MONGOLIA

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					                                                                                                                 cOuntRy paGes & Key indicatORs   53




mongol ia                                                           expenditures remain little changed. During the boom years
                                                                    of 2003-07, the government ran modest fiscal surpluses, but
population            2.6 million
                                                                    these turned out to be insufficient to absorb the fiscal shock
population growth     0.9 percent                                   caused by the collapse of the mineral prices and spending
surface area          1,567,000 sq.km.
                                                                    plans based on these prices remaining high. Moreover, the
                                                                    fiscal shock was made worse by government policies during
capital               ulan Batar                                    the boom years to shift the fiscal burden away from the non-
                                                                    mining sector, leaving the budget increasingly dependent on
                                                                    revenues from mining.

                                                                    The global downturn also aggravated problems in the financial
                                                                    sector which had been overheating during the boom years.
                                                                    During the boom, very high inflation (33.7 percent year-
                                                                    on-year in August 2008, the highest in East Asia) and loose
                                                                    monetary policies led to a credit boom that masked growth
                                                                    in non-performing loans (NPLs). High inflation also led to
                                                                    negative real interest rates on local currency deposits, resulting
                                                                    in flight of local currency savings into foreign exchange
                                                                    deposits, where interest rates were as high as 12-18 percent
                                                                    in some banks. As a result the successful policy actions by the
Mongolia has been one of the countries in East Asia hardest         central bank – including interest rate hikes and auctioning of
hit by the financial crisis, although unlike others, the crisis     foreign exchange - deposits have now recovered. However,
was transmitted via the commodity channel. The collapse in          non-performing loans have continued to increase, and bank
copper prices that began in July 2008 hit Mongolia harder           lending to the private sector has come to a virtual standstill,
than the other major copper producers (Chile, Peru, Papua           as banks prefer to invest in central bank bills instead.
New Guinea and Zambia), because of the country’s particular
combination of expansive fiscal and monetary policies,              For 2009, Mongolia is facing a major slowdown in real
a fixed exchange rate and – at that time - an overheating           GDP growth to an estimated 0.5 percent from 8.9 percent
financial sector.                                                   in 2008. Unemployment has been steadily increasing since
                                                                    the beginning of the year as a result of the contraction in the
The government took strong actions to address the economic
downturn from the start of 2009, supported by programs with         Nonperforming loans and loans in arrears
the IMF, the World Bank, the ADB and Japan. These have led
to a stabilization of the external sector, the exchange rate and                   Loans with principal in arrears
                                                                       600         non-performing loans to non-residents                20.4
the budget. The trade balance has improved, but this is in part                    non-performing loans to residents           17.8
                                                                       500
caused by the sharper contraction in imports than exports due
to the economic downturn itself. Attention now is shifting to          400
                                                                                                      10.7
tackling the strains in the financial sector and ameliorating the      300

effects of the downturn on the real economy, unemployment,             200   5.2
and poverty.                                                           100

                                                                         0
The latest developments show that the budget remains                     Jul-08     sep-08     nov-08        Jan-09   Mar-09   May-09   Jul-09
under pressure, as revenues have continue to drop, whereas



