ezt-toim-12-2010-last-english.pdf Англи

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ECONOMIC REVIEW /December 2010/ NDIC 1

1. EXECUTIVE SUMMARY

Current macroeconomic indicators

Main activities occurred in social and economic sectors of Mongolia during 2010

Business-enabling environment reform year

Government of Mongolia, by Resolution No. 377 dated December 30th

of 2010, has

declared year 2010 as the “Business-enabling environment reform year” with the purpose of

supporting activities of business owners, lowering state participation in business activities to an

appropriate level and providing favorable legal and regulatory conditions.

In this regard, 101 licenses and approvals were cancelled and decision was made to

transfer authority to grant 10 licenses to professional non-governmental organizations on

contract basis. By doing so, Government of Mongolia has dissolved 35 percent of 337 licenses

for conducting business activities which is more than one third of total number. For instance,

signatures of 118 officials were needed to construct one building before, but it was cut down to

56. It reduced around 480 days an enterprise spent to collect the signatures to 180 days.

12.2009 12.2010

GDP growth (percentage) -1.3 6.1

Industrial sector growth (percentage) -3.2 10.0

Budget deficit (MNT billion) -342.6 3.5

Unemployment (thousand people) 38.0 38.2

Inflation (percentage) 4.2 13

Foreign trade turnover (USD million) 4023.1 6177.1

Foreign trade balance (USD million) -252.3 -378.7

MONGOLIAN ECONOMIC REVIEW

DECEMBER 2010

Үнäэсний хөãжил, шинэтãэлийн хороо




Thus, in response to the government policy to annul some licenses to conduct business

activities, a draft law on amending „law on licenses for business activities‟ along with related 20

or so draft laws were discussed and submitted to the State Great Khural for approval.

Development Bank

Development Bank of Mongolia was established by the Government and its article of

association was adopted. The Bank ‟s main responsibility is to provide financial service in the

strategically important sectors. The Bank shall provide medium to long-term financing to the

selected sectors, shall extend its cooperation with the international development banks and

organizations and utilize domestic and foreign capital into the economic circulation. By investing

in large projects to be implemented by the government of Mongolia through Development Bank,

every MNT 100 billion could contribute 1 percent of growth for the economy.

A draft law on Development Bank was discussed at the cabinet meeting of Mongolian

government and it was decided to submit the draft to the parliament upon reflecting changes

based on suggestions from the cabinet members. Government of Mongolia will provide loan

guarantee on behalf of the Development Bank and the Bank will directly finance beneficial

projects.

Infrastructure and heavy industrial factories that are to be established with investment

from the Development Bank will play important part to intensify the development of the nation,

to improve processing industrial sector, to substitute import products, to refine structure of gross

domestic products, and to increase diversification of the economy. The Development Bank,

hundred percent state-owned entity, will form its capital with allocation from state budget as well

as from certain amount of government stakes in legal entities holding mining licenses on

strategically important mineral deposits.

UN applauded National report

Mongolia has prepared National report of Mongolia on situation of human rights and UN

Human Rights Council on November 2-4th

, 2010 discussed and confirmed the report. United

Nations considered that the report covers all the necessary information and that difficulties

Mongolia are facing in protecting human rights were all covered. They also applauded that close

collaboration with civil society organizations and non-governmental organizations was utilized

when preparing the report. The announcement of the moratorium of death penalty in Mongolia

was also welcomed.

Erdenes-Tavantolgoi share-holding company was established.

It was established as a subsidiary company of “Erdenes MGL” company and financing

needed to form registered capital is to be funded from the capital of Erdenes MGL LLC. Step-

by-step actions are planned to be implemented after the establishment to give 10 percent of the




company‟s stakes to Mongolian citizens, to sell another 10 percent to the national enterprises at a

nominal price and to sell up to 30 percent of stakes in an initial public offering through national

and international stock exchanges. 50 percent of all stakes are to be retained by the government.

Civil registration and Human Development Fund

Revised civil registration covered 1.151.236 /one million one hundred fifty one thousand

two hundred and thirty six/ citizens that account for 61 percent of total population.First phase of motherland allowance or share was organized to distribute MNT 70000

from February 1st, 2010 and to handout remaining MNT 50000 from August 1

st, 2010. Progress

of allocating motherland allowance and share from the Human Development Fund is currently at

94.6 percent.

Arrangement was made to allow students to pay their tuition with Human Development

Fund allowance. University and college students are responsible for their tuition between

September to December, 2010 during 2010-2011 school year, but starting from the first quarter

of 2011, remaining tuition amount is arranged to be deducted from Human Development Fund.

Positive outcome emerged from cooperation with IMF

Government of Mongolia has implemented International Monetary Fund‟s “Stand-by”

program since April 2009 to stabilize the economy. During the period of cooperation between

the Government of Mongolia and IMF, not only did fiscal and financial situation get stable, but

budget deficit also got reduced and balance of payments was improved. Concrete outcomes were

achieved through actions executed by the Government of Mongolia within the framework of

“stand-by” program such as increase of foreign currency reserves, deceleration of rise of

inflation and stabilization of economic situation.

10 million livestock loss due to dzud and outbreak of highly infectious livestock diseases

Weather in winter and spring of 2010 severely worsened and 90 percent of the territorywas covered under snow. Around 10 million heads of livestock was lost due to temperaturegoing down to -40 Celsius, as a result, damages worth tens of thousands of billion MNToccurred. Around 1800 herder families lost all their livestock and carrion of livestock wascleaned up and destroyed. Aid worth MNT 75 billion was given by the state.

Within the framework of actions to prevent foot and mouth disease occurred during Apriland May of 2010, 1.6 million heads of livestock were vaccinated including all cows in Dornodand Sukhbaatar aimags, cows in two bordering soums of Khentii aimag and all large and small

cattle in soums of Dornogovi and Umnugovi aimags bordering Chinese territory. Due to the wideand quick spread of highly infectious foot and mouth diseases in Dornod and Sukhbaatar aimags,local administrative units, enterprises and citizens were announced with highly-preparedsituation alert and quarantine was set.

“Newcastle”, a contagious avian disease, broke out in territory of 13 th khoroo, Tuul

county at Khan-Uul district of the capital city. Thanks to government of Mongolia ‟s prompt




order of MNT 125 million for actions to be taken to arrest the spread of disease, outspread was

stopped without wide epidemic.

Population and housing census was organized

National census of population and housing was organized throughout the country

between 11-17th of November, 2010. The census covered Mongolian citizens living in Mongolia,

professionals and their families working in diplomatic missions in foreign countries andinternational organizations, citizens working and studying abroad for more than 6 months,

foreign citizens residing in Mongolia for long term and stateless people. A total number of

714,784 families and 2,650,673 people filled out the questionnaire forms during the census.

Filled-out questionnaire and internet survey answers will be combined and preliminary report

including the number of registered families, population, their age, sex and housing condition will

be ready in February of 2011. Final report is scheduled to be submitted to National commission

on census within July of 2011.

Atar III campaign was successfully implemented and food campaign started

Within the framework of “Atar III campaign” 2010 /cultivation campaign/ initiated by

Mr. Bayar, former Prime minister of Mongolia, a total of 355.1 thousand tonnes of grain, of

which 345.5 tonnes of wheat, 168 thousand tonnes of potato, 90.3 thousand tonnes of vegetable,

4.3 thousand tonnes of barley, 4.3 thousand tonnes of oat and 32.3 thousand tonnes of fodder

plants were harvested. Therefore, it became possible to provide 100 percent of domestic demand

of wheat and potato and 60 percent of vegetable with domestic supply.

Government of Mongolia has decided to continue the „Atar III campaign‟ as food

campaign to couple intensified livestock breeding with farming in order to ensure supply, quality

and safety of food products.

Issue of great debt was completely solved

During the official visit to Russia by Prime Minister of Mongolia, Mr. S.Batbold, parties

agreed to discount 97.8 percent of remaining great debt amount of USD 172 million and to make

payment once worth USD 3.8 million to Russia. Moreover, parties decided to establish joint

“Dornod-Uran” company of which Mongolian side would own 51 percent share.




2. ECONOMIC GROWTH

REAL ECONOMIC GROWTH

Gross domestic product

In 2010, real GDP increased 7.6 percent in the first quarter and 3.4 percent in the secondquarter; however, the growth rate accelerated to reach 8.4 percent in the third quarter.

Preliminary estimate of GDP growth last year was 6.1 percent year on year basis reaching MNT

4154.0 billion. GDP in real terms was positively affected by the increase of 6.3 percent growth

of mining and extractive industrial sector, 11.3 percent growth of processing industrial sector,

15.6 percent growth of construction sector and 23.4 percent growth of wholesale and retail trade.

However, due to the wintering, climate hardship and its severity, unnatural loss of livestock

increased which resulted in 16.8 percent contraction of agriculture sector.

Graph 1. Share of sectors providing real GDP growth /percentage/

Agricultural sector

As a result of high degree of unnatural loss of big cattle, supplies of livestock products

such as meat, milk, wool and cashmere decreased. Especially, high level of unnatural loss of

goats has led to sharp drop in supply of cashmere which is the main product of cattle-breeding

sector. State Great Khural of Mongolia had approved and begun implementing “National

Mongolian Livestock Program” in order to protect livestock from natural hazard and to improve

livelihood of herders. It necessitates further needs to organize implementation of this program

and to promptly take actions to re-stock herders. Moreover, it is important to organize transfer of

herder families who lost their livestock completely to different sectors in which demand and

need of workforce are strong.




In terms of farming sector, Atar-III national campaign, “Cultivation campaign”, was

organized. Within the framework of the program, a total area of 312.2 thousand hectares was

cultivated in 2010 and as a result, 355.1 thousand tonnes of grain, 168 thousand tonnes of potato,

and 82.3 thousand tonnes of vegetable were harvested. It supplied 100 percent of domestic

demand of wheat and potato and 60 percent of domestic vegetable demand. Total cultivated area

in 2010 is an increase of 11.4 percent compared to last year and cyclic cultivation territory

reached 584 thousand hectares in total with the addition of 255.3 thousand hectares of land from

fallow land as well as rested land.

Government of Mongolia has decided to implement “Khalkh river” project in the eastern

region in order to further intensify development of farming sector. It is the first step to develop

cattle-breeding sector and farming sector in the eastern region as independent, environmentally-

friendly and export-oriented animal husbandry and farming sector. Furthermore, the project will

ensure food security in the region and supply ecologically pure products to the world market.

