Real Sector Development
- The Mongolian economy will likely show another double digit growth in 2013 but is exposed to downside risks.
- The World Bank is revising its baseline growth forecast for 2013 to 12.5 percent from its previous forecast (13 percent) of the April Economic Update, reflecting the softer growth in China than we had previously projected in April and lower-than-expected pace of recovery in mining.
- Inflation remains at a single digit level but shows growing inflationary pressure in recent months.
- The national headline inflation picked up to 9.4 percent in August and further to 9.9 percent in September on year-on-year basis, after a steady downward trend earlier this year.
Fiscal Development and Outlook
- Rising off-budget spending remains a concern as large portion of the Chinggis bond proceeds have been used to finance public investment projects outside the budget, mainly through the Development Bank of Mongolia (DBM).
- The fiscal consolidation plan is a positive step toward more sustainable fiscal path, however the fiscal policy remains highly expansionary in 2013 due to the large off-budget spending.
Monetary and Banking Sector
- The monetary authorities have embarked on aggressive monetary easing programs in 2013 to offset the slowing credit growth early this year.
- Loose monetary policy has led to accelerating credit growth in recent months, particularly in construction and housing sector.
- The recent acceleration of credit growth needs close attention from the monetary authorities.
- Mounting balance of payments pressures pose a significant challenge to the economy as FDI inflows decline and mineral exports remain weak.
- Recent volatile exchange rate fluctuations underscore the importance of proper economic policies to address mounting balance of payments pressure and to attract new capital inflows.
Overall Assessment and Policy Recommendations
- The current loose economic policies are not sustainable given the mounting balance of payments pressure and will undermine macro-economic stability going forward.
- The downside risk will likely be exacerbated if the Mongolian economy faces growing headwinds from an unfavorable global economic environment.
- In light of the growing external imbalances and uncertain global environment, the growth-oriented economic policies need to be tightened toward economic stability.
- Fiscal policy should be further tightened and start rebuilding fiscal space.
- Fiscal policy should focus more on “spending well”.
- Monetary policy should be adjusted toward economic and financial stability.
- Supervision and monitoring of the banking system should be strengthened.
- Continuous improvement of investment climate is important.