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ASIAN DEVELOPMENT
OUTLOOK 2015 FINANCING ASIA’S FUTURE GROWTH
ASIAN DEVELOPMENT BANK
Mongolia
Economic growth decelerated in 2014 reflecting a drop in foreign direct investment. Inflation
required monetary tightening, but the current account deficit moderated. Fiscal deficits remained
high, and international reserves continued to shrink. Growth is forecast sharply lower in 2015
and 2016, with lower inflation but current account deficits persisting or widening. A major policy
challenge is to implement prudent macroeconomic management that retains sufficient scope for
productive investment and social protection.
Economic performance
Despite a substantial increase in mining output, GDP growth slowed
to 7.8% in 2014 from 11.6% in 2013. Foreign direct investment (FDI)
continued to fall, and the sizeable monetary stimulus that kept growth
high in the previous year became increasingly difficult to maintain in
light of pressures from inflation and the balance of payments (BOP).
As value added in mining increased by 24.2%, reflecting the
3.12.1 Supply-side contributions to growth
Agriculture
Mining
Other industry
Services
Gross domestic product
Percentage points
first full year of production at the vast Oyu Tolgoi copper and gold
mine, industrial production expanded by 16.1% and contributed 4.8
percentage points to GDP growth (Figure 3.12.1). This came despite
a 16.3% drop in coal production. Agriculture remained a driver of
20
15
10 6.4
5
0
17.3
12.3 11.6
7.8
growth, rising by 14.4% with favorable weather. Growth in services
slowed to 4.8%, however, as plunging mine investment took its toll.
Agriculture and services each contributed 1.5 percentage points to GDP
growth, while the contribution from industry other than mining was
negligible.
FDI dropped by 80.7% following the completion of the first phase
of Oyu Tolgoi and reflecting uncertainty over the economic viability
of projects in light of lower commodity prices, as well as over the
broader investment climate. Gross capital formation contracted by
33.5%, dragging GDP growth down by 18.4 percentage points. Domestic
consumption increased by 8.6% and contributed 6.0 percentage points
to GDP growth, with private consumption accounting for nearly all
of the increase. As exports grew by 51.4% in real terms and imports
by only 4.9%, the trade deficit shrank by 82.7% and the contribution
of net exports to GDP growth expanded to 20.3 percentage points.
Oyu Tolgoi’s contribution to GDP growth thus continued to shift from
investment to net exports (Figure 3.12.2).
The current account deficit narrowed significantly to 8.2% of
GDP from 25.4% in 2013 as the trade deficit crossed into surplus.
Merchandise exports grew by 35.3% as higher exports of copper
−5
2010 2011 2012 2013 2014
Source: National Statistics Office of Mongolia. 2015.
Monthly Statistical Bulletin. January. http://www.nso.mn
3.12.2 Demand-side contributions to growth
Private consumption
Government consumption
Total investments Net exports
Gross domestic product
Percentage points
45
30
15
0
−15
−30
concentrates more than compensated for a decline in other exports.
Merchandise imports fell by 14.4%, largely reflecting a sharp drop in
2010 2011 2012 2013 2014
Source: National Statistics Office of Mongolia. 2015.
Monthly Statistical Bulletin. January. http://www.nso.mn
This chapter was written by Mark Bezemer and Amar Lkhagvasuren of the Mongolia
Resident Mission, ADB, Ulaanbaatar.
Economic trends and prospects in developing Asia: East Asia Mongolia 159
investment-related material and equipment, as well as lower fuel prices.
The services deficit stabilized at $1.3 billion, equal to 11.2% of GDP.
Declining capital inflows generated a BOP deficit equal to 3.9% of GDP
despite nearly $700 million in government-guaranteed borrowing by
the Development Bank of Mongolia (Figure 3.12.3).
Gross international reserves fell to $1.6 billion—cover for 2.9 months
of imports—from $4.1 billion in 2012, and are increasingly financed
by short-term foreign liabilities, including a 3-year currency swap
arrangement with the central bank of the People’s Republic of China
(PRC) (Figure 3.12.4). Raising the currency swap ceiling in August 2014
to CNY15 billion (equal to 20% of GDP) provided a liquidity buffer, but
withdrawals will eventually need to be repaid or renewed. Public and
publicly guaranteed external debt including the foreign liabilities of the
Bank of Mongolia, the central bank, stood at 57.3% of GDP at year-end,
having more than doubled in 4 years and now approaching the $1.5
billion raised through the US dollar-denominated sovereign Chinggis
bond. As capital inflows ebbed, the Mongolian togrog depreciated by
13.8% against the US dollar, having already depreciated by 19.2% in
2013. Meanwhile, ruble depreciation caused the togrog to appreciate in
nominal effective terms by 2.3%, and by 11.0% in real terms because of
comparatively high inflation in Mongolia.
