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Private Investment and Economic Stability Support Each Other
Mongolia is one of the fastest growing countries in the world, with economic gains over the last 20 years lifting per capita income levels up to around $4,000. Strong international interest in the future of the Mongolian economy helped the country access the international bond market in 2012.
Yet sharp falls in foreign direct investment (FDI) and the depreciation of the tugrik have raised concerns around how Mongolia might be affected by an uncertain global economic climate. With an expectation of a sustained economic recovery in the US and Japan, and planned phasing out of aggressive monetary easing in the US, investors have been moving funds from Asia’s emerging markets, resulting in steep declines in the value of many Asian currencies.
While Mongolia was once largely insulated from such global economic developments, this is no longer the case. Its economy and markets increasingly depend on foreign businesses and investors, who have provided the fuel for the bullish growth of the past few years.
Still, the prospects for Mongolia’s economy are favorable and we project economic growth of 12% in 2013. Although coal exports have recently plunged, the commencement of copper production at Oyu Tolgoi is keeping growth levels high. This said, economic policy makers need to manage the current situation by safeguarding fiscal and financial stability and improving the legal and regulatory framework for FDI.
A flexible exchange rate system that allows the currency to adjust to economic and financial shocks is beneficial, especially for a small open economy like Mongolia. Orderly currency depreciations, particularly following extended periods of high inflation, should increase the competitiveness of local companies exporting to other countries or competing with foreign companies in the domestic market. This, in turn, will support the creation of jobs.
While Mongolia’s economy has grown rapidly, it is still very narrowly-focused, especially on the mining sector. Diversifying the economy and deepening value chains is critical to improve the quality of growth and create a substantial number of sustainable jobs. Broadening the economic base would also lessen the dependency on a few international commodities whose prices fluctuate widely with global trends.
ADB is already working with many companies in Mongolia including those producing milk, carpets and cashmere, and we believe there is ample room for growth, both in domestic and international markets for these companies as well as for companies in other industries.
Financial stability is a key for inclusive and sustainable growth. A country with most of its income derived from minerals can save during periods of high commodity prices, and use such savings as buffers during downswings to minimize the adverse impact of fluctuating commodity prices on its economy.
In the past, the Mongolian government tended to spend more when high commodity prices were earning the country a larger income, but without creating sufficient reserves to support public spending when the country experienced economic slowdown. Other resource-rich countries have proven that finding the right balance between spending and saving is necessary for long-term sustainable and inclusive growth. ADB therefore fully supports the government’s efforts to create a sovereign wealth fund that will save mineral-derived revenues for future generations, providing a cushion of support for Mongolia during periods of economic turbulence.
As delegates gather for the World Economic Forum on 15 September, I hope potential investors will recognize the opportunities Mongolia offers.
The Mongolian government is making concerted efforts to improve the country's investment friendliness and safeguards for financial stability. Greater private sector investment – not only in mining but particularly in other sectors– will support a virtuous cycle that reduces volatility, stabilizes the economic environment, and provides greater comfort to private investors, all of which will help Mongolia achieve sustainable and inclusive development.