The Mongolian government will continue to keep on good terms with its neighbours. Mongolia remains at risk of becoming dependent on China, and therefore it will continue to pursue investment ties with other countries in the US, India, as well as states in the North Asian region such as Japan in its so called 'third neighbour' foreign policy.
Weak mining-related investment, subdued export demand due to a cooling Chinese economy, and a slowdown in the construction and real estate sectors will act as headwinds to the Mongolian economy in 2015. Beyond 2015, we expect real GDP growth to pick up over the coming years, averaging 8.1% over the next decade, as the second phase expansion of the Oyu Tolgoi (OT) copper and gold mine looks set to being in late 2015.
We are bearish on the Mongolian togrog against the US dollar owing to the country's weak economic fundamentals and technical picture. Notably, elevated inflation and a deteriorating terms of trade picture point towards further weakness in the Mongolian togrog. However, the weakness will not be excessive as foreign capital return to the country owing to the second phase expansion of the OT copper and gold mine, which looks set to begin in late 2015. We forecast the unit to average MNT1,975/USD in 2015 and MNT2,000/USD in 2016.
Headline inflation will decline over the coming months on the back of the Bank of Mongolia (BoM)'s tight monetary policy, and we expect headline consumer price inflation (CPI) to average 7.0% in 2015 (versus 12.9% in 2014). Meanwhile, we expect the BoM to keep its key policy rate on hold at 13.00% for the time being, before cutting by 100 basis points (bps) to 12.00% in Q415, in an attempt to support the flagging economy.
The Mongolian government continues to make considerable expenditure through the Development Bank of Mongolia (DBM), which is operating off-budget. We remain concerned about the country's overall fiscal deficit over the coming years as it will remain elevated. Fiscal revenue growth will be significantly lower than expenditure growth due to weak commodity prices, particularly copper and coal, presenting huge risks to the country's long-term fiscal sustainability.
Major Forecast Changes
We have revised our average 2015 and 2016 forecast for the Mongolian togrog stronger to MNT1,975/USD and MNT2,000/USD (from MNT2,000/USD and MNT2,100/USD previously). The unit was stronger than what we had anticipated in the first half of 2015 due to the significant volatility. Meanwhile, we expect the pace of depreciation to be more gradual in 2016 as foreign capital returns to the country.
We have revised down our average consumer price inflation forecast for 2015 to 7.0% from 8.5% previously as money supply growth slows over the coming months.
We have downgraded the government's reported budget deficit as a share of GDP to 5.3% in 2015 from 5.0% previously as fiscal revenue growth will be significantly lower than expenditure growth owing to weak commodity prices.
Key Risks To Outlook
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.
|f= BMI forecast. Source: BMI, National Sources|
|Nominal GDP, USDbn||12.7||12.0||12.5||14.0|
|Real GDP growth, % y-o-y||11.6||7.9||4.6||5.8|
|Consumer price inflation, % y-o-y, eop||12.5||11.0||9.5||8.0|
|Exchange rate MNT/USD, eop||1,663.00||1,888.50||2,050.00||2,150.45|
|Budget balance, % of GDP||-1.3||-4.1||-5.3||-5.5|
|Current account balance, % of GDP||-24.8||-8.2||-10.1||-9.1|