Gradual Recovery On The Cards
Parliamentary elections are scheduled to take place by June 2016, and Mongolia's political environment will be volatile ahead of the elections. The two major parties, namely the Democratic Party and the Mongolian People's Party, are unlikely to win a convincing mandate, and we expect a coalition government to be formed. This means that the business environment will remain challenging for investors.
The Mongolian economy will begin a gradual recovery in 2016, and we forecast real GDP growth to average 7.9% over the next decade as investment recovers owing to the second phase expansion of the Oyu Tolgoi (OT) copper and gold mine, which is estimated to commence in the middle of 2016. However, the landlocked economy will continue to face headwinds due to a cooling Chinese economy, which will prevent the Mongolian economy from growing at a faster pace.
We remain bearish on the Mongolian togrog against the US dollar, and forecast the unit to average MNT2,075/USD in 2016 and MNT2,178/USD in 2017. The country's widening current account deficit and signs of increasing external vulnerability will put downside pressure on its currency. However, the return of foreign inflows due to the second phase development of the Oyu Tolgoi gold and copper mine will prevent any excessive weakness.
Following the decision by the Bank of Mongolia (BoM) to reduce its 1-week central bank bill by 100 basis points (bps) to 12.00% in late-December 2015, we forecast that the central bank will cut its key policy rate by another 100bps to 11.00% by the end of 2016, with the aim of supporting the country's sluggish economy. Falling headline consumer price inflation (CPI) due to shrinking money supply will provide scope for the central bank to ease its monetary policy stance over the coming months.
Mongolia will continue to run fiscal deficits in the coming years as structurally low commodity prices temper revenue growth while public expenditure growth remains elevated as the government struggles to reduce spending in 2016 as parliamentary elections loom. The country is increasingly at risk of a credit event as Mongolia and its state-linked entities are facing significant bond repayments beginning from 2017.
Major Forecast Changes
We have downgraded our 2016 real GDP growth forecast to 3.2% (versus 4.5% previously) as the country's economic fundamentals worsen and a further deceleration in the Chinese economy, which accounts for approximately 90% of the demand of Mongolia's overall exports.
We have revised weaker our average currency forecast to MNT2,075/USD in 2016 (versus MNT2,000/USD previously) as the country's widening current account deficit due to a pick up in imports and subdued export growth amid continued elevated external indebtedness will put downside pressure on the togrog.
We have downgraded the government's reported budget deficit as a share of GDP to 6.2% in 2016 (from 6.0% previously) as austerity by the government is unlikely to be successful in a parliamentary election year, keeping expenditure elevated. Meanwhile, government revenues will remain weak as any recovery in the Mongolian recovery is likely to be gradual.
Upside Risk: An early start of the second phase of expansion at the OT project would help galvanise investment activity.
Downside Risk: In a worst-case scenario, a significant slowdown in Chinese economic growth and, by extension, demand for commodity imports would seriously hamper Mongolia's growth prospects. Any deterioration in the country's business environment due to delays in other major mining projects could weaken investor confidence, which could force the BoM to hike rates unexpectedly (to the detriment of the banking sector), in order to shore up the currency.
|e/f= BMI forecast. Source: BMI, National Sources|
|Real GDP growth, % y-o-y||7.9||2.5||3.2||6.6|
|Nominal GDP, USDbn||12.0||12.1||12.6||13.5|
|Consumer price inflation, % y-o-y, eop||11.0||1.9||5.0||6.5|
|Exchange rate MNT/USD, eop||1,888.50||1,993.00||2,150.50||2,205.02|
|Budget balance, % of GDP||-4.1||-4.9||-6.2||-6.0|
|Current account balance, % of GDP||-8.2||-7.2||-9.2||-9.2|
The Mongolia Country Risk Report helps businesses with market assessment, strategic planning and decision making to promote growth and profitability in Mongolia. It is an essential tool for CEOs, Chairmen, Finance Directors/CFOs, Managing Directors, Marketing/Sales Directors with commercial interests in this emerging market.
An influential new analysis of Mongolia's economic, political and financial prospects through end-2019, just published by award-winning forecasters, BMI Research.