Moreover, a draft of “Law on exchange market for agricultural products and raw

materials” is formulated with the purpose of utilizing agriculture-based products into economiccycle, implementing standards for preparing, transporting, and storing raw materials and

providing pre-condition for manufacturers to be supplied regularly with seasonal raw materials.

Industrial and construction sector

Industrial sector saw strong growth in 2010 and preliminary estimates of 2010 stated that

surplus value of the sector has reached MNT 1196.5 billion year on year which is a 7.7 percent

increase from last year. Coal exploration, in 2010, has increased 91.8 percent, petroleum

exploration increased 16.7 percent and iron ore production also increased 2.3 times. As a result,

value of mining sector reached MNT 756.4 billion increasing by 6.3 percent compared to 2009.

Exploration capacity of newly-established Ovoot Tolgoi, Ukhaa Khudag, and Khushuut coal

mines expanded and coal production is increasing. Also, capacity of iron ore mines such as

Tumurtei, Bayangol, Tayannuur, Kharangat, Elstei and Tumurtolgoi enlarged as well.

Exploration of petroleum reached 2.2 million barrels in 2010 due to the intensification of

petroleum mining works in Tamsag and Dornogovi basins.

Surplus values produced in processing industrial sector increased by 11.3 percent year on

year, reaching MNT 260.7 billion. Food production enlarged the most and production of grain,

flour, milk and dairy products increased as well.

Surplus value of construction sector reached MNT 59.8 billion due to the 15.6 percentrise from year 2009. 25.6 percent increase or MNT 71.4 billion in construction assembly and

overhaul maintenance and 30.3 percent rise or MNT 75.9 billion increase in domestic

companies‟ perfor med work largely affected above-mentioned positive impacts.




Services sector

Surplus value of services sector reached MNT 1687.4 billion year on year which was an

increase of 4.6 percent compared to the same time last year. Although wholesale and retail trade

sector saw deficit in 2009, it regained its growth in 2010 and surplus value went up by 23.4

percent. Boost of surplus value in this sector was largely due to the 62.4 percent increase of turnover in wholesale and retail trade sector from last year, 53.3 percent increase in imported

product amount and 34.4 percent increase of enterprises conducting activities in this sector which

reaching 5058.

Increased frequency of mining exploration activities and start of construction and

development works of Oyutolgoi project resulted in increase of transported freight for import

which in turn affected surplus value of transportation sector to increase by 9.1 percent. Overall

transported freight amount reached 29.4 million tonnes in 2010 which is 18.7 percent increase

from last year‟s amount.

Value-added tax income increased by 77.1 percent, excise tax income went up by 61

percent and foreign trade tax income increased by 66.7 percent. These affected taxation income

to be 54.2 percent higher than last year at current year price.

Conclusion

Economy of the nation had diminished by 1.3 percent in 2009 due to financial and

economic difficulties, but economy started to regain its stability and recovery from the beginning

of 2010 and real GDP saw 6.1 percent growth. Processing industry and trade sectors experienced

the highest growth rates in 2010 recovering from previous year‟s deficit. Moreover, considerable

increase of taxation income also affected GDP growth positively. Further large planneddevelopment works in mining and infrastructure sectors are projected to bring economic growth

to high level in the medium term.

Product sales of industrial sector

Amount of industrial sector products sold reached MNT 4468.2 billion at current year

price as of 2010. Products worth MNT 3062.6 billion or 68.5 percent of total was traded in

foreign markets.

Share of mining and exploiting industry in total amount of sale reached 70.6 percent

which is an addition of 4.7 points compared to the same time last year. Likewise, share of

processing industry also increased to 21 percent due to high growth of mining sector, seeing

growth of 3.7 points while share of energy production for heating and electricity and water

supply sectors took up 8.4 percent which is 1 point drop from last year.




Graph 2. Sales pattern on industrial sector products / as of 2010, percentage/

It shows that the reason the share

of mining and exploiting industry

increased in sales pattern was because

coal and iron ore export had increased

sharply and market prices of mining

commodities had gone up in the worldmarket.

If we look at the breakdown of

industrial products exported to and sold in

the international markets, 100 percent of

mined petroleum products, 92.9 percent

of metal ore production, 89.4 percent of

coal production, 64.2 percent of knitting sector production, 47.1 percent of iron factory

production and 4.2 percent of food products were sold in foreign markets.

Workforce in industrial sector was 54289 as of December, 2010 which was after the

positive growth of 3.3 percent of 1715 workers compared to the same time of the previous year.

Labor productivity in industrial sector at current year price reached MNT 36.5 million.

That was an increase of MNT 1.9 million in 2010 or in other words, 5.5 percent growth. On the

other hand, labor productivity in mining and exploiting industry had increased by MNT 0.1

million or 0.2 percent while it had gone up by MNT 2.0 million or 8.3 percent in processing

industry and MNT 0.8 million or 5.5 percent in electricity, heating and energy production and

water supply sectors.

Future trend

Taking into consideration of preliminary estimate as of the end of 2010, industrial sector had

expanded compared to last year, but growth speed had decelerated during the last few months of

2010. It was due to the fact that stabilization of economy and increased production of industrial

sector occurred in the 4th

quarter of 2009. Production of industrial sector is estimated to

experience stable growth in 2011.

Following factors are projected to result in such growth:

Mining sector growth: Production of main mining commodities such as coal, petroleumand iron ore are projected to increase sharply.

Processing industry growth: Processing industry as a whole, specially food production,

construction material and iron production is forecast to grow.




Infrastructure and construction: Infrastructure construction and development works at

Oyutolgoi project and other large mining deposits are going to intensify and as a result, it

will drive up growth construction sector as well as demand for electricity and heating.

Although industrial sector had experienced growth in 2010, production of some main

commodities of mining sector declined. For instance, gold production decreased by 38.4 percent,

zinc concentrate production declined by 20.4 percent and it had negative impact on growth of

mining sector. Moreover, 34.2 percent decline of meat production and 48 percent decrease of

combed cashmere production negatively affected processing industry‟s growth.

Conclusion

In analyzing the data from the end of 2010, production growth in mining, exploiting

industry and processing industrial sectors affected total production of industrial sector to increase

by 10 percent compared to the previous year. Moreover, further forecasted increase of

production in the above sectors is projected to not only provide industrial sector growth, but also

to steadily improve overall economic growth.

Fiscal development and preliminary performance in 2010

Preliminary estimate suggested that total fiscal income of Mongolia in 2010 reached

MNT 3069.9 billion which was MNT 374 billion or 13.9 percent more than planned amount. It

was also MNT 1076.9 billion or 54 percent higher than the same time in 2009. Following factors

mainly affected in this growth.

Copper and gold prices in global market were relatively higher than expected amount

Taxation and Customs Authorities intensely organized actions to collect tax debts of

enterprises and accumulated income.

Total foreign trade turnover in 2010 was increased by 53.5 percent or USD 2154 million

compared to the previous year.

Within the assistance provided by the USA to countries in financial and economic crisis,

MNT 14.5 billion worth of monetary support was offered to Mongolia for financing

social welfare expenses. They all contributed to surplus of planned fiscal income.




Table 1. Fiscal income plan, performance

same time current year PERCENT DIFFER.

last year Plan Plan Performance (4 : 3) (4 - 3)

1 2 3 4 5 6

( MNT billion )

TOTAL AMOUN T OF INCOME AND GRANTS 1 993,0 2 695,9 2 695,9 3 069,9 113,9 374,0

CURRENT INCOME 1 965,5 2 668,3 2 668,3 3 027,3 113,5 359,0

TAXATION INCOME 1 615,3 2 321,4 2 321,4 2 673,6 115,2 352,2

Income tax 520,0 808,6 808,6 974,0 120,5 165,4

Income tax of business entities and organizations 205,4 309,3 309,3 390,6 126,3 81,3

Personal income tax 128,1 149,8 149,8 160,2 107,0 10,5

Price increase tax of some products 186,5 349,5 349,5 423,2 121,1 73,6

Social insurance premium, fee 257,3 280,8 280,8 321,7 114,5 40,8

Property tax 11,0 11,6 11,6 13,6 117,1 2,0

Domestic goods and services tax 508,7 764,3 764,3 863,5 113,0 99,2

Foreign trade income 116,0 165,3 165,3 193,3 117,0 28,1

Other taxes 202,3 290,8 290,8 307,5 105,8 16,7

NON-TAX REVENUE 350,3 346,9 346,9 353,7 102,0 6,8PROPERTY INCOME 3,0 5,6 5,6 8,0 142,7 2,4

ASSISTANCE INCOME 24,5 22,0 22,0 34,6 0,0 12,6

BUDGET

2010BUDGET INCOME

Preliminary budget performance estimate in 2010 found that national fiscal expenditure

amount reached MNT 3066.4 billion that was a cost cutting worth MNT 107.8 billion.

Fiscal and monetary policies were integrated with each other in order to stabilize and

expand the economy against financial and economic crisis. Loan amount worth MNT 30

billion was financed from the state budget to support small and medium enterprises while

subsidies worth MNT 12.6 billion for price differentiation was provided from the statebudget as well.

Human Development Fund financed MNT 305.1 billion for cash transfers to citizens and

MNT 10.9 billion for part of citizens‟ health insurance premiums for which the state is

responsible for. 94.5 percent or, in other words, MNT 489.9 billion of planned expenses

for social insurance fund were executed.

Moreover, MNT 80 billion worth of loan was provided from government bond sources

for implementing housing program for civil servants. Another MNT 10.2 billion worth of

loan was financed through „Farming support fund‟ to assist farmers. Subsidies equal to

MNT 12.3 billion and loan financing equal to MNT 7.1 billion were financed from

„Employment support fund‟ in order to increase employment and support small and

medium enterprises.

State budget contributed MNT 170.7 billion worth of subsidy to social insurance fund,




MNT 36.5 billion worth of subsidy to energy cost deficit and MNT 760 million to

political parties with a seat in the parliament.

