WORLD BANK: MONGOLIAN ECONOMY IS EXPERIENCING RAPID GROWTH
Ulaanbaatar, Mongolia /MONTSAME/ The Mongolian economy is experiencing rapid growth in 2011: the second quarter saw the economy growing at a whopping 17.3 percent year on year, compared to 9.9 percent in the first quarter. Transportation and construction grew at 39.9 percent and 38.4 percent, respectively, while retail and wholesale trade grew at 24.7 percent, with Mongolians spending more on consumption as a result of higher incomes. The mining and manufacturing sectors recorded respectable growth rates of 8.3 and 12.9 percent yoy in the second quarter, respectively.
Reflecting the higher growth, unemployment declined from 13 percent in December 2010 to 8.7 percent in June. Informal labor markets for unskilled workers are also booming, with real wages nearly doubling between December 2010 and June 2011. Since poverty was reduced considerably during the previous period of high economic growth rates (2002-8), we think that current trends in the economy bode similarly well for poverty reduction. However, recall that sharply rising inflation towards the end of the previous boom undermined some of the gains made, particularly for the poor. Hence, keeping a lid on inflation by reigning in excessive government spending and avoiding loose monetary policy will be the key to successfully reducing poverty during the current economic boom.
Unfortunately, Mongolia is again experiencing high levels of inflation. UB inflation was up 11.4 percent yoy in July, up from 5.5 percent in the previous month. Core inflation, excluding volatile energy and food prices, increased even faster, by 13.7 percent yoy. And as the livestock herd continues to recover from the dzud and China's food prices, especially meat, continue to rise (34 percent yoy in July), food prices are likely to remain high.
This inflation is being stoked by increased government spending (up 27 percent, with most of it on wages and transfers), as well as high spending by the private sector-producers and consumers alike-as reflected in the large import bill relative to last year: imports are up by 106 percent.
A booming mining industry, especially the Oyu Tolgoi copper mine, spurred these imports, especially of transport equipment and machinery. This pushed Mongolia's trade deficit to US$ 1349 million in July 2011. On the export side, coal has surpassed copper as the largest export, comprising 38 percent of all exports, having grown 129 percent yoy in July. China is the sole destination for Mongolia's coal exports and it is the largest thermal coal consumer in the world. Mongolia's exports of coal are expected to grow with new coal mines coming on board. Crude oil exports were up 42 percent yoy in June owing to higher oil prices, while copper volumes are declining, as are Chinese metal imports from Mongolia. Gold, greasy cashmere, and combed goat down were other poor performers in the export sector. Credit in the banking sector is growing very fast. The stock of outstanding loans grew by 46 percent yoy in real terms in July 2011. It is therefore imperative that the BoM enforces prudential norms on all Mongolian banks, and ensures that they maintain adequate buffer capital to absorb potential losses. The stock of the Non-Performing Loans currently stands at MNT 382 billion including those of the two failed banks. Together with loans in arrears, the ratio to total outstanding loans is about 10 percent in July and decreasing. However, because the volume of outstanding loans is rising fast, this should not be a reason for complacency.
The volume of MNT deposits reached a record MNT 2.6 trillion in July, a 73 percent yoy increase. However, since real interest rates on local currency deposits are currently again in negative territory because of rising inflation, the attractiveness of local currency deposits must stem from the public's expectation of an appreciating currency. Compared to July 2010, the average monthly exchange rate against the US$ appreciated by about 9 percent, or about one percent compared to the previous month. Nominal interest rates on US$ deposits are high by international standards: for certain time deposits they are as high as 14 percent. Such high rates are a cause for concern, as they may reflect liquidity problems rather than an unusually high profitability of project lending.
On a 12 month rolling basis, the fiscal surplus reached 7.4 percent of GDP yoy in July. Annual revenues and grants grew by 46 percent in real terms in July yoy, in addition to increases in royalties, VAT, customs duties and corporate income tax. On the expenditure side, there was a very large increase (27 percent yoy) in expenditures in July, with capital expenditures up by 57 percent and current transfers up 48 percent, owing to cash handouts to citizens through the Human Development Fund (HDF).
Such large increases in public expenditures risk throwing Mongolia back to a pro-cyclical fiscal stance. To counteract this tendency, the Fiscal Stability Law (FSL), passed in 2010, locked in counter-cyclical policies. However, because the core of the FSL-the structural balance of minus 2 percent of GDP-only starts in 2013, risks exist concerning its implementation, especially with elections around the corner in 2012. The FSL was supported by a large majority in parliament and will assist Mongolia in avoiding the typical pitfalls of growth for resource rich countries, especially the Dutch Disease. In the Netherlands, the Dutch Disease was eventually ?cured? through a similarly broad-based political agreement centered on fiscal and wage restraint. If the Dutch example holds a lesson, it would be for Mongolia's parliament to hold the course to implementing the letter and the spirit of the law, and to pass a supportive new budget law in the fall session.
