Sovereign Outlook To Remain Weak
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 expanded at a muted rate of 1.4% y-o-y in H116, and we are downgrading our 2016 real GDP growth forecast to 1.2% (from 3.0% previously) to reflect this deterioration. However, the Mongolian economy should recover gradually from 2017 mainly due to the second phase development of the Oyu Tolgoi copper and gold mine, despite our slight revision of the 2017 growth forecast to 3.7% (versus 4.2% previously).
The Mongolian togrog has weaken significantly to record low levels against the US dollar, and we are revising our 2016 average forecast to MNT2,150/USD (versus MNT2,040 previously) as investors are likely to maintain their cautious stance towards the currency. Nevertheless, we forecast the MNT to stabilise in 2017 and average MNT2,300/USD. Capital flows will likely return gradually amid confidence instilled by a possible IMF bailout, efforts by policymakers to consolidate its fiscal accounts, and a modest recovery mainly driven by the second phase expansion of the Oyu Tolgoi copper and gold mine.
Mongolia's weak public finances have worsen significantly over the course of 2016, and they are likely to improve marginally over the coming years. The MPP-led government aims to contain spending while increasing revenues by raising personal income taxes. We forecast the reported fiscal deficit as a share of GDP to widen significantly to 19.0% in 2016 (from 5.0% in 2015), before narrowing slightly to 18.6% in 2017.
Major Forecast Changes
We have downgraded our 2016 real GDP growth forecast to 1.2% (from 3.0% previously) as the Mongolian economy deteriorated in Q216. That said, we believe that the recovery has only been delayed, and the implementation of the second phase expansion of the Oyu Tolgoi (OT) copper and gold mine should lead to a pick up in growth over the coming years.
The Mongolian togrog has depreciated by around 16% against the US dollar since the start of 2016, we have revised our average 2016 forecast weaker to MNT2,150/USD (from MNT2,040/USD previously) as we expect the currency to remain under downside pressure over the coming months.
We have revised our forecast for the reported fiscal deficit as a share of GDP to 19.0% in 2016 and 18.6% in 2017 (versus 8.0% and 7.8% previously) to reflect the sharp deterioration in Mongolia's fiscal deficit over the course of 2016.
Upside Risk: An earlier ramp up of the second phase expansion at the OT project would help galvanise investment activity significantly.
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||1.2||3.7|
|Nominal GDP, USDbn||12.3||11.7||11.1||11.2|
|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||2,300.00||2,300.00|
|Budget balance, % of GDP||-4.0||-5.0||-19.0||-18.6|
|Current account balance, % of GDP||-11.5||-4.0||-9.7||-11.9|
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.
Your subscription service includes:
- Delivery of the report in print and PDF
- Online access for 12 months
- The functionality to translate your online report into your choice of 10 languages - Arabic, Chinese, French, German, Italian, Japanese, Korean, Portuguese, Russian and Spanish
- The ability to export data and graphs from the online report directly into your workflow
- The support of a dedicated Account Manager to answer any questions you might have about your subscription
- Access to our team of leading analysts who will be happy to answer any questions you might have about the data and forecasts included in this report