Persistent uncertainties clouding Mongolia's political and business environment outlook suggest that downside risks remain to our real 2014 and 2015 GDP forecast of 9.8% and 8.0% respectively. Our core scenario remains for an agreement for the Oyu Tolgoi (OT) mine expansion to be reached by end-2014 although we note downside risks that further delays could mean that an agreement will only be reached after parliamentary elections in 2016. Indeed, rising domestic opposition from both within the ruling coalition and bureaucrats threatens to prevent the government from passing the legislative changes needed to restore investor confidence in the economy.
The Togrog remains under immense depreciatory pressures, with the latest dispute between Rio Tinto and the Mongolian government (over alleged tax evasion) further weakening the unit in addition to the 10% losses since the beginning of 2014. We believe that fundamental and technical factors continue to suggest that the currency will remain on a depreciatory trend for 2014, but expect the unit to see some respite when an agreement for the OT mine expansion is reached by end-2014.
Headline inflation is now firmly in double-digit territories, stoked by the Togrog's depreciation and the government's housing stimulus. With its latest 150 basis points (bps) hike, we do not expect the Bank of Mongolia (BoM) to raise rate beyond the current 12.00%, especially with credit growth waning and growth remaining a priority for the monetary authority.
The Mongolian government continues to make considerable expenditure through the Development Bank of Mongolia (DBM), which is operating off-budget. We remain doubtful about whether the authorities will be able to keep within the 2% of GDP structural deficit limit mandated by the Fiscal Stability Law (FSL), and note that the government is facing increasing political and social pressure to further increase its fiscal spending to offset the impact from the weakening economy. This presents risks to the country's long-term fiscal sustainability, especially if the mining projects are not brought online.
Major Forecast Changes
We have downgrade our real GDP forecast for 2015 to 8.0% as the OT expansion plans have not been agreed on or finalised. With rising twin current account and fiscal account deficits stoking inflationary pressures higher and the Togrog weaker, we believe the risks to growth are firmly to the downside, and note that assistance from a multilateral organisation may be needed should crisis occurs.
Key Risks To Outlook
Upside Risk: An early start of the second phase of expansion at Oyu Tolgoi (OT) would help galvanise investment activity.
Downside Risk: In a worst-case scenario, a collapse in Chinese economic growth and, by extension, demand for commodity imports would seriously hamper Mongolia's growth prospects. Further delays in the resolution of the Oyu Tolgoi expansion could weaken investor confidence, which could force the BoM to hike rates beyond the 100bps we forecast in 2015 (to the detriment of the banking sector), in order to shore up the currency.
|Nominal GDP, USDbn||10.3||11.5||11.7||14.3|
|Real GDP growth, % y-o-y||11.9||11.7||9.8||8.0|
|Consumer price inflation, % y-o-y, eop||14.0||11.9||17.0||15.0|
|Exchange rate MNT/USD, eop||1,390.50||1,663.00||1,935.00||1,849.86|
|Budget balance, % of GDP||-7.7||-1.4||-1.4||-0.1|
|Current account balance, % of GDP||-32.8||-27.4||-32.9||-31.9|