An increase in private consumption and demand for minerals is set to drive the economy 

In 2021, economic growth was driven by a strong recovery in mining (48% of GDP) and services, supported by strong demand for mining products and high commodity prices. Turquoise Hill Resources, a subsidiary of Rio Tinto, which owns 66% of the largest copper and gold mine in Oyu Tolgoi (OT), saw its revenues rebound by 118% in the first nine months of 2021. However, despite a relatively high vaccination rate and strong demand, COVID-19 outbreaks amid new variants disrupted coal exports to the leading trading partner China (92.5% of Mongolia’s total exports), as restrictions reduced truck movements across the border. Going forward, the economy is expected to accelerate in 2022 and recover to its pre-COVID level as the vaccination rate was high in late 2021 (65% of the population was fully vaccinated as of December 2021), transportation issues affecting exports should be resolved with the pandemic kept under control, and domestic demand is set to increase. The solid Chinese market should continue to stimulate mining exports (especially coking coal) to China, and, as a result, mining investments were delayed to some extent by the pandemic. Private consumption (60% of GDP) is expected to expand, assuming there will be no other lockdowns and that employment increases and is still benefiting from social protection and household support implemented during the pandemic and extended through the second half 2021. The support plan has exempted utility bills (electricity, heat, water, and waste) for households and some companies. However, - which rose sharply in the second half of 2021 due in part to supply-side factors - is expected to remain high in 2022. If it stays and hovers over the 4-8% target range, the Bank of Mongolia is likely to raise its policy rate to 6% by the end of 2020, but its policy would still be relatively accommodative. 

Public finances will recover but remain exposed to external shocks

Despite commitments and efforts under the IMF’s Extended Fund Credit Facility set up for three years in 2017 to reduce the fiscal deficit, the economy is still burdened with high debt, making it vulnerable to external shocks affecting FDI, commodity prices, and Chinese demand. Furthermore, with over 90% of public debt denominated in foreign currency, the country is exposed to exchange rate depreciation. The pandemic has deteriorated public accounts through declining revenues and support for the most affected households. That being said, the fiscal deficit should continue to narrow in 2022 with increased revenues, while expenditures should remain high to support the economy. The government is financing itself mainly bilaterally and multilaterally (with AIIB for 21 million in July 2021) to alleviate the fiscal pressure.

The current account deficit widened in 2021 due to disrupted exports to China. It is expected to broaden further in 2022, with increased imports due to rising mining investments. However, the trade balance should remain in surplus thanks to mining exports and their high prices. The services balance will remain in deficit due to freight charges (one-third of that deficit), as will the income account: foreign companies will repatriate more profits from their mining activities, and interests on debt are to be paid. In light of high demand, mining-related solid FDI inflows (10% of GDP) should increase and, alongside bilateral and multilateral loans, will continue to finance the current account deficit. Foreign exchange reserves remain ample and stood at 6.4 months of imports as of July 2021. The bilateral currency swap agreement with China - 15 billion yuan for 6 trillion togrogs (USD 2.2 billion) - was renewed on 31 July 2020 for another three years until 2023.

Corruption weakens the ruling party’s credibility

The presidential election in June 2021 consolidated the power of the Mongolian People’s Party (MPP) in the unicameral Parliament (62/76 seats from June 2020), with the former Mongolian Prime Minister and MPP leader, Ukhnaa Khurelsukh winning the election by a landslide. His socially oriented agenda focuses on supporting the Mongolian middle class and the independence of the legislative and judicial systems through Vision 2050, the long-term development policy. For instance, he proposes the implementation of a sovereign wealth fund and equal benefits from Mongolia’s mining resources to all citizens. However, those projects could face scrutiny as the country has been facing a high unemployment rate (8.8% in 2021) and corruption scandals - it is ranked 111th out of 180 countries in Transparency International’s corruption perceptions index. If unfulfilled, this could fuel disillusion among the population and increase social stability risks. Externally, the country maintains good relations with the neighboring countries, Russia and China, while seeking to diversify its ties through the “third neighbor” foreign policy, especially with India, the United States, Japan, and more recently, South Korea, its 6th strategic partner