Table 2. Fiscal expenditure plan, performance

same time current year PERCENT DIFFER.

last year Plan Plan Performance (4 : 3) (4 - 3)1 2 3 4 5 6

( MNT billion )

AMOUNT OF EXPENSE AND NET LENDING 2,321.6 3,174.2 3,174.2 3,066.4 96.6 -107.8

CURRENT EXPENDITURE 1,792.1 2,359.6 2,359.6 2,251.6 95.4 -108.0

Expenditure for goods and services 969.5 1,190.2 1,190.2 1,166.9 98.0 -23.4

Wage and salary 578.9 653.3 653.3 650.6 99.6 -2.7

Social insurance premium 54.7 63.2 63.2 61.7 97.7 -1.4

Other expense for goods and services 390.7 536.9 536.9 516.3 96.2 -20.6

Lending service fee 29.0 55.0 55.0 41.9 76.3 -13.0

Subsidy and transfer 793.6 1,114.4 1,114.4 1,042.8 93.6 -71.6

Property expense 457.9 654.1 654.1 567.6 86.8 -86.5

With internal source 431.6 615.8 615.8 554.4 90.0 -61.5

With external source 26.4 38.2 38.2 13.2 34.5 -25.0

NET REPAYABLE LENDING 71.6 160.5 160.5 247.2 154.1 86.8

CURRENT BALANCE 173.4 308.7 308.7 775.7 251.3 467.0

TOTAL BALANCE -328.6 -478.3 -478.3 3.5 (0.7) 481.7

BUDGET

2010BUDGET EXPENDITURE

Total balance for 2010 budget was planned to be in deficit equal to MNT 478.3 billion,

but due to above-mentioned factors, total balance, as in preliminary performance estimate, is

projected to be in surplus of MNT 3.5 billion.

January 2011 trend of fiscal development

Total fiscal income and grants in January, 2011 is expected to be around MNT 90 billion

while state budget income and repayable net lending amount is forecast to be around MNT 260

billion.

Some factors that may affect fiscal income and expense

Increase of inflation growth and speed

Price increase of raw materials and commodities (imported petroleum and food products)

Risks concerning delay and postpone of large projects‟ execution Fluctuation of currency exchange rate (appreciation and depreciation)

“Fiscal stability law”, which was approved by the State Great Khural, specifies that

certain fiscal policy and management principles must be adhered to when formulating

and approving medium-term budget framework, executing, reporting and approving




fiscal performance, developing and adopting budget draft as well as amending approved

budget. Law stated that special requirement for specific reasons shall be adhered to in

accordance with different phases and these stages are pointed out for each of the special

requirements. Following is the brief summary of these special prerequisites and different

phases that they concern to.

Fiscal year / Special requirements 2011 budgetframework,

annual budget

2012 budgetframework,

annual budget

2013 budgetframework,

annual budget

Fiscal income to be calculated with adjusted

regulation

Adhered Adhered Adhered

Adjusted fiscal balance shall have budget

deficit or budget surplus of no more than

two percent compared to gross domestic

product of the same fiscal year.

Not adhered Not adhered Adhered

Growth rate of fiscal expense in a certainyear shall be no more than the growth rate

of non-minerals sectors‟ gross domestic

products or average growth rate of non-

minerals sectors‟ gross domestic products

from continuous 12 years before that year

or whichever is greater.

Not adhered Not adhered Adhered

Remaining national debt evaluated in

current value shall be no more than 40

percent of gross domestic product

calculated at current year price

Adhered

/It can be 50 percent in

accordance with the law,but 10 percent,

exceeding the stated 40

percent, shall only be

utilized for providing

loan guarantee to

Development Bank /

Adhered

/It can be 60 percent in

accordance with thelaw, but 20 percent,

exceeding 40 percent,

shall only be utilized

for providing loan

guarantee to

Development Bank /

Adhered

/It can be 50 percent

in accordance withthe law, but 10

percent, exceeding

the stated 40 percent,

shall only be utilized

for providing loan

guarantee to

Development Bank /




3. EMPLOYMENT AND UNEMPLOYMENT

Level of unemployment

Third quarter report of 2010 on “Labor force survey” by the National Statistical Office of

Mongolia was published in November of 2010. Quoting from the results of the survey, the

number of employed rose 4.7 percent compared to the same time of last year which resulted in

4.9 percent increase of economically active population and 1.9 point boost in employment level.

Unemployment rate is 11.8 percent in Khangai region, 10.4 percent in western region

which is 1.8-3.2 points higher than national average, 8 percent in central region, 7.3 percent in

eastern region, and 6.1 percent in Ulaanbaatar city that is 0.6-2.5 points lower than the national

average.

Table 3. Labor force survey, third quarter

Indicator Unit 2008.3rd

quarter

2009.3rd

quarter

2010.3rd

quarter

Population aged 15 years or over Thous.people 1735.4 1845.7 1932.8

Economically active population Thous.people 1066.7 1137.1 1192.7

-Employed Thous.people 981.5 1018.1 1089.6

-Unemployed Thous.people 85.5 119.0 103.1

Economically inactive population Thous.people 668.7 708.6 740.1

Labor force participation rate percentage 61.5 61.6 61.7

Employment rate percentage 92.0 89.5 91.4

Unemployment rate percentage 8.0 10.5 8.6Source: NSO

Looking at economic activity sectors, labor force in agricultural sector increased by 46.9

thousand people from the same period of the last year. Workers in industrial sector went up by

5.5 thousand people and employees in services sector rose by 19.1 thousand people.

Accordingly, the total number of workers increased by 71.5 thousand workers compared to 3rd

quarter of the previous year. Share of agricultural sector workers in total labor force increased by

2 points while share of industrial sector workforce and services sector workforce went down by

0.6 point and 1.4 point respectively. It shows that professional structure of labor force is unable

to comply with demand and need of labor market of Mongolia.

The number of unemployed citizens registered at the Labor and Social Welfare Services

Office reached around 38.2 thousand people as of December 2010, increasing 0.4 point from the

last year.




Table 4. Unemployment rate

Indicator Unit December

2009

December

2010

Unemployed registered at Labor and social

welfare services office

person 38077 38250

Newly-registered unemployed person 75569 64328

Number of people who found jobs through

unemployment registration

person 51700 46335

Number of workplaces ordered* person 57996 61413

Number of people involved in vocational training* person 22568 18085

Number of people involved in public works* person 50064 47754

Source: NSO

Of the total unemployed citizens registered at Labor and social welfare services office, 24

percent falls within 16-24 years of age bracket whereas 34 percent falls within 25-34 years of

age, 24.3 percent includes people between 35-44 years of age and 17.7 percent covers citizens

between 45-59 years old. 82.3 percent of total unemployed people were between 25-44 years of

age, in other words, majority of the unemployed are people during their prime years of

employment. Therefore, it can be concluded that skills of people in their working age can not

quite accommodate labor market demands.

Government of Mongolia put efforts to increase workplaces through „Business-enabling

environment reform year‟. Actions were taken to support investments aimed at boosting

employment and to mediate jobless citizens to workplaces offered by employers according to

labor market demand and needs. Moreover, they were engaged in vocational trainings and new

job places were created through financing of small loans. Close collaboration with employers,

temporary vocational training institutions, public and non-governmental organizations was made

use of.

Various types of services were offered to people wishing self-employment, small

enterprises just starting their businesses. At national level, services including professional advice,

information service on projects and programs, small loan service and incubator services were put

forward through 12 business incubator centers, 27 business development support centers and 23

training centers for business establishment. In 2010, 26.1 thousand people took part in trainings

dedicated for business start-up and business skills. Around 7 thousand people obtained

consultancy and information services.




Moreover, as a result of actions organized to provide temporary workplaces to citizens

this year, around 47.7 thousand people participated in public works. Temporary jobs included

improving local roads, fields and buildings, planting trees, gardening, fixing and paving road,

drilling well, preparing wooden fuel by cleaning forests, restoring forests, cleaning flood dams

and garbage, repairing dam, ditch, trench, doing spring sowing, harvesting, hay-making, snow

cleaning, rebuilding stockyards in aimags experiencing harsh winter, sweeping roads, delivering

forage for cattle, cleaning up homesteads and destroying carrion of livestock.

Employment support fund financed MNT 11.9 billion worth of small loans to 2.8

thousand informal employees, 3.2 thousand unemployed citizens and 124 enterprises through

Khas bank, Savings bank, Khan bank and non-banking financial institutions such as Unench-

Itgel, Landorf finance, Cap Mon and ABTS. As a result, 15.9 thousand citizens acquired new

workplaces. 70 percent of newly-established workplaces through loans were created with loan

through Khan bank whereas 27.7 percent of jobs were established due to loans provided through

Khas bank. The remaining percentage was launched with lending through other banks and non-

banking financial institutions.

In addition, the Government of Mongolia also implemented targeted sub-programs like„Herders‟ employment support program‟ and „Students‟ employment support campaign‟.

New version of „Herders‟ employment support program‟ was approved with joint decree

by Minister for Social Welfare and Labor together with Minister for Food, Agriculture and Light

Industry. The program was implemented in 15 aimags starting from 3rd quarter of 2010. For the

implementation of the program, 267 herder families of 12 aimags were involved in purchasing

livestock to improve breed and grade of their livestock and selling of 9039 heads of cattle was

organized for that purpose.

In connection to sub-program on Students‟ employment support program, Labor andSocial Welfare Service Office in cooperation with Labor department of capital city implemented

part-time jobs for students. Authorities successfully organized mediation between students and

part-time jobs, involving them in public works, providing information and advice and

cooperating through “Students‟ labor exchange” under Labor department of capital city.

Enterprises and organizations requested 22.6 thousand workplaces within Students‟ employment

support program and students were mediated to 21.3 thousand workplaces.

On the job training programs at factories were implemented in order to provide local

training programs for vocational workers with same professions as specialists receiving from

abroad, to employ Mongolian workers in development projects in road, construction and miningsectors and factory buildings. Through the implementation of this program, 3.1 thousand citizens

studied 19 professions at 86 enterprises operating in mining, road, construction and local

development sectors.




Training for one thousand workers during the first phase of the plan was financed through

investment by Oyutolgoi LLC. Trainings focused on occupations that have high demand in the

labor market such as concrete armature finishers, assembler, plumber, welder, electrician, heavy

machinery serviceman, heavy machinery and equipment operator for road construction,

electrician for railway and mines and mining machinists.

Government has paid special attention to, through business-enabling environment reform

year, create new employment by supporting investment aimed at increasing workplaces, toinvolve unemployed citizens in repeated trainings to instruct new vocations, and to provide

seasonal and permanent workplaces to citizens.

Future trend

Several measures have been planned to be implemented throughout the country next year

as the government of Mongolia declared year 2011 as “Employment support year”. These

include:

-Supporting agriculture, farming, livestock breeding and processing industries throughinvestment, loan and tax policies in order to expand the labor market and to absorb workforce,

-Rationally determining scope of employment promotion policy and improving outcome,

-Preparing highly-skilled workforce that meets labor market demand and need as well as

providing jobs and workplaces,

-Supporting sustainability of workplaces through protecting labor rights and developing

productivity as well as skills and abilities,

-Implementing employment policy that is directed at maturing social partnership,

-Supporting informal workers, small and medium manufacturers with loan services,training, consultancy service and business incubator services,

- Organizing activities, both at central and local levels, to protect herders from risks,

improving business development skills, enhancing income and improving business organization.

