Friday, July 25, 2014

The pace of Mongolia’s economic growth to slow

The World Bank Group has lowered its previous forecast of Mongolia’s economic growth from double-digits to 9.5 percent, coinciding with an April forecast by the Asian Development Bank which predicted a growth rate of 9.5 percent.
Two international financial organizations that actively operate in Mongolia have now predicted that Mongolia’s economic growth will decelerate.

However, also in April, analysts at the International Monetary Fund forecasted economic growth at 12.9 percent. Nevertheless, the Government of Mongolia has a much more positive outlook. In a 2014 economic projection, the government estimated Gross Domestic Product (GDP) growth of 14.7 percent.
This year’s economic environment and opportunities are evidently weaker than those of previous years. Hence, economic growth may not reach the expected 14 percent. In addition, analysts keep warning that Mongolia’s economic growth will slow down considerably, so forecasts of the World Bank and Asian Development Bank are likely to be accurate.

China’s economy significantly impacts the growth of Mongolia’s GDP, for China accounts for 90 percent of Mongolia’s exports and 50 percent of imports. Published by Mongolian Financial Market Association, Purple Book Magazine said that China’s economy will grow by 7.5 percent in 2014. Not only Purple Book but also many financial organizations, reports and analysts forecast China’s economic growth at between 7.5 to 7.7 percent. Even the Government of China itself announced the same estimate. Generally, our economy grows at a higher rate than our southern neighbor’s, so Mongolia’s economy will not abruptly decelerate if China’s economy grows by about seven percent.

Mongolbank identified two factors as causes of economic growth deceleration, namely the decrease of foreign direct investment and the decrease of mineral product prices in international markets.
Chief Economist of Mongolbank S.Bold once said, “Mongolia’s economic growth won’t fall from double-digit growth if Mongolia earns 5 billion USD from mineral sales and 5 billion USD from direct foreign investment.” However, as of the first five months of 2014, Mongolia has attracted 402.3 million USD in direct foreign investment. Income from mineral exports decreased as well due to mineral price decreases in the international market, although the amount of mineral exports increased by 25 percent. As you can see, the amount of foreign direct investment sharply fell below the “threshold” stated by the chief economist of Mongolbank. In other words, we don’t have enough “fuel” to maintain the pace of economic growth. The Government for Change took some futile measures to increase foreign investment. Authorities submitted a draft bill to make amendments to the Budget Sustainability Law, to increase the limit of external debt to 70 percent of GDP, but couldn’t get it approved. Had the draft bill passed, the Government could raise 3 billion USD.

Unofficial sources claim that Mongolia and China will sign agreements of several billion USD during the visit of Xi Jinping, the President of China, in August. Nevertheless, it’s known that the two countries will carry out a 30 billion USD coal gasification project. The upcoming visit of the President of China might change the course of Mongolia’s economic growth. But currently, Mongolia’s economic growth is likely to decelerate and slip into the single-digits.

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