- Forecast the pace and stability of Mongolia's economic and industry growth through end-2019.
- Identify and evaluate adverse political and economic trends, to facilitate risk mitigation.
- Assess the critical shortcomings of the operating environment that pose hidden barriers and costs to corporate profitability.
- Contextualise Mongolia's country risks against regional peers using BMI's country comparative Risk Index system.
- Evaluate external threats to doing business in Mongolia, including currency volatility, the commodity price boom and protectionist policies.
BMI provides our fully independent 5-year forecasts for Mongolia through end-2019 for more than 50 economic and key industry indicators. We evaluate growth, and also forecast the impact of economic management.
Economic Outlook Contents
The Mongolia Country Risk Report features BMI's forecasts with supporting analysis for 2015 through to end-2019, set against government views and BMI's evaluation of global and regional prospects.
Key Areas Covered:
- Full 10-year forecasts with data - for key macroeconomic variables including GDP (real growth and per capita), population, inflation, current account balance and the exchange rate.
- BMI's comprehensive Risk Index system - rates each country worldwide for economic and political risk, and rates the business environment, within a global and regional context.
- Economic Activity - real GDP growth, employment, inflation, consumption (retail sales and confidence).
- Balance of Payments - trade and investment, current and capital account.
- Monetary Policy - interest rate trends (bank lending and deposit rates) and inflation (producer price and consumer price).
- Exchange Rate Policy - currency controls, foreign investment flows, exchange rates and foreign exchange reserves.
- Fiscal Policy - macroeconomic strategy and policies, government finance and tax reforms.
- Foreign Direct Investment - approvals, inflows and climate.
- External Debt - debt profile (short and long-term plus public and private sector obligations).
- Global Assumptions - forecasts for each year to end-2019 covering: major commodities, growth in key regions, inflation, and interest and exchange rates, in the United States, Japan, China and the eurozone.
- Rely upon BMI's 100% independent forecast scenarios for Mongolia and underlying assumptions - we take no advertising and are privately-owned.
- Exploit the benefits of BMI's comprehensive and reliable macroeconomic database on Mongolia, sourced and fully maintained by BMI from an extensive network of private sector, government and multilateral contacts.
- Gain key insights into the current and future direction of government economic policy, which could significantly affect your company's business prospects, from BMI's team of analysts and economists.
What are the political risks to doing business in Mongolia over the next 5-years?
BMI's Mongolia country Risk Index evaluates the short- and medium-term threats to political stability.
Political Outlook Contents
- SWOT Analysis for the Mongolia Market - Political Strengths, Weaknesses, Opportunities and Threats facing Mongolia.
- Political Stability and Risk Assessment - BMI's Risk Index assesses explicit short- and long-term risks to political stability; latest positioning and trends for Mongolia's risk are compared with regional and global averages.
- Current Administration and Policy-making BMI assesses the threats to the continuity of economic policy, and likely changes to the business operating environment.
- Long-Term Political Outlook BMI examines the structural risks to the stability of Mongolia’s political system and the dominant public policy issues likely to affect decision-makers, and outlines scenarios for how the state could evolve in the medium to long term.
- Benchmark Mongolia's risk profile against its neighbours, the global and regional average, allowing easy comparison of risks between key business markets.
- Identify, evaluate and anticipate political and security risks to the business environment, and to your company's current operations and future plans.
- Gain valuable insights into government and policy-making, through BMI's specialist team of analysts and economists, and their network of private and public sector sources.
What are the current operational risks and difficulties associated with doing business in Mongolia?
The Operational Risk section gives an evaluation of current risks and difficulties associated with operating in the market. It also provides a brief overview of the regional Operational Risk Index which benchmarks Mongolia against its neighbours.
Operational Risk Contents
The chapter provides a summary of the main threats in the country, within:
- Labour Market Risk (Education; Availability of Labour; and Labour Costs)
- Logistics Risk (Market Size and Utilities; Quality and Extent of the Transport Governance)
- Trade and Investment Risk (Economic Openness; Government Intervention; and Legal Risks)
- Crime and Security Risk (Crime; Terrorism; and Interstate Conflict risks).