Mongolia

Recent Economic Development and Outlook

November 2013

1

The economy maintained double digit growth buoyed by expansionary economic policies…

Figure 1. Economic growth maintained

double digits.

Figure 2. … driven by strong non-mineral

sector outputs.

Quarterly GDP Growth (%, year-on-year)

2013 Second Half Growth rates by Sectors (%)

Source: NSO Bulletin, World Bank staff estimates

-5

0

5

10

15

20

25

Q4

-08

Q1

-09

Q2

-09

Q3

-09

Q4

-09

Q1

-10

Q2

-10

Q3

-10

Q4

-10

Q1

-11

Q2

-11

Q3

-11

Q4

-11

Q1

-12

Q2-

12

Q3

-12

Q4

-12

Q1

-13

Q2

-13

2

The high growth came with large balance of payments imbalance as the current deficit remains large and the FDI declines…

Figure 3. The high economic growth came

with large current account deficit.

Figure 4. Foreign investment has been declining,

putting pressure on the balance of payments.

Economic Growth and Current Account Deficit to GDP

Ratio (%)

Current Account Deficit and the FDI trend (in $ million)

-2500

-2000

-1500

-1000

-500

00

500

1000

1500

2000

2500

Q1-1

0

Q2-1

0

Q3-1

0

Q4-1

0

Q1-1

1

Q2-1

1

Q3-1

1

Q4-1

1

Q1-1

2

Q2-1

2

Q3-1

2

Q4-1

2

Q1-1

3

Q2-1

3

Current Account Deficit (Right Axis)

Net FDI Inflow (Left Axis)

-35

-30

-25

-20

-15

-10

-5

0

5

10

-5

0

5

10

15

20

Current Account Deficit to GDP (%,

Right Axis)

Real GDP Growth (%, Left Axis)

3

The large balance of payments pressures are reflected in international reserves and exchange rate.

Figure 5. The balance of payments pressure

is reflected in foreign exchange market.

Figure 6. The share of foreigner’s short-term

investment is low in Mongolia’s capital market.

International Reserve Level and Exchange Rate

Outstanding Foreign Investment Position (June 2013, $ million)

1100

1200

1300

1400

1500

1600

1700

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Jan-1

1

Mar

-11

May

-11

Jul-11

Sep-1

1

Nov-

11

Jan-1

2

Mar

-12

May

-12

Jul-12

Sep-1

2

Nov-

12

Jan-1

3

Mar

-13

May

-13

Jul-13

Sep-1

3

Gross Internatinal Reserve

(millions USD, Left Axis)

Exchange Rate (MNT/USD,

Right Axis)

15,015

2,674

261

3,839

203 497 Foreign direct

investment in

MongoliaPortfolio

investment

Trade credits

Loans

Currency and

deposits

4

Amidst the high growth and continuous loose economic policies, inflation has been rising in recent months

Figure 7. Inflation rose in recent months.

Figure 8. Food price inflation is also rising.

Consumer Price Inflation (%, year-on-year)

Price Changes in Major Non-meat Food Items (%, year-on-

year)

Source: NSO Bulletin, World Bank staff estimates

-5%

0%

5%

10%

15%

20%

25%

30%

35%Bread and Cereals

Milk, Cheese and Eggs

Vegetables

Non-alchoholic Beverages

5

Fiscal policy remains expansionary, boosting economic growth and import demand.

Figure 9. Off-budget spending has been

increasing

Figure 10. Overall budget deficit will reach

12% of GDP

On-budget and Off-budget expenditures

Overall Budget Balance to GDP (%)

6

0

1

2

3

4

5

6

7

8

9

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e

DBM Spending (billions of MNT)

On-budget spending (billions of MNT)

Budget Revenue (billions of MNT)

Public debt is on the rise.

Figure 11. Public debt to GDP ratio jumped

in 2012

Public Debt to GDP Ratio (%)

0

10

20

30

40

50

60

70

2009 2010 2011 2012

Domestic debt (% to GDP)

External debt (% to GDP)

Public Debt (% to GDP)

Figure 12. Commercial external loans rose in

2012 due to the issuance of Chinggis Bonds

Public Debt Composition (in billions of MNT)

Composition of External

Public Debt

Composition of

Total Public Debt

7

The composition of public debt has changed as well.

Figure 13. Commercial external loans accounted for 1/3 of total public debt in 2012.

