(live-PR.com) - Early evidence from the first quarter suggests that the Mongolian economy has seen a sharp slowdown in activity. At the heart of this growth collapse has been a drying up of investment inflows and export receipts, and both these trends are partially a function of policy missteps from the government. While we envisage a revival in economic activity in the coming quarters, uncertainty over China´s growth trajectory continues to cast a large shadow over the H213 outlook and we expect full-year real GDP growth to disappoint.
There are signs that the ongoing contractual dispute between the Mongolian government and global mining major Rio Tinto over the Oyu Tolgoi mine will come to an amicable conclusion in the coming months, if not weeks. An acceptable compromise on the dispute will be mutually beneficial, as it will allow commercial production of the mine to come online in H213, thereby providing a measure of support to the subdued economy.
The precipitous fall in Mongolia´s headline rate of consumer price inflation should continue in the coming months given the pervasive weakness in economic activity and the government´s efforts to rein in food prices as part of its Price Stabilisation Programme. However, while the latter spending plan may help to keep specific price items under wraps in the near term, the huge fiscal cost will serve to undermine long-term inflation expectations.
Mongolia´s fiscal balance in 2013 is unlikely to improve dramatically from the previous year´s estimated 7.7% of GDP deficit, suggesting that the government will miss its budget target of 2.0% by a long way.
The key swing factor will be the timeline for commercial production at the Oyu Tolgoi mine. However, on balance, we are forecasting a nominal shortfall of 7.3% of GDP this year, with both revenue and expenditure growth disappointing. Increasing sovereign credit concerns suggest the government will be more constrained in terms of debt issuance in the coming months.
Major Forecast Changes
We have revised down our real GDP growth forecast to 8.5% from 11.0% previously, putting us well below double-digit consensus projections.
A resumption in inflationary pressures and sizeable twin deficits suggests to that further aggressive monetary easing by the Bank of Mongolia (BoM) is unlikely. The central bank has already cut interest rates by 175 basis points (bps) in 2013 to date and we are factoring in an additional 50bps at most in the coming months.
Key Risks To Outlook
Upside Risk: An early resolution to the Oyu Tolgoi dispute could help re-ignite exports and investment and place significant upside risks to our forecasts.
Downside Risk: In a worst-case scenario, a collapse in Chinese economic growth and, by extension, demand for commodity imports in H213 would seriously hamper Mongolia´s recovery prospects.The price of this market report covers 4 quarterly reports on this sector. This quarterly report will be downloadable instantly as a PDF document, with the 3 remaining reports delivered at regular intervals throughout the year.
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