MONGOLIA: RISK ASSESSMENT
Country Rating: C
Business Climate Rating: C
Risk Assessment
Continued growth but risk of overheating
Growth accelerated in 2011 thanks to higher raw material prices and to investment in the mining sector, in a country with immense deposits of gold, copper, coal and uranium. The signing of an investment agreement between the Canadian Ivanhoe Mines and the Anglo Australian Rio Tinto for the operation of Oyu Tolgoi (the world’s largest unexploited gold reserve) and the setting up of a consortium involving Chinese, Russian and American companies to operate Tavan Tolgoi (one of the biggest coal deposits) underline the strong interest of foreign investors for Mongolian mineral resources. This mining sector boom has sustained services and construction (especially infrastructures).
In 2012, the country is expected to experience continued strong growth driven by the strength of foreign direct investment in the mining sector. Moreover, the manufacturing sector, wholesale, retail and transport should continue to grow strongly. The main driver of activity will remain Chinese demand which accounts for 85% of Mongolian exports and stimulates investment in the raw materials and infrastructure sectors. However weaknesses remain. The instability of economic policies and the regulations towards foreign investors threaten to impede the necessary modernization of production capacity. Moreover, the economy remains extremely dependent on the price of minerals, which represent 81% of exports and 30% of GDP. It is, however, worth noting that the expected rises in production volume should enable the effect of a sharp price correction to be offset. Finally, cattle rearing and textiles suffer from a lack of competitiveness. Their growing difficulties could have serious social consequences. The clothing industry has been affected by the increased competition from Asian neighbors benefiting from cheap labor. Besides, subsistence agriculture focused on livestock remains extremely vulnerable to climatic shocks and disease. In this context inflation will remain very high in 2012 in a country where 35% of the population lives below the poverty threshold. The difficulties of these sectors will therefore keep up social tensions and the expansion of the mining sector will not be able to bring the necessary jobs increase.
Public sector finances remain shaky
The IMF Standby Arrangement of 2009 enabled an improvement in debt ratios. In respect of public finances, the budget is expected to be in deficit in 2012 because of the abolition of the 68% tax on mining profits and of salary increases. Nevertheless, it will be financed by large scale privatizations as for example that of Erdenes Tavan Tolgoi planned for 2012. Moreover, public debt is expected to decline thanks to the substantial dividends that the government is expected to receive from its participation in the Oyu Tolgoi project. However, uncertainties remain as to the cost of bank recapitalization which could weigh heavily on public finances.
In 2012, the current account deficit – although falling – is expected to remain substantial because of significant imports of the capital goods and oil necessary for the exploitation of mineral resources. Nevertheless the debt – essentially concessional – will remain manageable. Moreover, foreign exchange reserves (9 months of imports in 2102) have reached a satisfactory level.
Tense political situation
The political instability due to internal dissension between the Mongolian People’s Party, which has a majority in Parliament, and the Democratic Party, which holds the presidency, continues to slow the pace of reforms. Besides, governance shortcomings (in particular, corruption and government inefficiency) constitute the country’s Achilles heel. Finally, the social risk bears watching because of growing inequalities.
Strengths
Production start-up of colossal mineral resources
Proximity of two economic giants, China and Russia, whose demand is very strong
Influx of foreign direct investment
Limited foreign debt
Weaknesses
Vulnerability of the economy to fluctuations in raw material prices
High poverty and unemployment rates
Domestic political dissension
Alarming level of corruption
Business Climate Rating: C
Risk Assessment
Continued growth but risk of overheating
Growth accelerated in 2011 thanks to higher raw material prices and to investment in the mining sector, in a country with immense deposits of gold, copper, coal and uranium. The signing of an investment agreement between the Canadian Ivanhoe Mines and the Anglo Australian Rio Tinto for the operation of Oyu Tolgoi (the world’s largest unexploited gold reserve) and the setting up of a consortium involving Chinese, Russian and American companies to operate Tavan Tolgoi (one of the biggest coal deposits) underline the strong interest of foreign investors for Mongolian mineral resources. This mining sector boom has sustained services and construction (especially infrastructures).
In 2012, the country is expected to experience continued strong growth driven by the strength of foreign direct investment in the mining sector. Moreover, the manufacturing sector, wholesale, retail and transport should continue to grow strongly. The main driver of activity will remain Chinese demand which accounts for 85% of Mongolian exports and stimulates investment in the raw materials and infrastructure sectors. However weaknesses remain. The instability of economic policies and the regulations towards foreign investors threaten to impede the necessary modernization of production capacity. Moreover, the economy remains extremely dependent on the price of minerals, which represent 81% of exports and 30% of GDP. It is, however, worth noting that the expected rises in production volume should enable the effect of a sharp price correction to be offset. Finally, cattle rearing and textiles suffer from a lack of competitiveness. Their growing difficulties could have serious social consequences. The clothing industry has been affected by the increased competition from Asian neighbors benefiting from cheap labor. Besides, subsistence agriculture focused on livestock remains extremely vulnerable to climatic shocks and disease. In this context inflation will remain very high in 2012 in a country where 35% of the population lives below the poverty threshold. The difficulties of these sectors will therefore keep up social tensions and the expansion of the mining sector will not be able to bring the necessary jobs increase.
Public sector finances remain shaky
The IMF Standby Arrangement of 2009 enabled an improvement in debt ratios. In respect of public finances, the budget is expected to be in deficit in 2012 because of the abolition of the 68% tax on mining profits and of salary increases. Nevertheless, it will be financed by large scale privatizations as for example that of Erdenes Tavan Tolgoi planned for 2012. Moreover, public debt is expected to decline thanks to the substantial dividends that the government is expected to receive from its participation in the Oyu Tolgoi project. However, uncertainties remain as to the cost of bank recapitalization which could weigh heavily on public finances.
In 2012, the current account deficit – although falling – is expected to remain substantial because of significant imports of the capital goods and oil necessary for the exploitation of mineral resources. Nevertheless the debt – essentially concessional – will remain manageable. Moreover, foreign exchange reserves (9 months of imports in 2102) have reached a satisfactory level.
Tense political situation
The political instability due to internal dissension between the Mongolian People’s Party, which has a majority in Parliament, and the Democratic Party, which holds the presidency, continues to slow the pace of reforms. Besides, governance shortcomings (in particular, corruption and government inefficiency) constitute the country’s Achilles heel. Finally, the social risk bears watching because of growing inequalities.
Strengths
Production start-up of colossal mineral resources
Proximity of two economic giants, China and Russia, whose demand is very strong
Influx of foreign direct investment
Limited foreign debt
Weaknesses
Vulnerability of the economy to fluctuations in raw material prices
High poverty and unemployment rates
Domestic political dissension
Alarming level of corruption
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