The government continued its highly procyclical fiscal policy in
2014, largely by channeling substantial expenditures off-budget through
the Development Bank of Mongolia and financing them with the
proceeds of the Chinggis bond and government-guaranteed external
borrowing. The consolidated fiscal deficit, which includes off-budget
spending, rose to 11.5% of GDP from 9.8% in 2013. Excluding off-budget
spending, the cash deficit expanded to 4.1% of GDP from 0.9% in 2013,
3.12.3 External indicators
Net goods Net services
Net income Net transfers
Current account balance Foreign direct investments
% of GDP
60
40
20
0
−20
−40
2010 2011 2012 2013 2014
Sources: National Statistical Office. http://www.nso.mn;
Bank of Mongolia. http://www.mongolbank.mn
3.12.4 Gross international reserves and
foreign liabilities
Gross international reserves Central bank foreign liabilities
$ billion
5
4
3
2
1
0
and the structural deficit reached 3.7%, breaching the 2% ceiling under
the Fiscal Stability Law (FSL) (Figure 3.12.5). Budgetary expenditure
remained constant at 32.2% of GDP. However, revenue fell to 28.1% of
GDP from 31.3% in 2013 as receipts increased by only 2.6%, falling short
of the highly optimistic budget partly because of falling commodity
prices. On the positive side, the Glass Account Law will improve the
transparency of procurement, budgets, and finances of government
agencies and legal entities with state involvement.
The ratio of public debt to GDP rose in net present value terms to
54.7% in 2014 (breaching the 40% ceiling of the FSL) and to 77.4% in
nominal terms including the central bank’s foreign liabilities. Interest
payments reached 7.1% of government expenditures in 2014 (Figure 3.12.6).
Debt sustainability is further affected by the rising share of commercial
borrowing since 2012 and the uncertain economic returns of some public
investment projects.
Expansionary monetary and fiscal policies and currency
depreciation drove consumer price inflation to a peak in July 2014 of
14.9% year on year. Facing inflationary and BOP pressures, the central
bank raised the policy rate from 10.5% to 12.0% in July 2014 and 13.0%
in January 2015. Despite starting corporate lending worth 1.6% of GDP,
the central bank’s total quasi-fiscal loans—mainly for housing and
construction at subsidized rates—were reduced to 18.7% of GDP from
23.7% in 2013. Growth in domestic lending slowed markedly to 16.1%,
Jan Jan Jan Jan Jan Jan 2010 2011 2012 2013 2014 2015
Source: Bank of Mongolia. http://www.mongolbank.mn (accessed 14 March 2015).
3.12.5 Fiscal indicators
Budget balance
Development Bank of Mongolia spending
Primary balance
Structural balance
% of GDP
5
0
−5
−10
−15
2012 2013 2014 2015
Budget estimate
Sources: Ministry of Finance; National Statistical Office. 2015. Monthly Statistical Bulletin. www.nso.mn
160 Asian Development Outlook 2015
holding broad money growth to 12.5%. Inflation moderated to 11.0% in
December, having averaged 12.8% for the year (Figure 3.12.7).
The quality of bank assets is under pressure in light of their rapid
expansion in recent years and slowing economic growth. While
3.12.6 Public debt indicators
Public debt Interest payments
% of budget
commercial banks’ stock of nonperforming loans grew by 48.5%, the
ratio of such loans rose only slightly to 3.1% of all loans outstanding.
However, loan growth is slowing rapidly, and the stock of loans past
due—a leading indicator—more than doubled by the end of 2014 to
2.2% of all loans. Moreover, sizeable policy loan programs point
to supervisory forbearance and increased exposure to the cyclical
construction and housing sector. Banks need bolstering by closer
% of GDP
100
80
60
40
20
0
expenditure
20
15
10
5
0
monitoring of asset quality and liquidity buffers, stronger supervision
of risk, the adoption of international capital standards, improved
corporate governance, and forward-looking provisioning. Some positive
steps from January 2015—introducing a 1% provisioning ratio for new
loans and imposing higher risk weights on new foreign currency loans
to unhedged borrowers—should perhaps be gradually extended to
existing loans.
Economic prospects
Despite robust growth expected in agriculture and expanded extraction
at Oyu Tolgoi, albeit less than in 2014, GDP growth is forecast to slow
to 3.0% in 2015 as falling prices for exports are felt and as monetary and
fiscal policy are tightened to contain inflationary and BOP pressures.
