Asia > Eastern Asia > Mongolia > Mongolia Economy Profile 2012

Mongolia: Mongolia Economy Profile 2012






Mongolia Economy Profile 2012

The global economic crisis and collapse in copper prices in 2008 hit the Mongolian economy hard. The loose macro-policies and tightly managed exchange rate pursued during the preceding boom years had made the economy particularly vulnerable and the situation deteriorated markedly earlier in 2009. The authorities then adopted an ambitious adjustment program supported by an IMF Stand-By Arrangement that, thanks to their strong policy implementation, has helped to quickly stabilize the economy.

After averaging 9 % during 2004–08, real growth is expected to be slightly negative in 2009 as a result of the global crisis and the necessary tightening of policies. Nevertheless, the economy is now bottoming out and is projected to recover strongly in 2010 driven by investment in the Oyu Tolgoi mining project. Inflation, after peaking at over 30 % in 2008, has declined sharply in recent months and is expected to settle at around 6 % by end-2010. Medium-term prospects are favorable as Mongolia stands to benefit enormously from its vast mineral deposits and growth is expected to accelerate sharply around 2013 when production at the Oyu Tolgoi mine begins.

The authorities are making progress toward restoring health to public finances. An ambitious fiscal consolidation in 2009 is helping to unwind the considerable loosening of fiscal policy that took place during 2007–08. The budget deficit is projected to be 6½ % of GDP for 2009 and 5 % of GDP for 2010. Moreover, the authorities are committed to adjust spending, if needed, to offset any revenue shortfalls but to save any revenue over-performance. The government aims to adopt by early 2010 a Fiscal Responsibility Law to lock in fiscal discipline and a comprehensive social transfer reform to increase benefits to low-income households.

Exchange rate and monetary policies implemented earlier in 2009, especially the hike in interest rates, were instrumental in stabilizing market conditions. Since then, the authorities have appropriately lowered interest rates in line with the sharp decline in inflation and evolving market conditions. The authorities remain committed to a flexible exchange rate and a monetary policy geared toward low inflation and safeguarding international reserves.

The rapid expansion of credit during the boom years is now taking its toll on the banking system. The central bank is committed to strengthening the banking system and, as needed, acting promptly and decisively to bolster confidence. Two troubled banks were put into receivership in late November 2009 and the authorities are preparing a comprehensive bank restructuring plan with Fund staff assistance. The authorities already have in place an emergency facility for liquidity support and a blanket deposit guarantee which provide a strong basis for maintaining financial stability. Progress has also been made in strengthening supervision and a new Banking Law has been submitted to Parliament.

The effect of falling export values and foreign investment was transmitted to domestic demand and became more broad-based as the supply of credit eroded and public sector wages were frozen. The wholesale and retail trade sectors were the most affected by the slowdown, followed by the agriculture, manufacturing, and construction sectors.

The transport and communication sectors grew. The dramatic fall in mineral prices ended in early 2009 as prices began to rise slowly. Substantial support from international financial institutions has been used to meet shortfalls in fiscal expenditure. For 2009, the overall fiscal balance reflected a deficit equivalent to 5.4% of GDP. The Bank of Mongolia managed to rebuild its net international reserves and stabilize its currency, the Togrog, which began to appreciate toward the end of the year. The banking sector remained under stress, with most banks suffering liquidity shortages and poor governance. Nonperforming loans reached 18.4%. To restore confidence, the government took Anod Bank into conservatorship in December 2008 and established a State Bank as another large bank (Zoos bank) failed in 2009. Other attempts to stabilize the banking system included tightening prudential ratios, and new laws and regulations.