stoked by the Togrog's depreciation and the government's housing stimulus. With its latest 150 basis points (bps) hike, we do not expect the Bank of Mongolia (BoM) to raise interest rates beyond the current 12.00%, especially with credit growth waning and growth remaining a priority
for the monetary authority. 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 2% of GDP structural deficit limit mandated by the Fiscal Stability Law (FSL), and note that the government is facing increasing political and social pressures 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 downgraded our real GDP forecast for 2015 to 8.0% as the OT expansion plans have not been agreed on or finalised. With rising twin current account and fiscal account deficits stoking inflationary pressures higher and the Togrog weaker, we believe the risks to growth are firmly to the downside, and note that assistance from a
multilateral organisation may be needed should crisis occurs.

Table Of Contents

Mongolia Business Forecast Report Q4 2014
Executive Summary 5
Core Views...5
Major Forecast Changes.5
Key Risks To Outlook5
Chapter 1: Political Outlook.. 7
SWOT Analysis 7
BMI Political Risk Ratings.. 7
Domestic Politics. 8
Domestic Opposition To Limit Foreign Policy Success8
While the Mongolian government has made some progress in their foreign policy, such as the signing of a free trade agreement with
Japan and possible coal gasification agreement with Sinopec, we expect domestic opposition to prevent the country from benefiting
from them in the next few years.
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
Risks Remain Despite Downbeat 2015 Growth..14
Persistent uncertainties clouding Mongolia's political and business environment outlook suggest that downside risks remain to our real
2015 GDP forecast of 8.0%. While our core scenario is still for the government to reach a conclusion for the Oyu Tolgoi mine expansion
by end-2014 and ongoing expansionary fiscal and monetary policies to further support economic growth in 2015, we note that downside
risks loom given the intensifying domestic opposition and vulnerabilities in the financial and external sectors.
Table: Economic Activity14
Fiscal Policy... 16
Growth Emphasis To Stoke Fiscal Deficits...16
We believe that the government's focus on growth indicates that fiscal expenditures will likely remain above revenues, even as growing
exports lift the government's collection of custom duties.
Table: Fiscal Policy17
Monetary Policy.. 17
Rates On Hold Until H115..17
Although inflationary pressures in Mongolia have been intensifying, we believe that the Bank of Mongolia (BoM) will hold its policy
rate at 12.00% until H215, and prioritise growth concerns instead. Additionally, we note that the risk of stoking another banking crisis
will further dissuade the central bank from hiking rates until after an agreement on the expansion of the Oyu Tolgoi mine has been
Table: Monetary Policy..18
Exchange Rate Policy . 19
MNT: OT Deal By End-2014 To Help Stabilise Togrog.19
We forecast the Mongolian Togrog to remain on a depreciatory path for the rest of 2014, weighed down by the uncertainty surrounding
the expansion of the Oyu Tolgoi (OT) mine, which we expect will only be resolved at the end of 2014. Beyond a mild appreciation
in 2015, on the back of brighter growth prospects with the OT deal in place, we expect the unit to only record stronger gains after
parliamentary elections take place in 2016.
Table: Currency Forecast.20
Table: Current Account.20
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 2023 (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 25
SWOT Analysis... 25
BMI Business Environment Risk Ratings 25
Chapter 5: BMI Global Assumptions. 27
Global Outlook.... 27
US Revision Drags Down Forecast.27
Table: Global Assumptions27
Table: Developed States, Real GDP GrowtH, %..28
Table: Emerging Markets, Real GDP Growth, %.29

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