Eurasia: Mongolia's GDP Accelerates 16.7% in 1Q2012
Accelerating economy. In 1Q2012, the Mongolian economy had its best first quarter in a decade. The economy registered an outstanding GDP growth rate of 16.7% y-o-y in 1Q2012, the National Statistics Office of Mongolia data revealed on 10 May. In nominal terms GDP growth rate stood at 30.2% y-o-y. The growth is driven by the mining sector, commodity exports and government spending. Industry and construction expanded 8.4% y-o-y in real terms, services 18.6%, agriculture 13.6%. Economic growth in first quarter is traditionally somewhat slow as the activities are subdued in mining, construction, agriculture and some other sectors. In 2011, the economy expanded 9.8% in 1Q and accelerated to 17.3% y-o-y by the year end.
Continued strength of mining sector. Industry and construction contributed 15.7% to GDP growth. Mining sector output, the largest component (68%) in industrial output advanced 10.1% y-o-y. Coal output surged 10.3% to almost 10 mn tonnes (Mt), crude oil +59.8% to 1.1mn barrels, iron ore +44% to 1.5Mt, zinc concentrate 24.6% to 43,100 tn.
Resource exports hitting new peaks. Mongolia's export growth continued to be in line with our call that Mongolia is to benefit from strong demand for resources in major Asian economies, primarily China, and competitive commodity prices. Mongolia's mineral exports that reached 94% share of total exports surged 20% y-o-y (vs total exports +19.1%) and contributed a 98% y-o-y increase in total exports in 1Q2012. Coal exports jumped +81% in monetary terms, iron ore +43% and crude oil +63% while copper was down 18%. Coal exports in physical volume increased 466,300 tn to 3.4Mt and average export price surged 56% y-o-y to US$108/tn. China remained the largest export market for Mongolia. Exports to China surged +24% y-o-y representing 92% of Mongolia's total exports (vs 89% a year earlier).
Rising government spending. The government budget revenue increased 20.9% y-o-y to MNT1,474.7bn. Tax revenue increased 21.5% to MNT1,300.3bn. The government accumulated MNT8.9bn in Stabilisation fund. With expenditure growing at a faster 31.7% rate to MNT1,513.8bn, the general government budget registered MNT39.1bn or 1.7% of GDP deficit. Capital expenditure doubled to MNT255.4bn, including domestic investments of MNT248.3bn, government consumption increased 27.2% y-o-y to MNT215.3bn. Wages and salary payments were up 28% to MNT322.4bn, one of the key reasons for the high inflation.
Inflation remains a concern. Inflation reached outrageous 16% y-o-y in April. Inflation accelerated 8.2% y-t-d in 4M2012 vs 2.5% a year earlier. In supply side, meat price increase caused by decline in production has been significantly contributing to the inflation. Also, inflation has been imported through increased prices of oil products, construction materials and other products. In demand side, state cash handouts are permanently fueling consumer demand, and increasing state sector salary also has the same effect. The demand is expected further to increase as the State is giving every person a choice to receive MNT1mn in cash instead of 1,072 shares of Erdenes Tavan Tolgoi. It is expected that the central bank may further tighten the monetary policy.
New law on foreign investment may impact economic growth. We are increasingly concerned that the new draft law on regulation of foreign investment in business entities of strategic importance may negatively impact the foreign investment inflows to the country. Although the latest draft has been significantly softened from the first version, we expect that that there is a common consensus among MPs to impose additional regulation on foreign investments coming to the sectors and entities of "strategic importance" (mining, financial, media and communications). Although a number of key restrictive proposals (extensive list of "strategic industries", over MNT100bn worth company subject to the regulations) were removed, the business and investment community views the law as impediment (in particular the provisions that limit foreign ownership to 49% in business entities in the strategic industries) to bringing foreign investments to Mongolia and sustaining strong economic growth of the country. In our view, if the new law on regulating foreign investments in strategic industries is adopted in its current form (which is restrictive, in our view), this may impact inflows of foreign investments and economic growth as a whole. The new regulation may affect the current speed of output by key resource producing companies, the government revenues and private consumption, therefore, our estimate of 20% growth rate in 2012, articulated in Eurasia Capital Mongolia Outlook 2012 at the beginning of this year, may not be reached. We are also concerned that the recent arrest of the ex-president leads to increase in political risks in the country and negatively impacts investor sentiments toward Mongolia. We expect more clarity as to the business environment of the country after the lawmakers adopts the legislation and the Parliamentary elections are held in June this year.
