Once Strong Mongolian Economy in Turmoil

Just four years ago, the Mongolian economy grew by 17% and attracted billions of dollars in foreign investment, according to World Bank data. Today, there is a mounting debt crisis and the risk of a possible default from the Mongolian government, with GDP only growing about 1.3% for the first half of the year. Currency has also plummeted nearly 10% against the dollar in the past month alone, and concern continues to grow as more investors pull their funding from the country.

The Mongolian Central Bank has attempted to stop the foreign investment problem by raising interest rates by 4.5 percentage points to 15%, but the efforts have thus far fallen short. Finance Minister Choijilsuren Battogtokh stated the country “may not be able to afford to finance salaries and operational costs of their government departments” as a result of the crisis. Experts expect Mongolia’s economic growth to be flat or in very low single digits, and the business climate has become more risky with time.

The country has abundant resources, and in the past attracted billions in mining investment through their coal and gold mines. As investors have stopped providing money, foreign direct investments into these mines has slowed. At the same time, gold prices have slumped and demand from China has slowed as a result of its own economic slowdown. Mongolia is just one of the many Asian countries that relies so heavily on China to purchase their supply of raw materials. Unfortunately for Mongolia, China buys over 75% of its exports, so any decreases in demand can greatly impact the country’s economy.

Since Mongolia does not have a large stockpile of currency reserves, the new administration of the Mongolian People’s Party is expected to present a pro-mining agenda. The Mongolian tugrik has plummeted almost 12% against the dollar this year, further increasing worries that the government will not be able to repay its borrowers. It is possible that the International Monetary Fund will intervene, as they gave Mongolia a bailout in 2009. Experts believe that as a country, Mongolia is far too important strategically for external parties not to intervene as the situation exacerbates.

There are fortunately two projects underway that may be able to improve economic conditions in the country. The first is the $5.4 billion Oyu Tolgoi gold and copper mine that is expected by to fully operational by the year 2020. Additionally, there is a $4 billion coal mine under development in the South Gobi region that could provide more foreign investment for the country. In order to improve conditions, the government will have to make extreme policy overhauls, but Mongolia’s natural resources could prove to benefit the economy once again.