Mongolia Quarterly Economic Update - June 2012

June 25, 2012


The advice to Mongolian policy-makers is to “hold your horses” and adopt a more cautious macro-economic stance, tightening both monetary and fiscal policy to prevent further over-heating of the economy.

Key Findings


  • The Mongolian economy is continuing to grow at a very rapid pace, expanding by 16.7 percent year-on-year (yoy) in Q1. 
  • This high growth however, is also fuelling inflation which touched 16 percent in April, well above the Bank of Mongolia’s (BoM) inflation target of 10 percent. 
  • Increasing government spending on wages and salaries, large cash handouts to the general population, and burgeoning capital expenditures are adding to the demand pressures. 
  • Meanwhile, the worsening global economic outlook, in particular a faster than expected slowdown in China, Mongolia’s largest trading partner, has negatively impacted export growth, resulting in deterioration in external balances. 
  • Under these circumstances, the advice to Mongolian policy-makers is to “hold your horses” and adopt a more cautious macro-economic stance, tightening both monetary and fiscal policy to prevent further over-heating of the economy.

Real sector developments

  • Growth is being led by the service sectors, in particular wholesale and retail trade which expanded by 51 percent yoy in Q1, following an outturn of 70.5 percent in the last quarter of 2011, and transport which grew by 11.7 percent yoy. 
  • The development of the Oyu Tolgoi mine is having strong spillovers into the rest of the economy, including through lifting consumer and business sentiment. 
  • The first quarter data also revealed that the agriculture sector is finally recovering from the effects of “dzud” (severe weather conditions) suffered in late 2009/early 2010, growing by 13.6 percent in Q1.

Fiscal developments

  • Government spending growth is outpacing revenue growth, resulting in an increasing fiscal deficit. Spending, in nominal terms, was 32 percent yoy higher in April (year to date, YTD, basis) with capital spending growing by more than 100 percent. 
  • Revenues are failing to grow at the same pace, rising only 21 percent in nominal terms on a YTD basis in April, as a result of weaker growth in receipts from taxes on international trade, and negative growth in excise taxes, royalties and dividends from mining sector companies. 
  • As a result, the fiscal deficit has climbed considerably, reaching 4.7 percent of GDP in March, its highest level in nearly two years.

Inflation and Banking Sector

  • Inflation is being pushed up by rising core inflation, which reflects demand side pressures from higher government spending, and by rising food prices, notably of meat. 
  • Recent rate hikes by the BoM are helping to reduce the pace of bank lending, which had been growing over 60 percent at the start of the year. Although there is room to hike further, with the interest rates on central bank paper still negative in real terms, monetary tightening needs to be complemented by fiscal restraint in order to be effective.

External sector

  • Exports contracted by 2.8 percent yoy in April. This was the first fall in more than two years, and reflected weaker global economic conditions, sliding commodity prices and slowing growth in China which is Mongolia’s largest trading partner. 
  • Coal, which is the largest export earner, is barely growing, while copper exports have been performing poorly for some time now. 
  • On a four-quarter rolling sum basis, the current account deficit widened to 35 percent of GDP in Q1 2012 from 18 percent in Q1 2011 but was financed by the record levels of FDI(Foreign Direct Investment) inflows of US$ 4.4 bn or roughly half of GDP, and Foreign Currency reserves remain high. 
  • The Togrog (Mongolian currency) has appreciated in recent months, in both nominal and in real terms which will undermine the competitiveness of Mongolia’s non-mineral traded sector.


  • Recent poverty analysis, conducted jointly by the World Bank and the National Statistics Office of Mongolia, finds that the national poverty headcount rate declined from 39.2 percent in 2010 to 29.8 percent in 2011. This progress took place against the backdrop of strong economic growth, sizeable social transfers, and large investments to help the recovery from the 2010 dzud
  • However, the recent acceleration in inflation is worrying since it will impact the poor disproportionally, and rising food inflation is particularly worrying since food constitutes 49 percent of expenditures among households in the lowest quintile of the income distribution.

Economic outlook

  • The global economic outlook has deteriorated considerably in recent months. Financial conditions in high-income Europe, higher oil prices, and, most importantly, the slowing Chinese economy pose risks for Mongolia. 
  • Given these risks, Mongolian policy-makers need to adopt a cautious macro-economic stance. This will entail limiting the build-up of vulnerabilities in the banking sector, reining in the growth of government expenditures, minimizing off-budget financing activities and ensuring that the lending of the Development Bank of Mongolia is within the framework of the Fiscal Stability Law. 
  • Adjusting the policy stance in this manner will address the internal imbalances that are already evident as well as position Mongolia better to deal with the risks to the regional and global economy. 
  • It will also ensure that the money spent is well spent, namely on activities that help to build the public and human capital infrastructure of Mongolia and maximize the returns of the country’s mineral wealth to its people.