Mongolia's economic outlook depends heavily on global macroeconomic factors: the current uncertainty and poor growth prospects for the global economy are cause for concern. If there is another global recession, Mongolia's small, open economy will be affected. In that case, China's policy reaction will be crucial for Mongolia. If China reacts as fast and as strongly as it did in 2008/9 then the effects of a global recession on Mongolia will be mitigated, largely owing to Chinese demand for minerals from Mongolia. Beyond this, it is up to Mongolia to capitalize on its excellent long term prospects by continuing the reform agenda it embarked on during the 2008/9 crisis.
B.Oyundelger
Reflecting the higher growth, unemployment declined from 13 percent in December 2010 to 8.7 percent in June. Informal labor markets for unskilled workers are also booming, with real wages nearly doubling between December 2010 and June 2011. Since poverty was reduced considerably during the previous period of high economic growth rates (2002-8), we think that current trends in the economy bode similarly well for poverty reduction. However, recall that sharply rising inflation towards the end of the previous boom undermined some of the gains made, particularly for the poor. Hence, keeping a lid on inflation by reigning in excessive government spending and avoiding loose monetary policy will be the key to successfully reducing poverty during the current economic boom.
Unfortunately, Mongolia is again experiencing high levels of inflation. UB inflation was up 11.4 percent yoy in July, up from 5.5 percent in the previous month. Core inflation, excluding volatile energy and food prices, increased even faster, by 13.7 percent yoy. And as the livestock herd continues to recover from the dzud and China's food prices, especially meat, continue to rise (34 percent yoy in July), food prices are likely to remain high.
This inflation is being stoked by increased government spending (up 27 percent, with most of it on wages and transfers), as well as high spending by the private sector-producers and consumers alike-as reflected in the large import bill relative to last year: imports are up by 106 percent.
A booming mining industry, especially the Oyu Tolgoi copper mine, spurred these imports, especially of transport equipment and machinery. This pushed Mongolia's trade deficit to US$ 1349 million in July 2011. On the export side, coal has surpassed copper as the largest export, comprising 38 percent of all exports, having grown 129 percent yoy in July. China is the sole destination for Mongolia's coal exports and it is the largest thermal coal consumer in the world. Mongolia's exports of coal are expected to grow with new coal mines coming on board. Crude oil exports were up 42 percent yoy in June owing to higher oil prices, while copper volumes are declining, as are Chinese metal imports from Mongolia. Gold, greasy cashmere, and combed goat down were other poor performers in the export sector. Credit in the banking sector is growing very fast. The stock of outstanding loans grew by 46 percent yoy in real terms in July 2011. It is therefore imperative that the BoM enforces prudential norms on all Mongolian banks, and ensures that they maintain adequate buffer capital to absorb potential losses. The stock of the Non-Performing Loans currently stands at MNT 382 billion including those of the two failed banks. Together with loans in arrears, the ratio to total outstanding loans is about 10 percent in July and decreasing. However, because the volume of outstanding loans is rising fast, this should not be a reason for complacency.
The volume of MNT deposits reached a record MNT 2.6 trillion in July, a 73 percent yoy increase. However, since real interest rates on local currency deposits are currently again in negative territory because of rising inflation, the attractiveness of local currency deposits must stem from the public's expectation of an appreciating currency. Compared to July 2010, the average monthly exchange rate against the US$ appreciated by about 9 percent, or about one percent compared to the previous month. Nominal interest rates on US$ deposits are high by international standards: for certain time deposits they are as high as 14 percent. Such high rates are a cause for concern, as they may reflect liquidity problems rather than an unusually high profitability of project lending.
On a 12 month rolling basis, the fiscal surplus reached 7.4 percent of GDP yoy in July. Annual revenues and grants grew by 46 percent in real terms in July yoy, in addition to increases in royalties, VAT, customs duties and corporate income tax. On the expenditure side, there was a very large increase (27 percent yoy) in expenditures in July, with capital expenditures up by 57 percent and current transfers up 48 percent, owing to cash handouts to citizens through the Human Development Fund (HDF).
Such large increases in public expenditures risk throwing Mongolia back to a pro-cyclical fiscal stance. To counteract this tendency, the Fiscal Stability Law (FSL), passed in 2010, locked in counter-cyclical policies. However, because the core of the FSL-the structural balance of minus 2 percent of GDP-only starts in 2013, risks exist concerning its implementation, especially with elections around the corner in 2012. The FSL was supported by a large majority in parliament and will assist Mongolia in avoiding the typical pitfalls of growth for resource rich countries, especially the Dutch Disease. In the Netherlands, the Dutch Disease was eventually ?cured? through a similarly broad-based political agreement centered on fiscal and wage restraint. If the Dutch example holds a lesson, it would be for Mongolia's parliament to hold the course to implementing the letter and the spirit of the law, and to pass a supportive new budget law in the fall session.
Mongolia's economic outlook depends heavily on global macroeconomic factors: the current uncertainty and poor growth prospects for the global economy are cause for concern. If there is another global recession, Mongolia's small, open economy will be affected. In that case, China's policy reaction will be crucial for Mongolia. If China reacts as fast and as strongly as it did in 2008/9 then the effects of a global recession on Mongolia will be mitigated, largely owing to Chinese demand for minerals from Mongolia. Beyond this, it is up to Mongolia to capitalize on its excellent long term prospects by continuing the reform agenda it embarked on during the 2008/9 crisis.
B.Oyundelger
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