Mongolia: The country finished the year with a broad-based coalition and a new Prime Minister

Falling mineral prices and a tapering of foreign investment resulted in slower economic increase in Mongolia in 2014. However, a commitment by the recently installed coalition government to clear bottlenecks in the investment pipeline and cut spending could see lower deficit levels and better foreign interest in development projects in the year ahead.

Commodity pros and cons

The country finished the year with a broad-based coalition and a new Prime Minister, as Ch. Saikhanbileg restored N. Altankhuyag in November. The incoming leader inherited a far additional sluggish economy than his predecessor, with increase, confidence and foreign investment all lower year-on-time(y-o-y), as falling request for minerals dragged on exports and earnings.

Weak request for Mongolian commodities from its major export market, China, as well took its toll during the year. However, one bright spot was an increase in exports of copper concentrate due to a ramp up in operations at the Oyu Tolgoi mine over the course of the year. The total figure rose to $2.3bn in the initial 11 months of 2014 from $851m in the same period y-o-y according to official data. Coal exports rose to 16.9m tonnes compared to 16.1m tonnes y-o-y; however this was offset by a steep decline in prices, with the price of coal exports falling to $760.1m from $1b a year before.

With the price of exports still well below their peak of a few years ago, the World Bank cut its 2014 GDP increase estimate from 9.5% to just over 6%. Increase slowed to an annualised 7% in the initial nine months of 2014, well below the 12.8% witnessed the previous year. Increase projections for 2015 have as well been revised downwards, from 8.8% to 6.2%.

Weaker foreign investment inflows were largely a result of an economic slowdown and a drop in world commodity prices. In the initial nine months of the year, foreign direct investment (FDI) amounted to $647.5m, less than one-fifth the level seen in 2012. Investment fell 64% y-o-y in the January to May period alone.

Reopening the investment pipeline

However, efforts are underway to increase FDI through the easing of investment regulations and opening of new and before cancelled or deferred exploration tenders.

A further boost to foreign investment could come in the wake of deals struck with China and Russia in late 2014 that have the potential to increase trade and promote better investment in transport, infrastructure and industry. Trade with both Russia and China is pencilled to reach $10bn under the initial outlines, facilitated in part by extensive investments in the Mongolian rail network, giving the country access to wider markets.

On the horizon for 2015, the new government must conclude an international tender it has relaunched to develop Erdenes Tavan Tolgoi, the country\\\'s major coal deposit, next the previous tender collapsed in 2011. At the same time, the authorities have on their schedule to resolve a dispute with mining giant Rio Tinto over a $5bn expansion of the Oyu Tolgoi copper mine.

According to some estimates, a fully operational Oyu Tolgoi mine could contribute up to one-third of GDP. As such, clearing the way for the second stage of its development, inclunding facilitating the roll out of new projects, will likely top the schedule in 2015.

Belt tightening ahead

The new government is taking steps to cut spending ahead of what could be a additional austere year. In late December, it announced plans to trim the by presently approved 2015 budget to curb spending and reduce the deficit. The proposed measures include reducing bonuses to national employees and downsizing government ministries by 15%, inclunding redefining public spending programmes to make child welfare needs-based and to award student grants on merit.

Revenues will as well be buoyed by a broader tax base, presently set to include a lot of in the rural community – herders in particular – who were before exempt from levies. The amendments to the budget will cut at least MNT100bn ($60m) from the projected deficit of MNT439.2bn ($263.5m).

The Mongolian economy may as well benefit from lower oil prices during the year, as it relies on imports to meet 90% of its oil needs. Although this will help to curb expenditures, the savings are unlikely to offset lost revenue from lower commodity prices. Furthermore, some gains will be cannibalised by the devaluation of the tugrik, which has lost about a quarter of its price against the US dollar since the start of 2013.

Lower oil prices could as well come with a downside. Cheaper imported hydrocarbons may dampen investor enthusiasm for the development of domestic oil reserves in the short to medium term, inclunding the country’s oil shale deposits – estimated at additional than 700bn tonnes.