As such, a number of activities are planned to be executed.




4. INFLATION

Inflation level

2010 socio-economic guideline stated an objective to keep the price increase of goods

and services within one digit number, but due to unexpected and unexpected and unclear

conditions, internal and external factors, inflation rate was 13 percent at the of 2010. For

instance, inflation rate had been extending from the start of the year to reach the highest level of

13.1 percent in May. However, it was relatively stable until November 2010 when it increased by

2.4 percent in December, thus reaching 13 percent on average at the end of the year.

Graph 3. Inflation level in 2010 /start of the year/

December 2010 saw the highest price increase. Looking at seasonal fluctuation of

inflation, it can be seen that inflation level has been changing since 2000.

Graph 4. Monthly inflation effect




From the graph above, it can be observed that inflation level had tendency to increase

higher than the usual level during the first month of winter and spring, but seasonal impact

played higher role during the middle of the year during last few years.

Taking a glance at the structure of inflation, price increase of food products were the

main reason for the enlargement of a general price index. /Graph-5/

Graph 5. Inflation structure

Price increase of meat was the most influencing factor among food products. It is because

meat group alone takes up 16 percent of family consumption. In other words, meat and meat

products occupy the largest share in consumer basket of goods. Due to consequence of dzud

during 2010, supply of meat sharplydropped causing shortage of meat

reserve.

Mongolia imported 70 percent of

food products and goods. Out of 287

types of products in basket of goods, 158

sorts of goods were imported and their

share in total basket was 30 percent.

During 2010, main importpartners of Mongolia also experienced

high prince increase. 80 percent of

import are traded from Russia, China,

South Korea, the USA and Japan.




Table 5. Inflation of main import partners in 2010

I II III IV V VI VII VIII IX X XI XII

USA 2.6 2.1 2.3 2.2 2 1.1 1.2 1.1 1.1 1.2 1.1 1.5

Russia 8 7.2 6.5 6 6 5.8 5.5 6.1 7 7.5 8.1 8.8

China 1.5 2.7 2.4 2.8 3.1 2.9 3.3 3.5 3.6 4.4 5.1 4.6

South

Korea

3.07 2.69 2.31 2.57 2.66 2.58 2.6 2.6 3.6 4.1 3.3 3.5

Japan -1.3 -1.1 -1.1 -1.2 -0.9 -0.7 -0.9 -0.9 -0.6 0.2 0.1 0.0

Looking from the table, Russia, which supplied one third of Mongolia‟s import, saw 8.8

percent of inflation in 2010 while China, which supplied 30.1 percent of import to Mongolia,experienced 4.6 percent of inflation that had not been the case during the last few years.

Although Mongolian currency appreciated by MNT 200 against US dollar in 2010, reaching

MNT 1258.17 at the end of the year, price of imported goods and services went up because of

high level of inflation rate continuing in neighboring countries.

It showed that food, apparel and textile groups contributed the largest share for inflation

in 2010. For instance, 13 percent inflation rate in 2010 can be explained due to 57.9 percent price

increase of food group and 12.7 percent price increase of apparel and textile groups.

Graph 7. Inflation structure




From the graph above, it can be observed that housing, water, electricity and fuel group

prices took up 10.7 percent of inflation in 2010 while education service group contributed 8.0

percent.

During the high inflation level of 2008, non-food group price and food group price

excluding meat and flour sharply increased to be responsible for 90 percent of total inflation rate.

Likewise, in 2010, price increase of meat and meat products occupied 50 percent of inflation and

other 13 units composed 6.6 points.

Moreover, the rise of non-food group price compared to the end of 2009 indicated that

economy is recovering and production was picking up. On the other hand, money supply

increased by 62.5 percent and domestic net lending went upward by 25.3 percent. As a result,

loan amount awarded to enterprises and citizens reached MNT 3.3 trillion and total market value

increased 2.2 times. It illustrates the expansion of Mongolian economy.

In conclusion, inflation level reached 13 percent due to the following factors of 2010

such as recovery of economy, cash transfer of MNT 120 thousand from the government to every

citizen, harsh wintering in many aimags because of climate difficulty, cost increase of electricityand heating supply, remaining high price of cashmere, high economic growth rate of China

coupled with high inflation rate, export embargo by Russia on wheat as a result of harvest lost

because of high heat and drought.

There are other internal and external risks concerning price increase of goods and

services in addition to high economic growth in 2010.

Internal factors: There are many unclear and complicated to anticipate conditions such as

political decision, climate severity, and currency exchange shock and etc.

1. Motherland allowance – Human Development Fund, established in order to equallydistribute income from mineral and mining sectors, allocated MNT 120 thousand to every

citizen of Mongolia in 2010. Decision was made to continue the cash transfer with

monthly handout of MNT 21 thousand to people in 2011 which will accumulate to

around MNT 500 billion. Such increase of cash in people‟s hands, as a result, is possible

to drive up the demand of goods and services. Moreover, sudden increase of herders‟

income might also result in less interest to sell and trade their livestock which in turn

affects meat supply negatively to drive up the price of meat.

2. Climate severity – Due to the consequence of dzud occurring in the majority of territory,

10.3 million heads of livestock was lost in 2010. It dropped supply of meat and drove up

the price of meat. Likewise, such condition of climate difficulty has a risk of repeating in

2011 as well.

3. Electricity and heating cost – The Energy Regulatory Authority of Mongolia increased

electricity cost by 17.35 percent and heating cost by 14.5 percent in 2010. Energy sector

is still experiencing deficit so talks have been held to implement further electricity cost

adjustment and even privatize energy sector through phased liberalization of prices. Price




increase of basic goods has tendency to escalate enterprises‟ current expenses and affect

prices of goods and services.

4. Investment growth – Steady growth of economy and increase of investment on one hand

drives up domestic demand, but on the other hand, it enlarges importation of equipment,

machinery and construction materials. As a result, increased weight load of transportation

volume on ports may affect supply of other sectors‟ goods and products negatively

raising their prices.

5. Pressure to increase salary and pension – Political parties promised to greatly increase

salary and pension during parliamentary election in 2008. Since 2011 is the preceding

year before the next selection, government may receive pressure and stress from

politicians as well as labor unions demanding increase of wages and old-age retirement

allowances.

External risks: The World Economic Forum has conducted risk response survey among 580

leaders and decision makers and assessed possible global risks and their impacts in Global Risks

Report. The survey evaluated 37 types of risks that the world is facing globally and named 6

risks out of the list that were seen as having the biggest chance of occurring and being possible to

cause the largest damage. They are:

1. Climate change

2. Economic disparity

3. Global governance failures

4. Financial crisis

5. Extreme commodity price volatility

6. Geopolitical conflict

Looking from above, external risks might affect the economy and inflation such as

environment and climate change, as a result, a shortage of food products as well as jumpingprices of petroleum and fuel.




5. FOREIGN TRADE

Foreign trade

Foreign trade of the nation increased sharply owing to positive internal and external

effects on the economy. Total foreign trade turnover increased 53 percent compared to the same

time of the previous year, reaching USD 6.2 billion for the first time. Mongolia last year traded

with world‟s 132 countries, but trade with Russia, Japan, South Korea and Germany experienced

the largest deficit. Therefore, emphasis should be paid to improve trade and economic relations

with above-mentioned countries and effort to keep the trade balanced with these countries should

be emphasized. However, trade with China, Canada and United Kingdom saw trade surplus.

Graph 8. Foreign trade / First 9 months between 2005-2010, thousand USD/

Source: General Customs office, International merchandise trade statistics

Observing from the export structure of Mongolia in 2010, 98 percent of the products

consisted of goods with no technology absorption and low level of technology absorption. The

fact that exportation of mining commodities, which have no technology-absorbed and have low

level of processing, is increasing every year is making both export income of Mongolia and the

overall economy vulnerable.

Government of Mongolia adopted government decree No. 6 dated January 8 th, 2010 to

increase capacity and efficiency of “Gashuun sukhait” and “Shivee khuren” border points. Its

purpose was to boost circulation of foreign trade goods, especially coal export, and to resolve

issues and challenges citizens and business entities were facing when crossing national borders.

As a result, 10.9 million tonnes of coal were exported as of 3 rd quarter of 2010 which was 2.2




times larger than the amount same time last year. Such additional export capacity brought in as

much export income as copper concentrate export in money terms.

Import of cars and transportation vehicles almost doubled from the same time of last

year. Such increase can be linked to improvement of income and purchasing power of citizens.

Foreign direct investment in mining, transportation and services sector increased 4 fold as the

first half of the year. Moreover, economy quickly recovered to grow 6.2 percent during the first 3

quarters.

Increase of investment in mining sector and exploitation and transportation capacity was

sharply boosting up export of mining sector commodities. For instance, export of iron ore, in

relation to the amount it was at the same time last year, increased by 2.2 times whereas demand

of petroleum products jumped and its import increased 1.3 times as industrial and transportation

sectors intensely recovered.

Although export growth of processed and unprocessed skins and hides did not have a

large impact on total export sum, but it actually increased 36 percent from last year which was a

positive influence on skin and hide sector of the economy.

Graph 9. Export structure of Mongolia, by technology classification / percentage/




Graph 10. Import structure /2006-2010,percentage /

Future trend of foreign trade

Coal export was firmly increasing from the beginning of the year and such trend

was expected to continue to make coal the main export product of the country.

In relation to the increase of investment in mining, transportation and hotel sectors,

import of equipment, machinery, mechanisms and construction materials is

projected to grow up.

Economy is fast growing and population income and purchasing power are

advancing; therefore, import of passenger cars and consumer goods is looking to

increase as a result.

Price increase of main trade goods of Mongolia such as coal, copper concentrate

and petroleum are forecast to heighten foreign trade turnover.




6. BANKING AND FINANCE

Banking system

Deposits in commercial banks’ current and savings accounts rising steadily

Deposits in current and savings accounts of commercial banks have risen steadily for the

first 3 quarters of the year. Two things should be noted relating to this rise. Firstly, the proportion

of current account deposits has grown substantially in relation to sources of commercial bank

funds. At the end of last year, it stood at 20.3 of the total fund, and current account deposits now

represent a quarter of the total fund. Secondly, the amount of savings deposits in MNT is

increasing as MNT appreciates against other currencies. Savings deposits in foreign currencies

grew 14.7% year on year, meanwhile savings deposits in MNT grew by 51% during the same

period.