tRansfORMinG tHe ReBOund intO RecOveRy
54   cOuntRy paGes & Key indicatORs




     real sector. A recent survey of the informal urban sector and             in case of bank failures in order to retain confidence in the
     a recently commissioned study on the crisis implications for              financial sector. In addition, a restructuring of the banking
     household in the informal sector found that the effects of the            sector is envisaged after the completion of a series of loan
     economic slowdown have a widespread social and poverty                    portfolio audits. In the mining sector, the government can
     impact in Mongolia. Real effective income has fallen by                   now use the recent experience gained during the negotiations
     about 60 percent in some informal urban labor markets, due                of the OT investment agreement to improve the overall policy
     to high inflation eroding real wages and due to reduced job               environment.
     availability. Employment conditions
     are also becoming less favorable for          mongolia: Key Indicators
     informal workers in the rural regions,                                                   2004   2005   2006    2007   2008 2009e 2010f
     and herders and informal mining               output, employment and Prices
     workers are barely able to cope with the      Real Gdp (% change y-y)                     10.6    7.3    8.6    10.2    8.9   0.5    3.0
     decreasing job availability, falling wages    industrial production index                    ..     .. 100.0 110.4 113.4        ..     ..
                                                      (% change y-y)                              ..     ..     ..   10.4   2.8      ..     ..
     and increasing living expenses.
                                                     unemployment (%)                              3.6            3.3        3.2       2.8         2.8          ..            ..
                                                     consumer price index (% change y-y)          10.9            9.6        5.9      14.1        23.2        8.5             ..
     Recently, Parliament voted to approve
                                                     Public Sector
     four draft law amendments necessary             Government balance (% Gdp)                    -1.8           2.6        8.1        2.8       -5.0       -6.5             ..
     for the conclusion of the Oyu Tolgoi            domestic public sector debt (% Gdp)            1.4           0.1        1.0        0.5        0.0        0.0             ..
     (OT) investment agreement between
                                                     Foreign Trade, boP and external Debt
     the government and Ivanhoe Mines/Rio            trade balance (millions us$)                  -99          -100        136        -52        613       -183              ..
     Tinto. If the deal is concluded, the Oyu        exports of goods (millions us$)               872         1,066      1,544      1,951      2,535      1,830              ..
     Tolgoi copper and gold mine will make a            (% change y-y)                            39.0          22.2       44.8       26.4       29.9      -27.7              ..
                                                     Key export (% change y-y) 1/                     ..        14.7       94.8       27.7         3.0          ..            ..
     substantial contribution to the economic
                                                     imports of goods (millions us$)               971         1,166      1,408      2,003      3,147      2,013              ..
     growth of Mongolia in the near future.             (% change y-y)                            17.5          20.0       20.8       42.3       57.1      -35.7              ..
                                                     current account balance (millions us$)          24            30       222        265       -722       -291              ..
     Going forward, it is important that the            (% Gdp)                                     1.3           1.3        7.0        6.7     -13.9        -6.9             ..
                                                     foreign direct investment (millions us$)      129           258        290        360        586        517              ..
     government focuses on implementing
                                                     external debt (millions us$)                1,312         1,360      1,414      1,529      1,601      1,860              ..
     a fiscal responsibility framework to               (% Gdp)                                   73.7          59.7       44.3       38.9       33.1       46.5              ..
     avoid a repeat of the boom-and-bust             short-term debt (millions us$) 2/              0.0           0.0        0.0        0.0        0.0          ..            ..
     spending pattern that Mongolia has              debt service (% exports of g&s) 3/             9.4           7.6        5.4        4.3        3.5        4.3             ..
                                                     foreign exchange reserves (millions us$)      208           333        718      1,001        657        822              ..
     just experienced. It is also important
                                                        (month of imports of g&s)                  1.8           2.5        4.6        5.0        2.1         3.7             ..
     to improve the planning and budgeting
                                                     Financial markets
     for public investments, and to prioritize
                                                     domestic credit (% change y-y)               25.8   18.8   -3.1   78.4   60.6                               ..           ..
     the    protection    of    infrastructure       short-term interest rate (% p.a.) 4/         15.8    3.7    5.1    8.4    9.8                               ..           ..
     maintenance—critical      during      the       exchange rate (tugrik/us$, eop)            1209.0 1221.0 1165.0 1170.0 1267.5                               ..           ..
     downturn. Protecting the poor during            Real effective exchange rate (2000=100)      95.4 101.8 107.1 109.0 130.2                                   ..           ..
                                                        (% change y-y)                            -1.5    6.7    5.2    1.8   19.5                               ..           ..
     this downturn is a challenge, but can
                                                     stock market index (2000=100) 5/             121    204    382 2,048 1,182                                  ..           ..
     be achieved by starting to target the
                                                     Memo: nominal Gdp (millions us$)           1,814         2,307       3,156      3,930      5,258            ..           ..
     currently untargeted social grants (in
     particular, the Child Money Program).
                                                     Sources: national data sources
     In the financial sector, the authorities        e = estimate                                          3/ On ppG debt.
                                                     f = forecast                                          4/ yield of 14-day bills until 2006 and of 7-day bills for 2007.
     should ensure stability by intensifying         1/ copper concentrate.                                5/ top-20 index, eop, index=100 in dec-2000.
     supervision and taking decisive action          2/ short-term ppG debt.




                                                                                                                                          eap update november 2009

				
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