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FEATURE STORY

Mongolia Quarterly Economic Update - April 2011

May 5, 2011

Medium-term look

  • Mongolia’s prospects in the medium term look excellent from a growth perspective as well as a fiscal management perspective.
  • Staying the course in the medium term means implementing the landmark Fiscal Stability Law (FSL) passed last year, and adopting a supportive integrated budget law this spring session of parliament.

Economic Growth

  • The economy grew 6.1 percent year-on-year in 2010, following a contraction of 1.3 percent in 2009.
  • The last quarter of 2010 ended with a broad-based recovery, supported by transportation, construction and wholesale and retail trade.
  • For the employment of the poorest segments of society, the agriculture sector (down 17 percent yoy in 2010) experienced double digit contractions in all four quarters in 2010.
  • March data show a moderation in the headline UB inflation to 7.4 percent yoy, following an 11 percent yoy increase in the previous month. However, food prices are rising in Russia and China, from where Mongolia imports the bulk of its main food commodities.

Inflation

  • As a result of declining meat prices April data show a moderation in the headline UB inflation to 4.2 percent yoy, following a 7.4 percent yoy increase the previous month.
  • Meat prices, which constitutes about 40 percent of the food basket, declined by 10.4 percent yoy due to the additional supply of reserve meat. Consequently, food prices in Ulaanbaatar declined to 0.8 percent yoy, down from 6.4 percent increase in the previous month. However, prices of other food items continued their upward trend. In April, rice, flour and bread prices increased 11.8 percent yoy and fruits increased 33.7 percent yoy from 0.5 percent a year ago. These food items constitute about 37 percent of the food basket.
  • Core inflation continued to increase and reached 6.1 percent yoy in April from 5.3 percent yoy in February.

Budget

  • The latest fiscal data show continued improvement in the budget outturns. On a 12-month rolling basis, the fiscal surplus increased to 2.4 percent of GDP in March 2011, up from a 5 percent deficit in March last year.
  • The 2011 Budget of Mongolia envisages a steep increase in government spending to an unprecedented MNT 779 billion (over 52 percent of GDP).

Trade

  • Imports increased to record levels of 86 percent yoy in March as the trade deficit continued to widen reaching US$ 646 million.
  • Exports were up 71 percent yoy supported by the upward momentum in metal prices and large coal and copper imports by China, which absorbs 90 percent of Mongolia’s exports.

Banking Sector

  • In the banking sector, the steady rise in NPL ratios in 2009 has been reversed. However, there continue to exist solvency concerns for small and medium banks.
  • The stock of loans outstanding is on the rise since December 2009, up 35 percent yoy in March 2011 or 29 percent in real terms.
  • With credit growing this fast, as was the case prior to the 2008 crisis, regulatory and oversight issues among Mongolian banks (along with capital adequacy) remain crucial.

Labor Markets

  • Due to the increased activity in the construction sector, the number of informal workers in construction material markets rose while the number of informal workers declined in the other markets.
  • Workers’ real informal market wages on average increased by about 18 percent from December to March 2011, due to improved weather and moderated inflation.
  • Of the most vulnerable in society, about 40 percent of those surveyed continue to indicate that their earnings do not meet their basic needs, while the rest rely on these markets for food and shelter only. 

Similarities with the period prior to the 2008 crisis

  • The plans include large cash handouts, exerting upward pressure on prices for the second half of 2011, with the risk of substantial second-round effects in the form of a wage-price spiral.
  • While real interest rates are currently positive due to the fall in inflation, upward pressure on prices warrants a close watch on these rates, which could return to negative territory as was the case before the crisis.
  • With the trade deficit continuing to widen with the mining boom, the current account is also in deficit—as was the case prior to the crisis. Consequently, there is a risk of returning to the boom-bust scenario that prevailed before 2008.
  • High domestic inflation will cause the currency to appreciate in real terms, ultimately hurting the export sectors, and possibly creating a macroeconimic scenario called the Dutch Disease.

Prospects

  • Mongolia has the opportunity now to exercise prudent fiscal and macroeconomic policies so it can steer clear of the mistakes made by other resource rich economies and achieve its potential.
  • The Integrated Budget Law, which reforms the budget process and supports the implementation of the FSL, will be debated in Parliament’s spring session and would be an important step in permanently locking in prudent fiscal policies and mechanisms