Turning Positive On Growth Outlook
The landslide victory by the Mongolian People's Party (MPP) in the June 29 parliamentary elections will usher in a period of relative political stability and improved policy co-ordination over the coming years.
Mongolia's real GDP growth is stabilising, and appears to be turning the corner. Therefore, we are upgrading our 2016 real GDP growth to 3.0% (from 1.5% previously), and maintaining our 2017 forecast of 4.2%. Investment in the land-locked nation will recover amid improved policy-making under the MPP-led government and the start of the second phase construction of the Oyu Tolgoi (OT) underground copper and gold mine in H216. 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 are cautious on the Mongolian togrog against the US dollar, and maintain our forecast for the unit to average MNT2,044/USD in 2016 and MNT2,088/USD in 2017. The currency's valuations are elevated, and the togrog is still vulnerable to shocks owing to its high level of external indebtedness and the central bank's weak external liquidity position.
We are paring back our dovish expectations due to the lack of easing bias by the Bank of Mongolia (BoM) at its July monetary policy meeting where it held its benchmark policy rate steady at 10.50% and signs of currency weakness. We are now forecasting the central bank to cut interest rates by 50bps to 10.00% by end-2016 (versus 75bps previously). A muted inflationary environment should provide sufficient policy space for the central bank to attempt to provide continued support to the economy.
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 amid insufficient expenditure cutbacks due to the government's poor fiscal discipline. 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, and it is highly likely that the Mongolian government would have to refinance at significantly higher yields, if it were to be successful at it.
Major Forecast Changes
We have upgraded our 2016 real GDP growth forecast to 3.0% (from 1.5% previously) as the country's real GDP growth appears to be stabilising and turning the corner. We expect investment to recover as the second phase development of the OT mine begins in H216 and improved policy certainty.
We have revised our forecast for the reported fiscal deficit as a share of GDP to 8.0% in 2016 and 7.8% in 2017 (versus 6.7% for both years previously) to reflect the sharp deterioration in Mongolia's fiscal deficit in H116.
We have pared back our dovish expectations, and now forecasting the BoM to cut its 1-week central bank bill rate by 50bps to 10.00% by the end of 2016 (versus 75bps previously). At the same time, we also downgraded our average 2016 headline consumer price inflation (CPI) forecast to 2.5% y-o-y as price pressures have remained muted so far in 2016. However, inflation will remain substantially lower than the central bank's target of 7.0% y-o-y in 2016, implying that there is still room for the central bank to ease interest rates further.
Upside Risk: An early ramp up of the second phase 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|
|Real GDP growth, % y-o-y||8.1||2.4||3.0||4.2|
|Nominal GDP, USDbn||12.3||11.7||12.0||12.6|
|Consumer price inflation, % y-o-y, eop||11.0||1.9||2.5||5.0|
|Exchange rate MNT/USD, eop||1,888.50||1,993.00||2,075.00||2,100.00|
|Budget balance, % of GDP||-4.0||-5.0||-8.0||-7.8|
|Current account balance, % of GDP||-11.5||-4.0||-8.7||-10.1|
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