Mongolia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Exploitation of colossal mining resources (coal, copper, gold)
- Strategic geographic location between China and Europe (New Silk Road development project)
- Potential to diversify production, specifically agri-business (dairy products, meat, cashmere) and tourism
- Economy vulnerable to commodity price variations
- Highly exposed to Chinese economy
- Internal political disputes
- Alarming level of corruption and risks associated with rising inequalities due to non-inclusive mining development
Growth stimulated by mining investment
Recovery is expected to continue in 2018, stimulated by greater investment in the mining sector and higher mineral prices. The second phase of expansion at the Oyu Tolgoi mine (one of the largest gold and copper reserves in the world, operated by the Rio Tinto Corporation via its Turquoise Hill subsidiary) is set to attract substantial foreign direct investments. This project should have a beneficial effect on investor confidence, and stimulate investments overall. Mining development is expected to boost the construction sector, not only regarding mining infrastructure, but in terms of accommodation construction – a consequence of the country’s growing urbanization, with an influx of labor attracted by the mining boom.
However, growth is expected to remain below the average observed between 2010 and 2014 (11.3%), while waiting for the full utilization of mining resources, and will be limited by Chinese demand (90% of the country’s exports). In addition, subsistence agriculture focused on livestock remains vulnerable to climate shocks and pandemics. Meanwhile, public demand is likely to be dampened by the fiscal consolidation measures put in place by the government. Household consumption is expected to receive a boost from the benefits of mining sector development – provided, however, that there is a more egalitarian distribution of the profits. Finally, inflation too is expected to rise. This has been triggered by higher fuel prices and growth in money supply with foreign investment flowing into the mining sector.
The country's financial position will remain precarious
With the implementation of an Extended Credit Facility under the aegis of the IMF in early 2017, the government moved to implement fiscal consolidation measures to reduce its deficit. The 2018 budget foresees a new reduction of the deficit, creating grounds for social discontent within the population (e.g. teacher protests calling for wage rise). The president (from the opposition party) tried to veto the proposal (cancelled by a Parliamentary vote), judging the consolidation efforts to be inadequate. A new draw on the IMF USD 5.5 billion loan should allow the government to meet the next interest payment on a significant portion of its debt (USD 500 million and USD 160 million due in January and June 2018, respectively). Other payments due will be financed by the issuance of sovereign bonds by the central bank as well as bilateral (Japan) and multilateral (ADB) loans. This should reassure investors about Mongolia’s capacity to repay its debt.
The reduction in the current account deficit observed in 2017, thanks to increased mineral exports, is unlikely to continue. Effectively, imports of capital goods are expected to rise alongside new investments in mining. This rise is unlikely to be fully offset by the growth in exports, which is stimulated by higher mineral prices but limited by weakening Chinese demand. After a period of strong depreciation of the tugrick, the local currency, the trend is expected to reverse in 2018, as growth recovers and political uncertainties lessen. This should allow the central bank to cut its key rates again in 2018, after a two-percentage-point cut in June 2017.
The political situation is expected to stabilize
After the victory of the Mongolian People’s Party (PMD) in the June 2016 parliamentary elections (65 out of 76 seats in parliament), the presidential elections of June/July 2017 were won by the opposition candidate, Khaltmaagin Battulga (Democratic Party). Following this defeat, infighting resurfaced within the parliamentary majority, resulting in the dismissal of Prime Minister Jargaltulga Erdenebat in September 2017, on allegations of corruption. The appointment of Khurelsukh Ukhnaa as new Prime Minister in October 2017 is likely to help stabilize the situation, although renewed rounds of infighting cannot be ruled out.
With regard to the business climate, the composition of the new parliament, which is much more favorable towards foreign operations, is expected to encourage foreign investment and help implement more cautious economic policies under the IMF programmer. The arrival of President Battulga, whose campaign focused on more egalitarian wealth distribution and the fight against corruption, should encourage the implementation of good governance practices and improve the business climate, which have been inadequate to date.