Current and savings deposits, which make up the most of bank funds, are increasingsteadily; however, the main source of bank funds remains to be short-term.

Potential risks in the retail banks’ loan portfolio are slowing down the growth of loan

operations.

As of September 30th, the average weighted interest on securities issued by the central

bank was 11.1%, while the average rate offered by commercial banks on their savings account

was 11.8%. Even though the total loan amount was rising, the loan operations were slowing

down. The policy by the central bank was affecting the loan operations, but potential risks in the

banks‟ loan portfolio may be affecting the loan operations as well.

The macroeconomic environment is stabilising and it is having a positive impact on

increasing domestic demand; however, the purchasing securities of the central bank by

commercial banks, even with lower interest rate than savings rate, didn‟t subside. As of the third

quarter this year, the total amount of central bank securities purchased by commercial banks was

85% higher than the same period last year. If we look at this in terms of banks‟ assets; the central

bank securities represented 12.5% of the assets in the third quarter this year, and the

corresponding number for the same period last year was 8.8%. This is an indication that there is

a potential risk in the market that may hamper the loan operations.

The retail banks are being cautious to increase the loans operations due to the potentialrisk in the market, but we have seen a positive development in the past few months, a decrease in

past-due loans. However, there is no significant decrease in non-performing loans, alerting banks

to be cautious in terms of issuing loans.




The current economic environment demands the Bank of Mongolia to stick with its

current policy measures; and we don‟t see any significant changes coming in the loan operations

in the near future as the potential market risk remains within the banking sector.

Exchange rate

In 2009, the world industrial output fell by 0.6% and the developed nations‟ economy

shrank by 3.4%; but in 2010, the world economy started recovering and the world industrialoutput rose by 5%. As the world economy recovered, the consumption was rising and demand

for raw materials was increasing; at the same time, the capacity of our mining companies have

risen along with the improvement in transportation, resulting in a sharp increase in production of

mining sector. For instance, export volume of coal increased 2.3 times to 16.6 million tonnes and

export volume of iron ore increased 2.2 times to 3.5 million tonnes.

Inflow of foreign currencies has increased dramatically due to a huge growth in export in

2010; as a result, the foreign exchange reserve has shot well above 2 billion dollars.

As of January 1st, 2010, 1 USD was equal to MNT 1455.7, however, due to increase in

inflow of foreign currency our MNT has appreciated and 1 USD depreciated by about 200 MNT

by the end of year, equalling to 1258.17 MNT.

There is a large movement in exchange rates at international levels as well. Analysts have

noted that some large economies have introduced a protectionist policy, devaluing their currency

in order to support their domestic producers and increase their exports as high levels of

unemployment persisted.

Graphic 10. Net Foreign Exchange

Reserve




Graph 11. Currency rate fluctuation, by location

Source. Bloomberg Business week

Graphic 12. The list of currencies, which appreciated most against the USD in 2010

The last edition of Bloomberg Business Week Magazine for 2010 has listed the

currencies which appreciated and depreciated most against the USD in 2010. The Mongolian

tugrug is the most appreciated currency against the USD in 2010 according to this list.




We have seen lots of worldwide movements in exchange rates in 2010. There was

tendency for Asian currencies to gain strength. There are cases where new money and

investment to the economy have a negative impact on other sectors of the economy, possibly

even triggering some sectors to collapse. Netherlands discovered oil in the North Sea in 1959 and

as a result oil production and export of oil grew. However, it had a negative impact on the

economy as exports of other sectors in the economy dropped and unemployment rose due to the

stronger currency. As the currency becomes stronger against other currencies, the tradable goods

by the manufacturing sector become less competitive and the manufacturing sector declines; this

is called Dutch disease. Export of tulips, the main export of Netherlands before the oil

production started, collapsed and the economy became unbalanced (lopsided).

Additionally, if the growth rate in income per capita of resource-rich nations is lower

than the growth rate of those without natural resources, then that country is called to have a

“resource curse”.

As investment in mining sector increases and mining process accelerates; we need to take

preventive measures to avoid Dutch disease and resource curse, and study the possible effects of

a stronger currency. Stronger tugrug makes imported goods cheaper, and could help consumersby reducing the price level (at least creating an environment not to increase the price level). Our

consumer basket consists of 287 kinds of goods and services, out of which 158 are imported and

their weight on the basket is 30%.

We have seen from above graph that the tugrug was the most appreciated currency in

2010. We expect to see further appreciation in 2011, as revenue from main exports is expected to

increase by 40% and foreign exchange reserve is expected to increase by 72% to 3.6 billion

dollars. It is forecasted that tugrug will appreciate by about 3% against the USD due to increased

inflow of foreign currency, making 1 USD equal to 1222 MNT.

This 3% appreciation of tugrug could create an environment for 1% decrease in price

level, as imported goods represent 30% of our consumer basket; in which case it will be

beneficial for consumers.

On the other hand, appreciation of tugrug could hurt domestic producers by making our

exports less competitive. Especially, processing sector is vulnerable and its output could drop.

The possible effects of 10% appreciation of tugrug has been calculated on sectors producing

tradeable goods by using 55x55 balance between sectors.




Industries Effect of 10% appreciation of MNT

Leather processing and production of leather goods and

shoes

-402.7%

Manufacturing of clothes, processing of fur -89.6%

Textile -24.3%

Iron ore mining -14.5%Oil and natural gas production -11.3%

Other minerals mining -8.1%

Milk and milk products production -6.9%

Meat, fish, fruit, vegetable, fat and oil processing -1.8%

Financial market

Mongolian securities market

64.5 million shares worth MNT 62.9 billion of 136 companies were traded through 253

transactions at Mongolian Stock Exchange in 2010. In addition, 3000 units of government bond

equaling MNT 30 billion were also traded to make the total trade turnover worth MNT 92.9

billion.

67.7 percent or MNT 62.9 billion of total transaction turnover was transferred through

share trades while 32.3 percent or MNT 30 billion belong to trade transaction of bonds.

In comparison with indicator from 2009, a total amount of share trading increased by

171.1 percent or amount equal to MNT 39.7 billion.

Table 7. Comparison of transaction amount conducted in 2010 and 2009

Offering types

Transaction amount Change

2009 2010 Total

amount

Percentage

Government bond - 30.0 - -

Share (Total amount in MNT

billion ) 23.2 62.9 + 39.7 +171.1%

Share (number in millions) 89.9 64.5 -25.4 -28.3%

Company bond - - - -




Share trading

Average daily share trading was 255 thousand shares which were equal to MNT 248.5

million. Following are the list of companies whose shares increased in value during the reporting

period, sorted from the highest to the lowest. They are ADUUNCHULUUN Shareholding

company/SC/(1539.3%), BAYAN TEEG (1455.8%), UB BOOK SC (1128.4%), SILICAT

(700%), SHARIN GOL (519.1%), MOGOIN GOL SC (499%), SUU SC (438.1%),

TAVANTOLGOI (326.7%), GOVIIN UNDUR (320%), MONIT BULIGAAR (304.7%),SHIVEE OVOO SC (293.9%), CHANDMANI TAL (266.7%), APU (215.9%), BAGANUUR

(200%).

Graph 14. Graph of shares actively traded

Source: Mongolian Stock Exchange

Bond trading

3799th equity transaction of Mongolian Stock Exchange on September 17th of 2010

concluded transactions of 3000 units of government normal bond in total, amounting to MNT 30

billion. Bonds were traded based on their interest rates. Traded government bonds include 1500

bonds with 7.5 percent interest rate with a term of 365 days, 700 bonds with 7.2 percent interest

rate, 800 bonds with 7.29 percent interest rate, 1500 bonds with 7.8 percent interest rate with a

term of 546 days, 1117 bonds with 7.79 percent interest rate, 383 bonds with 7.8 percent interest

rate each. Thus, with differentiated interest rates on bonds, MNT 44.2 million was saved from

the interest rate payment on government bonds.




Market capitalization

Total market capitalization, compared to 2009, increased 2.2 times or MNT 753.2 billion

and reached MNT 1 trillion 373.9 billion. Companies with the highest market value are Tavan

tolgoi SC /MNT 303.3 billion/, Baganuur SC /MNT 220.2 billion/, Shivee ovoo SC /MNT 174.4

billion/, APU SC /MNT 147.8 billion/, MTsKh SC /MNT 90.5 billion/, Sharin gol SC /MNT

75.9 billion/ and Govi SC /MNT 43.7 billion/.

Graph 15. Market capitalization /MNT billion /

ТОP-20 index

During the reporting period, highest point of TOP-20 index reached 15039.97 units while

the lowest point was 6144.28 units. Therefore, average point of TOP-20 index was 10582.80

units. TOP-20 index dated December 31st, 2010, in comparison with the same date in 2009,

increased by 8569.9 units, in other words, it was multiplied by 2.4 times reaching 14759.81

units.

TOP-20 index had risen steadily since the beginning of 2010 and reached 15039.97 units

on September 8th

, 2010 which was the highest point in the history of Mongolian Stock Exchange

market.

Such growth was mainly contributed by appreciation of share value of companies in the

TOP-20 index basket including Sharin gol /519.1 percent/, Mogoin gol /499 percent/, Shivee

ovoo /324.2 percent/, Tavan tolgoi /326.7 percent/, APU /215.9 percent/, Baganuur /200 percent/,

Talkh chikher /85 percent/, Nako fuel /64.1 percent/, Khukh Gan /57.1 percent/, Makh impex

/56.5 percent/, BDSec /56.3 percent/ and Mongolia Telecom /52.8 percent/.




Conclusion

Equity prices of companies registered at Mongolian Stock Exchange had considerable

growth in the first quarter of 2010. It was closely related to the release of end-of-the-year

financial reports published by companies and announcement of scheduled dates for meetings to

distribute dividends. For instance, APU SC had operated with a profit of MNT 8.06 billion, of

which MNT 1.4 billion was decided to be allocated to the shareholders as dividends. This

decision drove up the rate of exchange by 136.51 percent in the first months of 2010.

Market demand declined from the middle of the second quarter and equity prices started

dropping. Investors, who wanted to get hold of the profit which was gained through price

difference of shares during the previous months, sold their shares in large quantity. It inflated the

supply of shares and affected the prices to decrease. Moreover, dividends of shareholding

companies like Govi and State Department Store were relatively lower than deposit rates offered

by the commercial banks. It affected equity rates to some extent as well.

