Mongolia’s economic growth decelerated from 7.8% in 2014 to 3.0% in the first half of 2015. Growth is now projected to bottom out at 2.3% in 2015, before an uptake to 3.0% in 2016.
|Selected economic indicators (%)||2015||2016|
|ADO 2015||Update||ADO 2015||Update|
|Current Account Balance (share of GDP)||-8.0||-5.0||-15.0||-7.0|
Mongolia’s consumption increased by 2.3% over the same period last year, but gross fixed capital formation dropped by 42.7% because foreign direct investment plunged below 1% of Gross Domestic Product (GDP) and stimulus was partly withdrawn. Exports declined by 4.5% as a 16.3% increase in copper concentrate exports (13.9% by volume) could not compensate for lower volumes and prices for both coal and iron. Net exports expanded, however, as lower foreign direct investment dragged down imports by 30.3%.
On the supply side, agricultural growth softened to 9.4% and services grew by 0.3%, but industrial growth remained robust at 12.1% as production at the Oyu Tolgoi copper and gold mine picked up.
Consumer price inflation halved to 6.9% year on year in July 2015 from 14.9% a year earlier, reflecting a slowing economy and monetary policy tightened to contain inflation and pressure on the balance of payments. Nonperforming loans reached 5.0% of outstanding loans, and loans past due reached 6.1%, highlighting the need for continued close supervision of the financial sector.
Government revenues decreased by 5.5% in the first 7 months as value-added tax receipts and nontax revenue fell. In the first half of the year, the structural deficit was kept on par with the ceiling for 2015 equal to 5.0% of GDP, while the more important consolidated deficit— including all Development Bank of Mongolia expenditures—remained largely unchanged at more than 8% of GDP. To provide a safety margin that aligns with prudent fiscal policy, the authorities need to move quickly to adopt a credible supplementary budget.
The current account deficit narrowed sharply to 6.1% of GDP in the first half of 2015 from 20.1% in the same period last year as the goods and services balance improved. In the first 7 months, gross international reserves recovered by $0.4 billion to $1.7 billion and the togrog depreciation against the US dollar was limited to a modest 5.1%, albeit at the cost of higher external debt.
The growth forecast is lowered for 2015 and 2016, reflecting a deteriorating external environment, drought-affected harvests, necessarily tight monetary and fiscal policies, and, on the positive side, the start of underground works at Oyu Tolgoi in mid-2016.
Average inflation will be lower this year than forecast in ADO 2015, and supplyside factors will hold inflation steady in 2016. The current account deficit will narrow more than forecast earlier but widen again in 2016 on imports for Oyu Tolgoi development.
Although the poverty rate improved to 21.6% in 2014 from 27.4% in 2012, many people remain vulnerable, as does the economy as a whole, to risks stemming from downward pressure on commodity prices, fluctuating production expected from Oyu Tolgoi and other mines, severe weather that affects crops and livestock, and uncertainty regarding the authorities’ success in maintaining tight macroeconomic policies.
Excerpted from the Asian Development Outlook 2015 Update.