Mongolia Country Risk Report Q2 2016
Parliamentary elections are scheduled to take place by June 2016,and Mongolia’s political environment will be volatile ahead of theelections. The two major parties, namely the Democratic Partyand the Mongolian People’s Party, are unlikely to win a convincingmandate, and we expect a coalition government to be formed.
This means that the business environment will remain challengingfor investors.
The Mongolian economy will begin a gradual recovery in 2016, andwe forecast real GDP growth to average 7.9% over the next decadeas investment recovers owing to the second phase expansion of theOyu Tolgoi copper and gold mine, which is estimated to commence inthe middle of 2016. However, the landlocked economy will continue toface headwinds due to a cooling Chinese economy, which will preventthe Mongolian economy from growing at a faster pace.
We remain bearish on the Mongolian togrog against the USdollar, and forecast the unit to average MNT2,075/USD in 2016 andMNT2,178/USD in 2017. The country’s widening current accountdeficit and signs of increasing external vulnerability will put downsidepressure on its currency. However, the return of foreign inflows dueto the second phase development of the Oyu Tolgoi gold and coppermine will prevent any excessive weakness.
Following the decision by the Bank of Mongolia (BoM) to reduceits 1-week central bank bill by 100 basis points (bps) to 12.00% inlate-December 2015, we forecast that the central bank will cut itskey policy rate by another 100bps to 11.00% by the end of 2016,with the aim of supporting the country’s sluggish economy. Fallingheadline consumer price inflation due to shrinking money supplywill provide scope for the central bank to ease its monetary policystance over the coming months.
Mongolia will continue to run fiscal deficits in the coming years asstructurally low commodity prices temper revenue growth while publicexpenditure growth remains elevated as the government strugglesto reduce spending in 2016 as parliamentary elections loom. Thecountry is increasingly at risk of a credit event as Mongolia and itsstate-linked entities are facing significant bond repayments beginningfrom 2017.
Major Forecast Changes
We have downgraded our 2016 real GDP growth forecast to 3.2%(versus 4.5% previously) as the country’s economic fundamentalsworsen and a further deceleration in the Chinese economy, whichaccounts for approximately 90% of the demand of Mongolia’soverall exports.
We have revised weaker our average currency forecast to MNT2,075/USD in 2016 (versus MNT2,000/USD previously) as the country’swidening current account deficit due to a pick up in imports andsubdued export growth amid continued elevated external indebtednesswill put downside pressure on the togrog.
We have downgraded the government’s reported budget deficit asa share of GDP to 6.2% in 2016 (from 6.0% previously) as austerityby the government is unlikely to be successful in a parliamentaryelection year, keeping expenditure elevated. Meanwhile, governmentrevenues will remain weak as any recovery in the Mongolianrecovery is likely to be gradual.
- Executive Summary
- Core Views
- Major Forecast Changes
- Key Risks
- Chapter 1: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Index
- Economic Growth Outlook
- Gradual Recovery In 2016 As Challenges Remain
- Mongolia's headline real GDP growth continued to trend slower in Q315, moderating to a fresh multi-year low of 1.9% y-o-y, but we
- expect growth to head marginally higher to 3.2% in 2016 (versus an estimated 2.5% in 2015). Although the second phase development
- of the Oyu Tolgoi gold and copper mine will provide support to investment when it commences in the middle of 2016, the landlocked
- economy will continue to face headwinds from a slowing Chinese economy and poor agricultural production.
- GDP By Expenditure Outlook
- TABLE: GOVERNMENT CONSUMPTION FORECASTS
- TABLE: GDP GROWTH FORECASTS
- TABLE: PRIVATE CONSUMPTION FORECASTS
- TABLE: FIXED INVESTMENT FORECASTS
- TABLE: NET EXPORTS FORECASTS
- Currency Forecast
- MNT: Still At The Mercy Of Downside Risks
- The Mongolian togrog is yielding to downside pressure against the US dollar so far in 2016, despite holding firm in the last quarter of
- 2015 due to management by the Bank of Mongolia, and we maintain that further weakness is in store for the currency over the medium
- term. The country's widening current account deficit and signs of increasing external vulnerability will put downside pressure on its
- currency. However, the return of foreign inflows due to the second phase development of the Oyu Tolgoi gold and copper mine will
- prevent any excessive weakness.
