Country Report Mongolia February 2009

Outlook for 2009-10

The political scene is set to remain volatile following a violent general election in June. The election was won by the ruling Mongolian People’s Revolutionary Party (MPRP), although the opposition Democratic Party (DP) decided to join the government despite disputing the election results. The political scene will continue to be turbulent as the government attempts to cope with the ongoing economic crisis, while also pursuing its main goal of reducing poverty. Real GDP growth will slow sharply in 2009, to 6%, owing to falling commodity prices.

The political scene

The deteriorating economic environment is putting the new coalition government under increased strain. The government has had to amend budget plans for 2009 in part owing to the sharp fall in tax revenue from the mining sector, as copper and gold prices have tumbled. The governor of the Bank of Mongolia (BOM, the central bank), Alag Batsukh, unexpectedly resigned in December, amid concerns over the independence of the BOM.

Economic policy

In November the economic and financial crisis claimed its first victim when the government took over a leading commercial bank, Anod Bank. Credit growth has risen rapidly in recent years, especially to the overheated property sector. In response to the crisis, a number of international rating agencies have downgraded the ratings of local banks. The government ran a fiscal deficit of Tg305.7bn (US$260m) in 2008 (equivalent to 5% of GDP), which was around double the target level.

The domestic economy

National accounts data for Mongolia remains patchy. However, the economy is slowing sharply owing to falling prices for copper (Mongolia’s main export), which has hit export earnings and government revenue. Meanwhile, problems in the banking sector have led to a marked tightening of domestic credit, further slowing overall economic growth. Consumer price inflation eased down to 22.1% year on year in December, from a high of 33.7% in August, and an average of 28% for the whole of 2008. The government has still not finalised an investment agreement with a Canadian firm, Ivanhoe Mines, to allow the long-delayed Oyu Tolgoi copper-mining project to get off the ground.

Foreign trade and payments

The merchandise trade deficit widened sharply in 2008 to reach US$1.1bn, compared with a deficit of only US$228.3m in 2007. Foreign-exchange reserves have fallen, amid attempts by the government to defend the togrog.

This report covers the following industry codes:
SIC Code: 48;47;49
NAICS Code: 517;48;22