Mongolia: Risk Assessment

Country Rating¹

Rating: D

Business Climate Rating¹

Rating: C

Risk Assessment²

Strong growth but associated with risks of overheating
After undergoing a year in recession, the Mongolian economy began to grow again in 2010 at very high pre-crisis levels. With a very harsh winter (20% of livestock destroyed) followed by a very dry summer, the agricultural sector significantly suffered. The economy was driven, however, by the rise of prices for raw materials (gold, copper, coal) and by investment in the mining sector with the government granting mine operating licences for enormous deposits: Oyu Tolgoi (world largest unexploited gold reserves), Tavan Tolgoi (one of the largest unexploited coal deposits), and Dulaan Uul (uranium). Weaknesses in the agricultural sector in conjunction with increases in civil service wages and pensions have spurred an inflationary surge.
In 2011, Mongolia is expected to achieve strong growth again fuelled by an upturn in FDI, which is likely to register a twofold increase attributable to investment projects in the mining sector. There are nonetheless persistent weaknesses, particularly a shortage of credit that could limit domestic consumption and investment. And inflation is expected to remain high in 2011, fuelled by the economic dynamism and the rise of public spending.

Public sector finances remain shaky
After the liquidity crisis in 2009, Mongolia turned to the IMF for assistance. Under pressure from the fund and the World Bank, the public sector deficit was cut by half (via the withdrawal of expansionary fiscal policies and the rise of fiscal revenues). But the subsequent increase in public spending (especially the prospective payment to each citizen of an exceptional $1,000 allowance) coupled with the decline in the exceptional revenues derived from mining projects is expected to result in a widening of the public sector deficit in 2011. In this context, parliament adopted a fiscal stability act to ensure that tax revenues from the mining sector are efficiently used. The public sector debt is nonetheless expected to continue to grow, reaching 70% of GDP in 2011.
As regards external accounts, the deterioration of the current account balance will likely continue in 2011 with imports (mainly of capital goods) expected to increase at a faster pace as a result of the launch of new mining operations. A marked increase in financing needs is thus likely. But direct investment flows are expected to accelerate and thus cover half of those needs. The level of Mongolia's foreign debt is considered low risk.
The banking sector remains fragile due especially to its low capitalisation and the extent of non-performing loans. The authorities thus adopted a law in 2010 intended to reduce banking risk (higher equity and provisioning requirements). These are expected, however, to have only a limited impact.

Tense political situation
The political instability attributable to the dissension between the Mongolian Peoples' Revolutionary Party, which holds the majority in Parliament, and the Democratic Party, which controls the Presidency, continues to slow the pace of reforms. Besides, governance shortcomings, particularly government corruption and inefficiency, constitute the country's Achilles heel.

Strengths

• Abundant raw material resources, production start-up of colossal mineral resources
• GDP growth underpinned by demand from China, which absorbs 40% of exports
• Limited foreign debt
• Influx of direct investment

Weaknesses

• Economy lacking diversification and thus vulnerable to downturns of raw material prices
• Manufacturing sector lacking competitiveness
• High poverty (36%) and unemployment rates
• Domestic political dissension