Percentage Share of Public Debt in 2011 Percentage Share of Public Debt in 2012

8

As monetary policy turned expansionary in 2013 as well, bank’s loan has been increasing fast.

Figure 14. The BoM has been providing

commercial banks with policy loans…

Figure 15. Domestic credit has been

accelerating fast.

Bank Loans to Private Sector and Central Bank Loans to

Banks

Domestic Credit Growth ( in percent, year-on-year)

0

500

1000

1500

2000

2500

3000

3500

0

20

40

60

80

100

120

Mar

-10

Jun-1

0

Sep-1

0

Dec-

10

Mar

-11

Jun-1

1

Sep-1

1

Dec-

11

Mar

-12

Jun-1

2

Sep-1

2

Dec-

12

Mar

-13

Jun-1

3

Sep-1

3

Central Bank Loans to Banks (in MNT bn, RightAxis)

Reserve Money Growth (yoy, %, Left Axis)

-10

0

10

20

30

40

50

60

70

80

90

Q1-2

009

Q2-2

009

Q3-2

009

Q4-2

009

Q1-2

010

Q2-2

010

Q3-2

010

Q4-2

010

Q1-2

011

Q2-2

011

Q3-2

011

Q4-2

011

Q1-2

012

Q2-2

012

Q3-2

012

Q4-2

012

Q1-2

013

Q2-2

013

Q3-2

013

Indonesia Philippines

Vietnam Mongolia

Malaysia

9

And the growth of banks loans are more concentrated on construction.

Figure 16. Loans to all sectors increased,

especially to construction sector.

Figure 17. The NPL ratio rose in recent

months.

Bank Loan Growth by Sectors (%, quarter-on-

quarter)

Bank’s Non Performing Loans Ratio (%)

Source: NSO Bulletin, World Bank staff estimates

-30

-20

-10

0

10

20

30

40

50

60

70

80

2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2

Agriculture

Construction

Mining

Manufacturing

Wholesale

0

2

4

6

8

10

12

14

16

18

20

22

24

Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13

NPLs: Aggregate

NPLS: Private sector

NPLs: Individuals

Principal in arrears: Aggregate

10

Economic policies have been highly expansionary compared with other countries in East Asia…

Figure 18. Economic policies are highly expansionary compared with other developing countries

in East Asia.

Fiscal Deficits in percent to GDP

Domestic Credit Growth (year-on-year, %)

Source: NSO Bulletin, World Bank staff estimates

-14

-12

-10

-8

-6

-4

-2

0

2

4

Mongolia Indonesia Vietnam Myanmar Lao PDR PapuaNew

Guinea

2011 2012 2013f

0

10

20

30

40

50

60

70

80

Mongolia Indonesia Vietnam Myanmar Lao PDR Papua New

Guinea

2011 2012 2013f

11

… and the economy became more vulnerable despite the higher growth.

Figure 19. Key economic indicators: Developing Countries in the East Asia region.

Real GDP Growth (%)

Current Account Deficit (% to GDP)

Inflation Rate (%)

FDI Inflow (in percent to GDP)

Source: NSO Bulletin, World Bank staff estimates

0

2

4

6

8

10

12

14

16

18

20

Mongolia Indonesia Vietnam Myanmar Lao PDR Papua New

Guinea

2011 2012 2013f

-35

-30

-25

-20

-15

-10

-5

0

5

10

Mongolia Indonesia Vietnam Myanmar Lao PDR Papua

New

Guinea

2011 2012 2013f

0

2

4

6

8

10

12

14

16

18

20

Mongolia Indonesia Vietnam Myanmar Lao PDR Papua

New

Guinea

2011 2012 2013f

0

10

20

30

40

50

60

70

Mongolia Indonesia Vietnam Myanmar Lao PDR Papua

New

Guinea

2011 2012 2013f

12

Economic policies need to be tightened further toward economic stability

The current economic policies are not sustainable given the large balance of

payments pressures and rising inflation.

Economic policies should be further tightened to address the growing balance of

payments pressure and economic vulnerability.

1. Fiscal policy should be tightened further. Spending of the DBM and the

Chinggis bond proceeds should be included in the fiscal tightening.

2. Monetary policy also should be tightened. The rapid growth of credit needs to

be curbed and policy lending programs should be phased out.

3. More focus is needed on how to spend well. Budget spending programs

should be prioritized based on broad national development strategy.

4. Banking supervision should be strengthened in light of rapid growth in bank

loans and the recent failure of Savings Bank.

13