Continued strength of mining sector. Industry and construction contributed 15.7% to GDP growth. Mining sector output, the largest component (68%) in industrial output advanced 10.1% y-o-y. Coal output surged 10.3% to almost 10 mn tonnes (Mt), crude oil +59.8% to 1.1mn barrels, iron ore +44% to 1.5Mt, zinc concentrate 24.6% to 43,100 tn.
Resource exports hitting new peaks. Mongolia's export growth continued to be in line with our call that Mongolia is to benefit from strong demand for resources in major Asian economies, primarily China, and competitive commodity prices. Mongolia's mineral exports that reached 94% share of total exports surged 20% y-o-y (vs total exports +19.1%) and contributed a 98% y-o-y increase in total exports in 1Q2012. Coal exports jumped +81% in monetary terms, iron ore +43% and crude oil +63% while copper was down 18%. Coal exports in physical volume increased 466,300 tn to 3.4Mt and average export price surged 56% y-o-y to US$108/tn. China remained the largest export market for Mongolia. Exports to China surged +24% y-o-y representing 92% of Mongolia's total exports (vs 89% a year earlier).
Rising government spending. The government budget revenue increased 20.9% y-o-y to MNT1,474.7bn. Tax revenue increased 21.5% to MNT1,300.3bn. The government accumulated MNT8.9bn in Stabilisation fund. With expenditure growing at a faster 31.7% rate to MNT1,513.8bn, the general government budget registered MNT39.1bn or 1.7% of GDP deficit. Capital expenditure doubled to MNT255.4bn, including domestic investments of MNT248.3bn, government consumption increased 27.2% y-o-y to MNT215.3bn. Wages and salary payments were up 28% to MNT322.4bn, one of the key reasons for the high inflation.
Inflation remains a concern. Inflation reached outrageous 16% y-o-y in April. Inflation accelerated 8.2% y-t-d in 4M2012 vs 2.5% a year earlier. In supply side, meat price increase caused by decline in production has been significantly contributing to the inflation. Also, inflation has been imported through increased prices of oil products, construction materials and other products. In demand side, state cash handouts are permanently fueling consumer demand, and increasing state sector salary also has the same effect. The demand is expected further to increase as the State is giving every person a choice to receive MNT1mn in cash instead of 1,072 shares of Erdenes Tavan Tolgoi. It is expected that the central bank may further tighten the monetary policy.
New law on foreign investment may impact economic growth. We are increasingly concerned that the new draft law on regulation of foreign investment in business entities of strategic importance may negatively impact the foreign investment inflows to the country. Although the latest draft has been significantly softened from the first version, we expect that that there is a common consensus among MPs to impose additional regulation on foreign investments coming to the sectors and entities of "strategic importance" (mining, financial, media and communications). Although a number of key restrictive proposals (extensive list of "strategic industries", over MNT100bn worth company subject to the regulations) were removed, the business and investment community views the law as impediment (in particular the provisions that limit foreign ownership to 49% in business entities in the strategic industries) to bringing foreign investments to Mongolia and sustaining strong economic growth of the country. In our view, if the new law on regulating foreign investments in strategic industries is adopted in its current form (which is restrictive, in our view), this may impact inflows of foreign investments and economic growth as a whole. The new regulation may affect the current speed of output by key resource producing companies, the government revenues and private consumption, therefore, our estimate of 20% growth rate in 2012, articulated in Eurasia Capital Mongolia Outlook 2012 at the beginning of this year, may not be reached. We are also concerned that the recent arrest of the ex-president leads to increase in political risks in the country and negatively impacts investor sentiments toward Mongolia. We expect more clarity as to the business environment of the country after the lawmakers adopts the legislation and the Parliamentary elections are held in June this year.
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