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Mongolia: The country’s year-end budget deficit is expected to reach nearly 20% of GDP


Slower economic increase and rising deficit levels were the major themes of the completed year, though Mongolia’s new government is acting to replace foreign investor confidence while seeking to curb the country’s growing budget deficit.

New government

Swept into office in general elections held at the end of June, winning 65 of the 76 parliamentary seats, the Mongolian People’s Party (MPP) has had to contend with a shortfall in revenue due to lower returns from the mining industry at a time at the same time as national spending has risen sharply.

The country’s year-end budget deficit is expected to reach nearly 20% of GDP, ratings agency Moody’s said in November, a situation that could worsen over the next two years with extensive debts due to be repaid or rolled over.

An extra challenge the new government has faced is a steep decline in foreign direct investment (FDI), stemming in part from a sharp fall in commodity request and prices, but as well from concerns over policy shifts implemented by the former Democratic Party (DP) government.

At least some of these concerns were allayed ahead of the June election, with the DP government reaching an agreement on profit sharing and taxation with mining giant Rio Tinto over the Oyu Tolgoi mine. As a result, in May Rio Tinto announced it would push ahead with the second stage of the mine, with the development valued at $5.3bn.

Addressing investment hurdles in the mining industry, along with the MPP government’s commitment to streamlining FDI procedures, should go some way to boosting capital inflows and underpin a measured recovery in the commodities sector in coming years.

Ratings roll back

In mid-November Moody’s downgraded Mongolia’s government long-term issuer and senior unsecured ratings from “B3” to “Caa1”, with a stable outlook.

Citing a decline in key fiscal metrics, which the ratings agency said it did not see materially reversing over the next few years, Moody’s cautioned that the government faced a number of fiscal challenges and liquidity risks.

“While we recognise that the authorities have made evolution in recognising off-budget spending and defining transparent, short- and medium-term corrective actions, we expect that Mongolia's deficit metrics will continue to deteriorate in the next two years while fiscal challenges will be compounded by a sharp slowdown in economic increase which places further pressure on the fiscal and external positions,” the Moody’s statement said.

On a additional positive note, Moody’s said that GDP increase would increase– albeit only slightly – next year next shrinking 1.6% in the initial nine months of 2016. Mining-related FDI is as well set to recover, leading to a pick-up in increase, as the second stage of the Oyu Tolgoi mine project comes on-line in 2018, the ratings agency said in its November note.

IMF assistance

At the end of September, the new MPP government reached out to the IMF, seeking to open negotiations towards obtaining fiscal assistance to bridge budgetary and deficit repayment gaps and improve liquidity in the domestic economy.

The IMF issued a statement in November saying that talks with the Mongolian government had been productive, with discussions covering policies that could become part of an economic and financial programme backed by the fund. Meanwhile, Mongolian officials announced they hoped a comprehensive support programme with the IMF could be finalised and in place by February.

The government has as well said it would welcome loan assistance from Japan as it seeks to balance austerity measures with economic development and reignite FDI, which dwindled to just $200m last year, roughly 5% of the peak capital inflow posted in 2011.

Mongolia’s deficit repayment programme and import costs have been impacted by a sharp decline in the tugrik, which fell to a record low of MNT2411:$1 in November. The currency declined 17% this year, with its retreat prompting the central bank to push up its benchmark interest rates by 4.5 % points to 15% to support the ailing currency.

Measured austerity

The MPP government has by presently moved to put in place measures likely to be met with IMF approval, inclunding cutting national spending, consolidating budgetary spending and conducting studies to determine the exact level of deficit owed to the private sector, inclunding foreign companies, according to international press reports.

As a initial step, in mid-October Prime Minister Jargaltulga Erdenebat announced that his government aimed to halve the budget deficit to 9% by the end of next year.

The government forecasts it will be able to bring down a balanced budget by 2020, though this may depend on revenue increases, which in turn will rely on improved commodity prices inclunding austerity measures the IMF may call for under the terms of a potential agreement in the new year.

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