Mongolian Economic Outlook

TUVSHINTUGS Batdelger

Economic Research Institute, November 2012

Economic Overview: Growing, but volatile

• Average Growth Rate between 1997-2011 of 6.3%

• Nominal GDP per capita has increased 6 fold between 1997-2011

503

3056

17.3

-5

0

5

10

15

20

0

1000

2000

3000

GDP per capita and growth (1997-2011)

GDP per capita (current US$) GDP growth (annual %)

Source: World Development Indicators, World Bank

MONGOLIA: country profile

Population: 2 811 600

Labor force: 1 124 700

Area (km2): 1 564 115

Neighborcountries:

China and Russia

HDI 0.653 (110th)

Source:Yearbook 2011. NSO, Mongolia

2

Economic Overview: Growing, but volatile

� Economy almost quadruples by 2020 with average growth of 14.8%.

� Mongolia will be the fastest growing economy in the world between 2010-

2030 with average growth rate 9.7% (Citigroup Global Markets, 2011)

Source: SES, NUM and BAEconomics Pty, 2011

8.6

1.1

2.5

0.0

2.0

4.0

6.0

8.0

Nominal and real GDP (bln US$, 1997-2011)

GDP (current US$) GDP (constant 2000 US$)

Source: World Development Indicators, World Bank

16.4

31.8

35.2

0

10000

20000

30000

40000

GDP with 7.2% growth GDP BASE PRICES

GDP OPTIMISTIC PRICES

3

Contributors to GDP: mining as a main driver

� Economy is highly reliant on the mining sector

� In the Future (copper $5,300; gold $965/oz; coking coal $ 54): Mining

sector will be even more dominant (29% as of 2040) and Agriculture

not so much (16% as of 2040)

� Policies remain the same

Source: SES, NUM and BAEconomics Pty, 2011

25%

12%

3%

7% 8%9%

22%

2%

29%

15%

2%4%

7%

13%

18%

1%

Mining Livestock andother agri

Manufacturing Transportation Construction Health, educ. anddefence

Other service Oil, gas andelectricity

2011 base 2020 base 2030 base 2040 base

4

Future major developments in the mining sector

Oyu Tolgoi: reaches 800,000 tonnes of copper

concentrate by 2020 and 28 tonnes of gold. Estimates

suggest, 25% of GDP in 2020 (price $5,300)

�Tavan Tolgoi: reaches 10 mln tonnes of coking coal by

2020 and 40 mln tonnes of thermal coal (~40 mln

tonnes, yesterday)

5

However, there are challenges:

Dutch Disease and Resource Curse

Many experiences of Dutch Disease and Resource Curse in

resource rich countries

Dutch Disease: RER appreciation combined with high labor cost

=> dominant Non-tradable and mining sectors; lower economic

growth potential; susceptible to high economic fluctuations

Resource Curse: Low quality of institutions and governance =>

Rising inequality, low economic growth, rampant corruption

These challenges are real for Mongolia!

Why?

6

Challenges for Mongolia : Institutional and

Governance Quality

Review of various surveys point to following major difficulties

in conducting business, negatively affecting country’s

competitiveness in general:

� Corruption: ranked 120 out of 183 (Transparency International,

2011)

� Index of Economic Freedom: ranked at 81 out of 179 (Heritage

foundation, 2012)

� Doing Business: ranked 86 out of 183 (World Bank, 2012)

� World Competitiveness Index: ranked 93 out of 144 (World

Economic Forum, 2012-2013)

7

Challenges for Mongolia : Institutional

Quality and Infrastructure

Major hurdles to conducting business in Mongolia:

-Inefficient government bureaucracy: Taxes, supervision and regulations

-Access to financing

-Government policy instability

-Law and contract enforcement

-Corruption

Infrastructure is another major hurdle for businesses:

� Bottlenecks at border

� Quality of roads and air transport infrastructure

Challenges for Mongolia :

Macroeconomic policies

Main purpose of macroeconomic policies: Stable and

sustainable growth

However, past Fiscal and Monetary policies have been pro-

cyclical:

— Exacerbates economic volatility and uncertainty

— Dutch disease effects are more prominent

— Increasing vulnerability from volatile commodity prices

— Limited policy room when needed: 2008/2009 crisis

9

Strongly Pro-cyclical Fiscal Policy

Average growth rate of nominal GDP is 22% while government revenue growth is 26% and expenditure growth is 25%

Fiscal Stability Law was ratified in 2010. Fully operational from 2013

There are risks: Development bank was established to finance big infrastructure and industrial projects – $1.5 bln. government bonds for 2013 being discussed. Off-budget?

Source:Yearbook 1998-2011, NSO Mongolia

-20%

0%

20%

40%

60%

80%

1997 1999 2001 2003 2005 2007 2009 2011

GDP and Fiscal nominal change (%)

GDP nominal growth Government revenue growth Government expenditure growth

10

Economic vulnerability

11

� 08/09 crisis clearly showed the country is extremely vulnerable to TOT shocks (25% decrease)

� Transmission: Export prices decrease => Drop in currency inflow into the economy => Pressure on Togrog to devaluate and Stagnant government revenue

� TOT shocks exacerbated by Pro-cyclical monetary and fiscal policies: i.e. when gov’t revenue is tight, expenditure is even tighter, leads to worsening economic downturn

What is Economic Outlook ?

Unless Institutional and economic policy challenges are

addressed:

� High Economic growth

� Rising Inequality

� Dominant Non-tradable and Mining sectors

� Volatile economy with many uncertainties

12

Thank you for your attention!