Mongolia Country Risk Report

Providing comprehensive data and in-depth analysis of political, financial and economic risk.

Report includes: BMI's Core Views, 10-year Forecasts, BMI's Economic Risk Index, Political Stability and Risk Index, Long-term Political Outlook, Operational Risk Index, SWOT Analysis and Structural Economic Sections

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Mongolia Country Risk Report
Product Price
$1,195.00

Turning Positive On Growth Outlook

Core Views

  • 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.

Key Risks

  • 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.

Macroeconomic Forecasts (Mongolia 2014-2017)
Indicator 2014 2015 2016f 2017f
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
Executive Summary
5
Core Views
5
Major Forecast Changes
5
Key Risks
5
Chapter 1: Economic Outlook
7
SWOT Analysis
7
BMI Economic Risk Index
7
Economic Growth Outlook
8
Growth Downgrade Amid External Headwinds And Political Uncertainties
8
GDP By Expenditure Outlook
9
TABLE: GDP GROWTH FORECASTS
9
TABLE: PRIVATE CONSUMPTION FORECASTS
9
TABLE: GOVERNMENT CONSUMPTION FORECASTS
10
TABLE: FIXED INVESTMENT FORECASTS
10
TABLE: NET EXPORTS FORECASTS
10
Fiscal Policy
11
High Bond Yield Issuance Highlights Fiscal Vulnerabilities
11
TABLE: 2021 COUPON RATE PRICED SIGNIFICANTLY HIGHER THAN PREVIOUS ISSUANCES
11
Structural Fiscal Position
12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
13
Exchange Rate Outlook
13
MNT: Benefiting From USD Weakness, But Still Vulnerable To Shocks
13
TABLE: BMI CURRENCY FORECAST
14
Outlook On External Position
16
TABLE: MAIN EXPORT & IMPORT PARTNERS
16
TABLE: MAIN EXPORTS & IMPORTS
16
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
16
Monetary Policy
17
Rate Cut Cycle Not Yet Over
17
Monetary Policy Framework
18
Chapter 2: 10-Year Forecast
21
The Mongolian Economy To 2025
21
Fierce But Volatile Growth In Store
21
TABLE: LONG-TERM MACROECONOMIC FORECASTS
21
Chapter 3: Political Outlook
25
SWOT Analysis
25
BMI Political Risk Index
25
Domestic Politics
26
Election Preview: Coalition Government Likely
26
TABLE: POLITICAL OVERVIEW
26
Long-Term Political Outlook
28
Transforming Minerals Into Wealth
28
Chapter 4: Operational Risk
31
SWOT Analysis
31
Operational Risk Index
31
Chapter 5: BMI Global Macro Outlook
33
Global Macro Outlook
33
Tentative Stability,But New Risks Emerging
33
TABLE: GLOBAL ASSUMPTIONS
33
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
34
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
35
TABLE: MACROECONOMIC DATA & FORECASTS
37

Assess your risk exposure in Mongolia with our 100% independent forecasts assessing the pace and stability of this key market. Backed by trusted data from BMI Research's 52 million data point economic forecast model, this report will allow you to measure political, economic, business environment and operational risks in Mongolia with confidence.

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