- TABLE: BMI CURRENCY FORECAST
- Outlook On External Position
- TABLE: MAIN EXPORT & IMPORT PARTNERS
- TABLE: MAIN EXPORTS & IMPORTS
- TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
- Monetary Policy
- BoM To Cut Rates Further As Inflation Eases Amid Gradual Recovery
- Following the Bank of Mongolia (BoM)'s decision to cut its 1-week central bank bill rate by 100bps to 12.00% during its December 22
- 2015 monetary policy meeting, we forecast the central bank to reduce its benchmark policy by another 100bps to 11.00% by the end
- of 2016. In an environment in which inflation is likely to remain relatively muted over the coming months, we believe there is increasing
- space for the central bank to ease interest rates, in an attempt to support the sluggish domestic economy.
- Monetary Policy Framework
- Fiscal And Public Debt Outlook
- Public Finances To Worsen In 2016
- Mongolia's public finances continue to deteriorate, and we expect their fiscal accounts to worsen further in 2016 owing to poor revenue
- collection and insufficient expenditure cutbacks due to the government's poor discipline. Therefore, we forecast Mongolia's reported
- fiscal deficit as a share of GDP to widen to 6.2% in 2016 (versus an estimated rate of 4.9% in 2015). Meanwhile, significant external
- bond repayments are due beginning from 2017, and the risks of a credit event are rising given that the country's vulnerabilities stemming
- from its twin deficits will persist over the coming years.
- Structural Fiscal Position
- TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
- Chapter 2: 10-Year Forecast
- The Mongolian Economy To 2025
- Fierce But Volatile Growth In Store
- At face value, Mongolia’s long-term economic prospects appear nothing short of formidable, such is the size of untapped natural
- resource wealth in the country, and we expect the country to remain one of the fastest-growing economies globally through to 2025 (at
- an annual average clip of 7.9%). That said, we do not expect the coming decade to be smooth sailing. Structural factors such as the
- magnitude of investment spending, the unprecedented scale of money creation, a gradual erosion of the local business environment,
- and question marks over the sustainability of long-term Chinese commodity demand all point to a more volatile growth trajectory for
- Mongolia in the years ahead.
- TABLE: LONG-TERM MACROECONOMIC FORECASTS
- Chapter 3: Political Outlook
- SWOT Analysis
- BMI Political Risk Index
- Domestic Politics
- Political Uncertainty To Remain Elevated
- Mongolia's political environment remains highly volatile, and we do not expect such uncertainty to abate anytime soon ahead of the
- country's parliamentary elections, which are set to take place by the middle of 2016. Coupled with deteriorating macroeconomic
- fundamentals stemming from its twin fiscal and current account deficits, we expect the country's currency and bonds to remain under
- considerable downside pressures.
- Long-Term Political Outlook
- Transforming Minerals Into Wealth
- The Mongolian government will face major domestic challenges over the coming decade as the country's mining boom takes off, and it
- seeks to strike a balance between distributing the revenues in a way that is acceptable to the population, while avoiding stoking inflation.
- Moreover, we believe it will face a tough task in managing the social change that the mining boom will create, including immigration and
- the growing gap between rich and poor. In foreign policy, the government's chief priority will remain avoiding falling too much under the
- influence of neighbours Russia and China, though we believe the latter in particular will prove almost impossible.
- Chapter 4: Operational Risk
- SWOT Analysis
- Operational Risk Index
- Chapter 5: BMI Global Macro Outlook
- Global Macro Outlook
- Downside Risks Gather Momentum
- TABLE: GLOBAL ASSUMPTIONS
- TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
- TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
- TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
- TABLE: MACROECONOMIC DATA & FORECASTS