Economic growth in Mongolia slowed to 5.3% in the first half of 2014. It decelerated sharply from 8.7% year on year in the final quarter of 2013 to 7.5% in the first quarter of 2014 and to 3.8% in the second, as stimulus was partly withdrawn and foreign direct investment plunged by 62.4%, tamping down investment by 32.4%. Consumption increased by 10.1%, however, and exports grew by 19.1%, driven by copper and oil. Imports fell by 8.3% as mine development slowed. On the supply side, agriculture expanded by 16.3% to continue as a key driver of growth. Industry value added increased by 10.1% thanks to increased output from the Oyu Tolgoi copper mine and dynamism in construction boosted by the central bank’s mortgage program. Services expanded by only 1.9% as currency depreciation and plunging investment in new mining projects took their toll.
|Selected economic indicators (%) - Mongolia||2014||2015|
|ADO 2014||Update||ADO 2014||Update|
|Current Account Balance (share of GDP)||-20.0||-12.5||-15.0||-15.0|
Source: ADB estimates.
Consumer price inflation soared to 12.9% year on year in July, fueled by last year’s highly expansionary fiscal and monetary policies. This prompted the central bank to raise its policy rate from 10.5% to 12.0% in August and to reduce lending to banks by 32.5% by midyear.
Government revenues increased by 8.4% in the first half of 2014, while on-budget expenditure rose by 12.6%, significantly less than budgeted, to leave a deficit of 2.2% of the gross domestic product (GDP). Financing from the Development Bank of Mongolia, a major source of off-budget expenditure, dropped to 6.3% of GDP in the first half from 8.8% in 2013 as a whole.
The current account deficit narrowed by 50.6% in the first half of this year, but the deficit in the balance of payments remained high. Gross international reserves had fallen by June to $1.3 billion, or cover for 3.0 months of merchandise imports, and the Mongolian togrog had depreciated by the middle of August by 14% to MNT1,892, its lowest rate ever against the US dollar. The togrog subsequently recovered by 5% in light of an agreement with the central bank of the PRC to increase the ceiling on currency swaps.
The growth forecast is revised down substantially for 2014 and 2015 because of unexpectedly slow growth in the first half, persistent delays in large mining projects, and likely further policy tightening. Given the trend so far in 2014, inflation this year will be higher than forecast in the Asian Development Outlook 2014, but restrictive policies are expected to rein in price increases in 2015 with inflation moderating but remaining above the April forecast. The current account deficit will narrow in 2014 much more than earlier forecast, then return in 2015 to the forecast narrowing trend from a high in 2012. Risks to this outlook stem from the economy’s vulnerability to external shocks, in particular from commodity prices, and uncertainty regarding the authorities’ success in moderating its expansionary policies.
Source: ADB. 2014. Asian Development Outlook 2014 Update. Manila.