Industrial production will grow more slowly than in 2014 as a credit
squeeze affects construction and real estate, and as lower export
prices pressure mine operators. Services are projected to grow only
marginally as other economic activity slows. Assuming a stable external
environment and the resumption of major investment in mining in
2015, economic growth should recover to 5.0% in 2016 even with the
continuation of restrictive fiscal and monetary policies (Figure 3.12.8).
Consumer price inflation will moderate to an average of 8.9%
in 2015 and 7.7% in 2016, reflecting slower growth and fiscal and
monetary tightening (Figure 3.12.9). The forecast assumes that the central bank will prioritize its target of 7.0% year on year for consumer
2010 2011 2012 2013 2014
Sources: Ministry of Finance. http://www.mof.gov.mn; Bank of Mongolia. http://www.mongolbank.mn
3.12.1 Selected economic indicators
(%)
2015 2016
GDP growth 3.0 5.0
Inflation 8.9 7.7
Current account balance -8.0 -15.0
(share of GDP) Source: ADB estimates.
3.12.7 Policy rate, credit growth, and prices
Inflation
Policy rate Credit growth
% %, year on year
15 100
price inflation and achieve it by the end of December 2016. Gross
international reserves are likely to remain under pressure in 2015 as
FDI inflows stay weak and the current account deficit large. The deficit
is forecast to be stable at 8.0% of GDP in 2015 as higher export volume
is balanced by falling prices. When large new mining investments start
to push up imports in 2016, the current account deficit may almost
double to 15.0% of GDP.
12
9
6
3
0
Jan 2011
80
60
40
20
0
Mar 2015
The main risks to the outlook stem from the economy’s
vulnerability to external shocks. If slowdown exceeds expectations in
the PRC—the destination of over 87% of Mongolia’s exports—or if prices
for exports decline further, the BOP, fiscal balance, and growth could
all suffer. The forecast is sensitive to the timing of large FDI projects,
such as underground expansion at Oyu Tolgoi or further development
of the Tavan Tolgoi coal deposits. The possibility of these projects
not going ahead in 2015 constitutes a significant risk to the outlook
Source: Bank of Mongolia. http://www.mongolbank.mn
(accessed 14 March 2015).
Jan Jan Jan
2012 2013 2014
Economic trends and prospects in developing Asia: East Asia Mongolia 161
for 2016. Another major factor is the ability of the government and the
central bank to achieve deficit reduction and keep inflation under
control. The government faces a difficult challenge to prepare and
implement realistic budget that respect FSL ceilings on debt and the
deficit, and the central bank may face pressure to expand its quasi-fiscal
lending—in particular to provide direct credit to corporations—or lower
its policy rates.
Policy challenge—strengthening debt management
In the long run, Mongolia needs to diversify its economy and better
insulate itself from the vagaries of volatile price swings and large-
scale FDI. However, the government’s immediate policy challenge is to
tighten monetary and fiscal policy to address pressure on the BOP,
while safeguarding financial sector stability, debt sustainability—and the
welfare of the population, especially the poor.
Some recent fiscal reforms are steps in the right direction.
Development Bank of Mongolia expenditures that were previously
off-budget are now partly within structural deficit calculations. Further,
the authorities revised the FSL structural deficit and debt ceilings to
bring them in line with reality, and will gradually lower them to more
prudent levels by 2018.
On the other hand, public debt has been redefined to exclude a
number of items as a means to create fiscal leeway without adjusting the
ceilings. Such measures weaken debt management and shift the debate
on debt sustainability to a myopic focus on raising debt and deficit
ceilings or the numeric value of the ratio of debt to GDP. This is
unconstructive as more important issues are debt sustainability with full
appreciation of the nature of different debt instruments as well as
productive use of borrowed funds to ensure their contribution to
repayment. In addition, preparations are urgently required toward
refinancing or repaying in 2017 and 2018 the $580 million eurobond of
the Development Bank of Mongolia, credit withdrawn from the currency
swap facility with the central bank of the PRC, and the $500 million first
tranche of the Chinggis bond.
In light of large consolidated deficits, rising debt and interest
payments, and anticipated depressed commodity prices, these issues
require open and informed discussion toward designing an effective
strategy to manage debt.
3.12.8 GDP growth
%
20
15
10
5
0
2010 2011 2012 2013 2014 2015 2016
Forecast
Source: Asian Development Outlook database.
3.12.9 Inflation
%
15
12
9
6
3
0
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