However, during the latter part of the year, it can be observed from the main indicators of stock market such as graph of market capitalization and TOP-20 index that shares listed in stock

exchange still kept their growth.

Another reason overall stock market was increasing in 2010 was that foreign investors

were very much interested in Mongolian Stock Exchange. As of 2010, transactions executed by

foreign enterprises and entities made up 70 percent of total transaction amount which was quite a

large share. Especially, shares of mining companies were experiencing sharp escalation.

Therefore, it can be concluded that international and national investors were very much

interested in Mongolian mining sector.

The fact that activities are being implemented to reform management and organizational

structure of Mongolian Stock Exchange shows that government started paying attention on

developing capital market. Thereby, London Stock Exchange is agreed to operate Mongolian

Stock Exchange by providing management and organizational services.




7. GLOBAL ECONOMIC SITUATION

CHINA

Abstract

Although Chinese economy has kept its high growth in 2010 due to the government

measures taken to fight the crises, sharp increase of investment in real estate, expansion of loan

from financial institutions, and an increase of consumer price led to economic overheat.

In 2010, the gross domestic product (GDP) of China grew by 10.3%, highest in 3 years,

and it reached 39.7 trillion RMB (5.87 trillion USD) in 2005‟s money.

Consumer price index reached to 5.9% in last month, which was 2.9 percentage points

higher than the central bank‟s target rate of 3%. The dramatic increase of the consumer goods

was a main factor to accelerate inflation rate. China, the world's third largest economy and

second largest exporter, directed its policy toward keeping its economic growth through

increasing domestic consumption and investment in recent years.

The new policy has diminished motivation to carry out economic reform and structural

changes through keeping traditional economic policy and created inflationary pressure. But on

the other hand, it was important to protect domestic markets when the foreign trade profit was

increasing and its currency, RMB (more commonly known as Yuan) was gaining strength fast; to

create employment through promoting manufacturing and infrastructural investments; and to

reduce the reliance on export-driven growth by increasing the domestic consumption.

China‟s 12th five-year socioeconomic plan was approved in 2010, and will start to be

implemented from 2011; and it has covered many structural problems that need to be tackled

urgently.

As China‟s influence increases, not just in the world economy, but in politics and

decision making processes; the country is shifting its focus to its defense, high technology and

information technology industries.

There are new economic players, which are newly emerging economies led by so-called

BRIC or Brazil, Russia, India and China; and now they have a strong geopolitical influence onkey industries such as international trade, transportation, communication, energy and mining.

This is a clear sign that the global balance power is shifting fast to the emerging economies.

GDP growth




In 2010, GDP grew to 39.79 trillion RMB, a 10.3% increase compared to a year earlier as

a result of increases in investment, consumption and export – 3 major forces moving the Chinese

economy according to the preliminary report. The growth rate was 1.1 percentage points higher

than the year before. If we look at the quarterly annualized growth rate, it was 11.9% in the first

quarter, 10.3% in the second, 9.6% in the third and 9.8% in the last quarter of 2010.

Graph 16. GDP growth /%/

If we look at the GDP growth by sector: there was 4.3% rise in agriculture, 12.2%

increase in manufacturing and processing, and 9.5% growth in service sector. The high growth in

the service industry is due to the government policy and the growth in the agriculture is

decreasing year after year.

The contribution of investment to the GDP growth was 5.6 percentage points, and the

contribution of private consumption was 3.9 percentage points; representing 92% of the total

growth together. Meanwhile, the net exports represented 7.9% of the total growth in GDP, 0.8percentage point of the growth.

Inflation rate

Inflation rate, measured as the change in consumer price index (CPI), reached 3.3% for

the year due to rise in consumer goods and excessive money supply. If we look at the inflation

rates by category: the highest rate of 7.2% for food, 1.6% for alcohol and tobacco, 3.2% for

medical care and other goods.

By the end of December, the CPI rate had reached 4.5%, creating an inflationary pressure

on the central bank to raise its base rate by 0.5%.

This high inflation rate is hitting the poor and those living on low income hard; as a result

the central bank is tightening its monetary policy in 2011.




Graph 17. Inflation rate, CPI /%/

Foreign trade

Both exports and imports rose and China is still experiencing a trade surplus. However

imports rose faster than exports, resulting in a smaller trade surplus in 2010. The total trade rose

to 2.978 trillion US dollars, an increase of 34.7% from a year ago. Out of which, exports

accounted for 1.577 trillion US dollars and import accounted for 1.394 trillion dollars, making a

trade surplus of 183.1 billion US dollars, 6.4% lower than the year 2009.

The profit from Chinese foreign trade is increasing, and RMB is gaining strength against

the USD and other major currencies due to increased inflow of money to the country. In January

2010, 1 USD equaled to 6.82 RMB, but in September it was depreciated to 6.74 RMB. The

exchange rate went further down to 6.5 in December, signaling the RMB will continue to

appreciate against other currencies. The fast appreciation of RMB, without the consideration of

the supply side, is creating a potential risk to make China lose its status of „exporting country‟

and hence creating a higher unemployment.

Money supply

Central bank has raised the banks‟ reserve requirement, 19% for 6 large banks and 16%

for rural small and medium sized financial institutions, as it tries to tighten the money supply to

relieve the inflationary pressure and to reduce banks lending as the proportion of non-performing

loans have increased.

Additionally, the People‟s Bank of China (PBC) has raised its base rate twice in 2010,

first increase since 2008. The money supply grew steadily; loans and savings amount declined in

2010. By the end of December, the broad money supply (M2) reached 72.6 trillion RMB: narrow

money supply (M1) of 26.7 trillion RMB, and currency in circulation (M0) of 4.5 trillion RMB.




By the end of December, the broad money supply (M2) increased by 19.7% from the same

period a year earlier, while narrow money supply (M1) increased by 21.2%.

The loans outstanding grew by 7.9% from the beginning of the year to 47.9 trillion RMB.

In 2010, banks and financial institutions have issued new loans worth 7.95 trillion RMB, which

is 1.65 trillion RMB lower than the previous year. Even so, it still surpassed the limit of 7.5

trillion RMB set by the government, triggering the faster change in interest-rate policy and

increase of the amount of the reserve requirement for banks and financial institutions.

The foreign exchange reserve of China stood at 2.84 trillion USD by the end of 2010, an

18.7% increase from 2009.

Graph 18. Growth in net foreign exchange reserve /billion USD/

Budget

Graph 19. Budget /billion RMB/

For the year of 2010,

the budget revenue reached

8.3 trillion RMB, which is

1.45 trillion RMB or 21.3%

higher than the year before.

Budget expense totaled 8.95

trillion RMB, a 1.32 trillion

RMB or 17.4% increase

from 2009. Budget deficit of

China is therefore 650 billion

RMB now, equal to 1.6% of

the GDP.




Forecasting for 2011 year

After the analysis of China‟s economy in 2010, the following forecast for the macro-

economic indicators of China can be made. The economy will grow slower in the first half of

2011, and grow faster at the second half by accounting the seasonal effects on the economy; and

its GDP is predicted to grow by 9.5%.The contributions to the GDP growth are expected to be

5.2% for investment, 4.0% for consumption and 0.6% for net exports.

There is a high probability that the central bank raises its base interest rate and reserve

requirement as the inflationary pressure increases. This change from expansionary monetary

policy to contractionary monetary policy may reduce the systematic risk, such as reducing the

inflation rate and the total loans being issued; but in the long-term it will have little effect.

The central bank has raised its base rate again, by 0.25 percentage point on February 9th

,

2011 and this could increase the inflow of money to the country therefore risks further

appreciation of RMB against the USD.

The economy is increasing relying on overseas for the supplies of raw materials and it

could push up the inflation rate. For example, China‟s dependence on exported oil products are

illustrated by the fact that 54% of the oil products it needed came from overseas in 2010.

Considering the possible price increases of coal, oil, copper and food, the inflation rate

for 2011 is predicted to be around 4%.

Global economic situation and prospects in 2011

However, global economy is getting rid of financial economic crisis of 2008-2009,

problems such as high unemployment, austerity policy and currency high risk which are pressure

on the recovery.

The recovery of the world economy has started to lose momentum since the middle of

2010, and all indicators point at weaker global economic growth, according to a new United

Nations report. The UN expects that the world economy will expand by 3.1 percent in 2011 and

3.5 percent in 2012 - far from sufficient to enable recovering the jobs lost because of the crisis.

In the World Economic Situation and Prospects 2011 (WESP), the United Nations

emphasizes that the outlook remains uncertain and surrounded by serious downside risks. The

cooperative spirit among major economies is waning, which has debilitated the effectiveness of

responses to the crisis. Uncoordinated monetary responses, in particular, have become a source

of turbulence and uncertainty in financial markets. The recovery may suffer further setbacks if

some of the downside risks materialize, in which case, a double-dip recession is looming for

Europe, Japan and the United States. WESP 2011 says that in the short run, more fiscal stimulus

will be needed to reinvigorate the recovery, but that it will need to be better coordinated with

monetary policies and re-oriented to provide stronger support to employment generation and




facilitate a sustainable rebalancing of the global economy. This cannot be done without better

international policy coordination.

Among developed economies, the United States has been on the mend from its longest

and deepest recession since World War II. Yet, the pace of recovery has been the weakest in the

country‟s post-recession experience. At 2.6 per cent in 2010, growth is expected to moderate

further to 2.2 per cent in 2011 before improving slightly to 2.8 per cent in 2012, according to the

report. This pace will not make much of a dent in unemployment rates, and recovering the jobslost during the crisis would take at least another four years.

The growth prospects for Europe and Japan are even dimmer, the report says. Assuming

continued and albeit moderate recovery in Germany, GDP growth in the Euro area is forecast to

virtually stagnate at 1.3 per cent in 2011 and 1.7 per cent in 2012. Growth in 2010 was 1.6

percent.

Some countries in Europe will see even less growth, especially where drastic fiscal

austerity and continued high unemployment rates are draining domestic demand. This is

especially the case in Greece, Ireland, Portugal and Spain, which are entrapped in sovereign debtdistress. Their economies will either remain in recession or stagnate in the near term. Japan‟s

initially strong rebound, fuelled by net export growth, started to falter in the course of 2010.

Challenged by persistent deflation and elevated public debt, the economy is expected to grow by

a meager 1.1 per cent in 2011 and 1.4 per cent in 2012.

