Mongolia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Development of colossal mining resources (coal, copper, gold) with investment reaching 40% of GDP
- Strategic geographical position between China and Europe (Silk Road Development Project)
- Potential for diversification of production, including agribusiness (livestock, dairy products, meat, cashmere) and tourism
- Important donor support (4.8% of GDP in 2019)
- Small economy vulnerable to changes in commodity prices and Chinese demand
- Internal political dissensions
- Massive land degradation, 90% of the vast grasslands prone to desertification (frequent occurrence of dust storms)
- Alarming level of corruption and fragile governance (justice, public expenditure, SOEs, mining licenses, and procurement)
- Risks associated with rising inequalities (28% of the population living in poverty in 2018) due to less inclusive mining development
- Insufficient foreign exchange reserves to absorb external shocks
A country spared by the virus but affected by the decline in global demand
In 2020, the economy contracted due to the COVID-19 crisis. Although the spread of the virus within the country was very limited, the global economic slowdown and border closures affected the demand for mining products (80% of total exports - 45% for copper and 15% for coal - and 48% of GDP) and the arrival of tourists in the country. The borders with China were closed as early as January 2020 and a state of emergency was declared in March. 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 decline by 27.4% in the second half of 2020 year-on-year due to lower demand and prices. Mining investments, the bulk of foreign direct investment in recent years, half of which has been in the OT project, have come to a halt. The OT mine expansion project, which had already been delayed due to difficult ground conditions and government renegotiations, is expected to start in October 2022. However, the economic recovery in China (which accounts for 88% of its exports), which is faster than in the rest of the world, will stimulate mining exports in 2021 and, consequently, economic recovery and mining investments. Private consumption (60% of GDP), although affected by the restrictive measures, is expected to recover as they are lifted, as household incomes have been broadly maintained. Indeed, the support plan (14.5% of GDP) included increases in family allowances, retirement pensions, and pensions for the disabled, reduction of social contributions, for example. Inflation will increase slightly in line with the recovery in consumption. The country's central bank has lowered its key rate four times (March, April, September, and November 2020) from 10% to 6%, with the aim to stimulate growth and investment.
Deterioration of public accounts and exposure to external shocks
Despite commitments and efforts under the IMF's Extended Fund Credit Facility set up 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 90% of public debt denominated in foreign currency, the country is exposed to exchange rate depreciation. The COVID-19 crisis has led to a sharp deterioration in the public accounts: declining revenues and support for the most affected populations have weighed heavily, and 2021 will bring only a partial recovery. The government is financing itself bilaterally (a loan of USD 236 million at a rate of 0.01% from Japan for instance) and multilaterally (USD 99 million from the IMF under the Rapid Financing Instrument, 160 million from the ADB, and 104 million from the EU) in order to alleviate the fiscal pressure.
The current account deficit was reduced in 2020. However, the decline in exports of goods has been much greater than the decline in imports. However, the decrease in profits repatriated by foreign companies and in purchases of services, despite the fall in tourism receipts, has more than compensated for this. In 2021, the situation would be reversed, and the current account deficit would return to its pre-crisis level. The trade balance will remain in surplus, but exports of mining products will remain below their pre-crisis level. The services and income balance will remain in deficit due to freight charges (one-third of the services deficit), profit repatriation by mining investors, and interest payments. Strong inflows of mining-related FDI (about 10% of GDP) help finance the current account deficit but are affected by the global economic situation. Foreign exchange reserves have deteriorated because of the Central Bank's market interventions and covered 4.7 months’ worth of imports in 2020. The MINT 6 trillion bilateral currency swap agreement with China was renewed on 31 July 2020 for another three years until 2023.
Some political stability
The legislative elections of June 2020 confirmed the dominance of the unicameral People's Party Parliament by giving it 65 of the 76 seats. The government's good management of the pandemic favored its victory. However, President Battulga, from the opposition, is expected to be re-elected in the 2021 presidential elections. These re-elections come as the fallout from several corruption scandals revealed in 2018-19 (involving embezzlement of public funds and bribery of public officials) continued to erode public confidence in the country's political elite. Following the dismissal of former Prime Minister Jargaltulga Erdenebat in 2017 on corruption charges, current Prime Minister Ukhnaagiin Khürelsükh is also not spared by such accusations, although none of them threatens his socially-oriented economic agenda. Although growth has been strong in recent years, as mining activity is not socially inclusive, the cost of living, as well as the unemployment rate, is rising. Landlocked between Russia and China, the country maintains good relations with both its neighbors while seeking to diversify its ties through the "third neighbor" foreign policy, notably with India and the United States or Japan.