Among the economies in transition, GDP of the Commonwealth of Independent States

(CIS) and Georgia rebounded by about 4 per cent on average in 2010, up from the deep

contraction of more than 7 percent in 2009. In 2011 and 2012, the pace of recovery in South-

Eastern Europe is expected to be rather slow.

Developing countries continue to drive the global recovery, but their output growth is

also expected to moderate to 6.0 per cent during 2011-2012, down from 7.0 per cent in 2010,

because of the slowdown in the advanced countries and phasing out of stimulus measures.

Developing Asia, led by China and India, continues to show the strongest growth performance,

but some moderation (to around 7 percent) is expected in 2011 and 2012.

Growth in Latin America is projected to remain relatively strong at around 4.0 percent,

though less robust than the GDP growth of 5.6 percent estimated for 2010. Brazil, the engine of

regional growth, continues with strong domestic demand to boost export growth of neighboring

countries. The sub-region also benefits from strengthened economic ties with the emerging

economies in Asia.

The economic recovery in the Middle East and other countries in Western Asia is also

expected to moderate from 5.5 percent in 2010 to 4.7 percent in 2011 and 4.4 percent in 2012. At

this pace, the average annual output growth will be lower than the pre-crisis rate.




Economic recovery has been solid in most of Africa. The rebound is expected to push

through at about 5 percent per year in 2011 and 2012, but this is well below potential and

conditions vary across the region. The economies in East Africa are showing strong growth, but

several of the poorest countries, especially those in the Sahel, have suffered from droughts and

conditions of insecurity, which is causing hunger and hampering the recovery of their

economies.

Annual percentage change

Changed from United Nations

forecast of June 2010

2010 2011 2012 2010 2011

World output 3.6 3.1 3.5 0.6 -0.1

Үүнээс:

Developed countries 2.3 1.9 2.3 0.4 -0.2

Euro zone 1.6 1.3 1.7 0.7 -0.2

Japan 2.7 1.1 1.4 1.4 -0.2

United

Kingdom

1.8 2.1 2.6 0.7 -0.2

United States 2.6 2.2 2.8 0.7 -0.2

Economics in transition 3.8 4.0 4.2 -0.1 0.6

Russian

Federation

3.9 3.7 3.9 -0.4 0.7

Developing economies 7.1 6.0 6.1 1.2 0.2

Africa 4.7 5.0 5.1 0.0 -0.3

Nigeria 7.1 6.5 5.8 0.6 -0.5

South Africa 2.6 3.2 3.2 -0.1 -0.3

East, South Asia 8.4 7.1. 7.3 1.3 0.2

China 10.1 8.9 9.0 0.9 0.1

India 8.4 8.2 8.4 0.5 0.1

Western Asia 5.5 4.7 4.4 1.3 0.6

Israel 4.0 3.5 3.0 1.1 0.4

Turkey 7.4 4.6 5.0 3.9 1.3

Latin America and the

Caribbean

Brazil 7.6 4.5 5.2 1.8 -1.1

Mexico 5.0 3.4 3.5 1.5 0.6

Of which:

Least developed

countries

5.2 5.5 5.7 -0.4 -0.1

Memorandum items:

World trade 10.5 6.6 6.5 .. ..

World output growth

with PPP-based weights

4.5 4.0 4.4 0.6 0.0




High unemployment is the Achilles heel for the recovery

The UN report says that the lack of employment growth is the weakest link of the

economic recovery. Between 2007 and the end of 2009, at least 30 million jobs were lost

worldwide as a result of the global financial crisis. As more governments embark on fiscal

austerity, the prospects for a fast recovery of employment look even gloomier.

In 2010, employment conditions in the United States seemed to be improving earlier inthe year, but started to falter later as the recovery decelerated and state and local governments

started to lay off workers. The unemployment rate may increase to 10 percent in early 2011, up

from 9.6 percent in the third quarter of 2010. All projections indicate that it will take several

years for the unemployment rate to return to its pre-crisis level.

In the Euro area, despite improvements in Germany‟s job market, the average

unemployment rate has continued to drift upward, reaching 10.1 percent in 2010, from 7.5

percent before the crisis. In Spain, the unemployment rate more than doubled to 20.5 percent. It

also increased dramatically in Ireland, reaching 14.9 percent in 2010, and other countries in the

region. WESP predicts that unemployment in Europe will decline at a snail‟s pace. In Japan,labor market conditions improved marginally during 2010, but the unemployment rate is

expected to remain above 5 percent in 2011.

Worldwide, unemployment and underemployment rates are very high among young

people (aged 15 to 24). At the end of 2009, with an estimated 81 million unemployed young

people, the global youth unemployment rate stood at 13.0 percent -- a 0.9 percentage point

increase from 2008.

High unemployment will constrain household consumption recovery, which in turn will

drag output growth. WESP points out that below-potential output growth, in turn, will constrain

employment growth. The longer this vicious cycle lasts, the higher the risk of “cyclical”

unemployment becoming “structural”, further impairing long term economic growth potential.

The UN report also provides evidence that workers in developing countries and

economies in transition have also been severely affected by the crisis, though the impact in terms

of job losses emerged later and was much more short-lived than in developed countries. Indeed,

employment started to rebound from the second half of 2009 and, by the end of the first quarter

of 2010, unemployment rates had already fallen back to pre-crisis levels in a number of

developing countries. Yet, despite the rebound in employment in parts of the world, the global

economy still needs to create at least another 22 million new jobs in order to return to the pre-

crisis level of global employment. At the current speed of the recovery, this would take at least

five years to achieve.




Increased exchange rate instability

WESP 2011 says that a much weaker recovery of the world economy is far from a remote

possibility. Besides the lack of job creation, especially in advanced economies, volatility in

currency markets is generating additional macroeconomic uncertainty which could further

jeopardize the recovery. In a more pessimistic scenario of greater uncertainty and no change in

policies, the UN predicts that Europe could well see a double-dip recession, while the economies

of the United States and Japan might virtually stagnate and possibly also fall back into recessionduring 2011. This would also significantly lower growth prospects for developing countries (by

almost 1 percentage point).

Tensions over currencies have emerged in part as a result of uncoordinated expansionary

monetary policies, essentially consisting of more money printing. The stronger quantitative

easing in the United States has put downward pressure on the dollar, causing ripples in currency

markets worldwide. The quantitative easing is to lower interest rates and stimulate investment.

The UN says this will not be very effective as long as financial systems are still clogged and

hence not channeling much money to finance productive investments. Instead, more capital is

flowing to emerging and other developing countries, in search of higher profitability. As a resultof these developments, the Euro and the yen have appreciated against the dollar, as have the

currencies of emerging market economies. This has led to interventions in currency markets and

introduction of capital controls in a number of markets. The report says that heightened tensions

over currency and trade could well trigger renewed turmoil in financial markets, jeopardizing the

recovery.

Five challenges for sustainable recovery

These potentially damaging spillover effects of national policies once again highlight the

need for strengthened international policy coordination, according to the report. Unfortunately,during 2010, the cooperative spirit among policymakers in the major economies has been

waning. “Avoiding a double-dip recession and moving towards a more balanced and sustainable

global recovery would require addressing at least five related major policy challenges”, said Rob

Vos, who led the team of UN economists that prepared the report.

The first is to provide additional fiscal stimulus, by using the ample fiscal space that,

according to WESP 2011, is still available in many countries. Such fiscal action should be

adequately coordinated among the major economies to ensure a reinvigoration of global growth

that will also provide external demand for those economies which have exhausted their fiscal

space. The present shift towards severe fiscal austerity measures in developed economies couldwell trigger a spiral of pro-cyclical fiscal adjustment, the UN report argues, with the result that

that fiscal consolidation will turn out to be self-defeating on a global scale.




The second challenge is to redesign fiscal stimulus and other economic policies to lend a

stronger orientation towards measures that directly support job growth, reduce income inequality

and strengthen sustainable production capacity on the supply side.

The third challenge, the UN report stresses, is to find greater synergy between fiscal and

monetary stimulus, while counteracting damaging international spillover effects in the form of

increased currency tensions and volatile short-term capital flows. This will require reaching

agreement about the magnitude, speed and timing of quantitative easing policies within a broaderframework of targets to redress the global imbalances. It will also require deeper reforms of

financial regulation, including for managing cross-border capital flows, and in the global reserve

system, reducing dependence on the US dollar.

The fourth challenge is to ensure that sufficient and stable development finance is made

available for developing countries with limited fiscal space and large developmental deficits,

including resources for achieving the Millennium Development Goals and investing in

sustainable and resilient growth.

The fifth challenge is to find ways to come to credible and effective policy coordinationamong major economies. The UN report says it is urgent in this regard to make the G20

framework for sustainable global rebalancing more specific and concrete. In this sense,

establishing concrete “current-account target zones” could be a meaningful way forward, if it is

part of a broader package aiming at addressing all of these challenges.

Different growth between advanced and emerging economies

Two-speed recovery to dominate 2011, with growth remaining slow in advanced

economies

In emerging economies, challenge for some is to manage possible overheating and capitalflows

Number of countries in Europe face tough and long macroeconomic adjustment

In an assessment of the global economy at the end of 2010, and the prospects for 2011,

the IMF‟s Chief Economist, Oliver Blanchard, said that countries should continue to focus on

rebalancing their economies in the coming year, including structural measures and exchange rate

adjustments. “Without this economic rebalancing, there will be no healthy recovery. The central

role of the Group of Twenty (G-20) advanced and emerging market economies in helping during

the global crisis and the need for continued cooperation to build on the recovery, as well as the

prospects for both Europe and low-income countries” he told.

Emerging market countries were affected by the crisis through both trade and financial

channels. The turnaround in trade has been nearly as sharp as the earlier collapse. But while trade

has not yet fully recovered, most emerging market countries have been able to increase domestic

demand so as to return to high growth. In turn, their good performance has led capital flows to




come back, in some cases, with much force. For many of these countries, the challenges are now

how to avoid overheating and how to handle capital flows.

In many advanced economies, the crisis damage was much deeper. The financial system

was badly broken. Securitization has to be reinvented. In many of these countries, markets are

still uncertain about the true health of banks and financial intermediation is not working well.

Combine this with the need to correct past excesses, from low saving to excess housing

investment and the result is a slow recovery, barely strong enough to decrease unemployment.

Fore-mentioned, rebalancing economy is significant to growth. Because developing

countries growth pre-crisis is genesis from high domestic demand, consumption, purchase, and

high housing investment. It was impossible to last for long time and countries still face to

support by budget policy because domestic demand needs to provide by other sources. However,

it was efficient step, it can‟t be continued further. So these countries should b e based on external

demand, otherwise, export. Similarly, newly developing economies should not be based on

demands or needs and they need to stimulate domestic demand and decrease export dependency.

Therefore, collaboration of G-20 and developing countries becomes main key to supportrecovery after financial economic crisis.

Major economies outlook in 2011

US economic outlook

Many economists believe that US economy will continue to grow around 3.5 percent in

2011, led by pickup in consumer and business spending. The extension of Bush-era rate cuts will

add moderately to GDP growth, while at the same time as increasing the budget deficit. US

economy grew just less than 3 percent and unemployment hovered just below 10 percent for the

year 2010, while stock markets recorded good gains with the S&P 500 rose about 12 percent, the

Dow gained more than 10 percent and Nasdaq advanced around 16 percent.

Graph 20. Consolidated index for stock exchanges in American continent

/December 2009 to December 2010 /

PCE is contributing between

0.7 percent and 2 percent to overall

growth. The component has gained

for five consecutive quarters and is

expected to grow around 1.9 percentin 2011.

On the other side, financial contagion

from Europe, budget problems at

state and local governments, and




Housing sector is the one area need to improve a lot as it has been dragging the economy

for the four straight years. But in third quarter residential investment constituted its lowest

proportion of overall economic activity suggest that any further contract in the sector will show

minimal impact on the growth.

The simple truth is that the economy is not strong enough to support a decent recovery in

housing demand. The unemployment rate remains high, income growth remains low. It may take

years for excess housing inventory to be weeded out, but eventually those vacant homes will be

filled up and construction activity will need to rise.

Asian economies outlook 2011

India economic and market outlook

Indian policy makers have been boosting growth at the cost of macro stability risks,

reflected in high inflation, a widening current account deficit and tight inter-bank liquidity due to

low deposit growth.

Japan 1.5 -0.3 2.3 5.0

Australia 3.5 3.0 -2.3 5.1

New Zealand 3.2 5.5 -4.4 5.8

Newly Industrialized Asian

Economies

4.5 2.7 6.9 3.7

Korea 4.5 3.4 2.9 3.3

Taiwan Province of China

4.4 1.5 9.5 4.9

Hong Kong SAR 4.7 3.0 8.3 4.1

Singapore 4.5 2.4 18.4 2.2

Developing Asia 8.4 4.2 3.0 …

China 9.6 2.7 5.1 4.0

India 8.4 6.7 -3.1 …

ASEAN-5 5.4 4.4 2.4 …

Indonesia 6.2 5.5 0.1 7.0

Thailand 4.0 2.8 2.5 1.4

Philippines 4.5 4.0 3.4 7.2

Malaysia 5.3 2.1 13.8 3.2

Vietnam 6.8 8.0 -8.1 5.0

Other Developing Asia 4.6 9.6 -1.3 …




Graph 21. Consolidated index for stock exchanges in American continent


WPI headline inflation and

non-food inflation have moderated to

7.5 percent yoy and 7.9 percent yoy in

November 2010 from the peaks of 11

percent yoy and 8.9 percent (in April2010) respectively. Monthly trade

deficit narrowed to 7.1 percent of

GDP, annualized in November, from

the peak of 10.8 percent of GDP,

annualized in August 2010.

Inter-bank liquidity should also

improve over the next three months as recent aggressive deposit rate hikes will help improve

deposit growth. Private sector capital expenditure has been accelerating over the last 10 months

and it will soon begin to reflect in the form of commissioned capacity.

Overall macro conditions will remain vulnerable over the next 4-5 months. Inflation,

while moderating, will remain above the RBI‟s comfort zone; while we believe the current

account deficit will also stay relatively high. Recent optimism in the developed world growth

outlook has increased the risk of a potential rise in crude oil prices to $110-120/bbl. Similarly,

there is additional risk of pass through of agricultural and commodity prices.

India‟s policy favors a change in mix of growth from consumption to capital spending.

An improving global growth environment could be the trigger for higher-than anticipated capital

expenditure. They favor cape proxies such as industrials, materials and property over

consumption sectors.

Euro area economies outlook in 2011

Tax hikes, salary cuts and redundancies in the public sector, curbs on public investment,

no pension increases, cuts in welfare spending – these are all elements of the austerity measures

planned in Greece, Ireland, Portugal and Spain in 2011. The Irish consolidation program alone is

set to account for around 9% of GDP in the period leading up to 2014. In terms of GDP,

achieving this sort of consolidation volume in Germany would involve raising VAT from19% to

around 45%.

Concern that consolidation could deal a severe blow to economic activity in these

countries is not surprising. Given that the less debt-burdened euro-zone countries are also

planning to don hair-shirts, the question arises as to how the EMU recovery will progress in

general. Will the upward or the downward forces gain the upper hand in Europe in 2011?




In our view, skepticism about the economic outlook for 2011 is not warranted, despite the

need for consolidation. A number of economic indicators, for example the purchasing managers'

indices, suggest that the economic recovery in the euro area has been gathering pace as we

approach the end of 2010.

Of key significance is the fact that none of the three largest euro area economies are on

the brink of recession – not even Italy. Although the Italian economy is picking up only

hesitantly, even its corporate sector is starting to step up its recruitment again. This is essential toensure that domestic demand can continue to recover. The prospects for domestic demand in

Germany and France in 2011 are looking brighter. In Germany, in particular, the recovery is now

on a broad footing. The positive interplay between rising employment, increasing incomes and

higher demand points towards solid growth for 2011, even if the global economic momentum

tapers off somewhat. In addition to the three largest euro-zone economies, smaller economies

that have been left unscathed by the debt crisis, such as the Netherlands and Austria, can also

look forward to rosy economic prospects in 2011.

Those euro zone countries whose government bonds carry high risk premiums are trying

to regain the trust of the markets by launching stringent consolidation programs. The likelihoodof successful consolidation in these cases depends both on the existing level of sovereign debt as

well as on the general state of the economy, which varies quite considerably from country to

country. However, given the low interest rates of the past, these countries are doubtless able to

service their current interest burden. In fact, with interest expenditures of 2.3% of GDP in Spain,

3.2% in Portugal and 3.3% in Ireland, the burden is actually relatively low. Even in Greece the

corresponding rate of 5.6% is not exceptionally high. Only ten years ago the Greek government's

interest expenditure amounted to 7.4% of GDP.

2008 2009 2010f 2011f

Germany 0,7 -4,7 3,7 2,6

France 0,1 -2,5 1,6 1,5

Italy -1,3 -5,1 1,1 1,2

% change on previous year

2011 looks likely to see further progress in terms of the adjustments made in the

countries hit by the debt crisis. Nevertheless, there is still a long way to go until these countries

achieve balanced economic development and a sustained boost to their competitiveness. GDPgrowth of euro area economies is expected growth of 1.6% in this year. In 2011 Germany is

again likely to lead the way with growth of 2.6 percent, while Greece will again bring up the rear

with a 2 percent decline in GDP.




Graph 22. Consolidated index for stock exchanges in European continent





8. CONCLUSION

Taking into account of current situation and further trend of socio-economic sector of

Mongolia in 2010, reports of influencing policies and actions implemented by the government of

Mongolia and their outcome and preliminary findings, it can be concluded that action plan for

combating against financial crisis were successfully executed and national economy has entered

a phase to recover and even intensive growth stage. Government of Mongolia, in 2010, directed

its focus to provide economic growth, create workplaces in large quantity, develop capital

market, increase financial and investment sources, improve its conditions, establishing basis for

rapid economic development and provide sustainability of socio-economic development of the

country. For instance, 2010 was declared as the Business-enabling environment reform year and

many challenges and difficulties enterprises face when starting new business and conducting

business activities were eliminated and favorable business environment was improved to certain

level. Moreover, Development Bank of Mongolia was established in order to increase sources of

financing for strategically important large projects and programs directed at rapid development

of economy. Furthermore, Fiscal Stability Law was adopted to provide sustainable developmentof economy so that it would be possible to maintain economic growth and prevent from risks.

Positive progress and improvement occurred in the national economy in 2010 in

comparison with 2009. This year real economic growth increased by 6.1 percent compared to

2009 and currency rate of MNT against USD was relatively stable in comparison with other

global currencies with slight appreciation. Foreign currency reserve increased 1.8 times to attain

USD 2091.2 million. In addition, many encouraging economic indicators were observed such as

fast development of national capital market and doubling of market capitalization. “Life vein” of

the economy, banking and financial sectors‟ activities advanced the level of 2009 which created

advantages for escalation of production and services and activation of economy. MNT depositsat commercial banks in 2010 increased by 51 percent, foreign currency deposit went up by 14.7

percent and lending by commercial banks increased by 22.9 percent as well.

A number of internal and external factors also made the growth of economy possible. For

instance, global economy stabilized while economic growth in some big developing countries

saw quick acceleration. It drove up the demand of our country‟s main export products and as a

result of high market price and increased demand, it provided favorable condition for economic

growth and development. Although several positive parameters have occurred in social and

economic sectors in 2010, a number of risks were also present that threatened to slow down the

economic growth rate and to unbalance macroeconomic stability. Furthermore, there is noguarantee that these risks would not happen again. Just to name a few impacts from welfare

policies because of political promises, we can point out price increase of basic goods and

services due to cash handout, burden of interest rate and fee on small and medium enterprises as

well as risks to limit economic growth and negatively affect the economic development.

Moreover, some external risks can also occur as global economy recovered and developing



countries, especially our neighbor China, are experiencing very rapid growth. It is leading to

overheat of the economy and is driving up the goods and services costs. It, in turn, would swell

the inflation and could even negatively affect economic growth of the nation. Loss of millions of

heads of livestock in 2010 due to harsh winter and dzud which has not occurred that severely

during the last several years resulted in risks and obstacles on the economy. Since we cannot

manage or influence natural phenomena, it reminds us that we need to take actions to prevent

further risks of dzud.

Promising indicators prevailed socio-economic situation in general this year such as

economy returned to the path of growth and population income advanced to certain level.

Therefore, we need to continue our efforts including establishment of the Development Bank to

increase its role and impact on the overall economy, prompt initiation of large project without

lapse of time to intensify the economy, construct infrastructure projects like railway, auto road

and power station, creation of workplaces in large number to improve population income

substantially, improvement of capital and financial markets even more and reaching international

standards.

--oo0oo--

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