Mongolia’s boom economy risks overheating

Feb 29 • Economy, Mining, News • 935 Views • No Comments on Mongolia’s boom economy risks overheating

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Mongolia, one of the fastest-growing economies in the world, is at risk of overheating and faces growing inflationary pressures because of a surge in government spending, the World Bank and the International Monetary Fund have warned.
The north Asian country’s vast deposits of coal, copper and gold have sparked a boom in mining investments, driving economic growth to a record 17.3 per cent last year. However, economists have cautioned that government spending – which is growing much faster than the economy – has increased inflation, making Mongolia vulnerable if commodity prices were to fall.

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“In the run-up to the last crisis, we had a similar episode where the economy was doing very well in 2007 and 2008 the government was spending a lot and that laid the roots of the ensuing crisis, creating a boom-bust cycle,” said Steven Barnett, assistant director of the IMF office for Asia and the Pacific. In 2008 a drop in commodities prices sparked an economic crisis in Mongolia that forced the country to take a $232m loan from the IMF.

Government spending grew a “staggering” 56 per cent in 2011 from the previous year, according to new data from the World Bank, and accounted for 44 per cent of gross domestic product. It is set to grow a further 32 per cent this year as politicians increase spending before parliamentary elections in June.

That spending has contributed to high inflation, which hit 11 per cent in December, and has eroded real wages for unskilled labourers in the informal sector, according to World Bank research.

Mongolia’s GDP reached $8.6bn last year as foreign direct investment hit a record $5.3bn, up threefold from the previous year.

However, Mongolian businesses are enjoying the growth, and seem more confident the boom times will last. Bayanjargal Byambasaikhan, chief executive of Newcom, a Mongolian business conglomerate working in telecoms, airlines and resources, said the company has an “optimistic” view of growth.

“When I told my board that airline passenger traffic would double this year compared to 2011, and that our airline revenues would also double, they told me I was too pessimistic,” he said with a chuckle. “The economy is growing, everything is expanding and thus the service industries that we are in will continue to expand.”

Mongolia wants to avoid the “resources curse” where, if not managed correctly, mining revenues can fuel currency appreciation and inflation that squeeze out non-resources sectors of the economy, stunting long term growth.
In a further sign of Mongolia’s breakneck growth, bank lending rose 73 per cent in 2011 from the previous year. Loan growth at these levels is a “tell-tale sign of a crisis in the making” said Rogier van den Brink, the World Bank economist who headed the latest report.

The data from the World Bank also showed a drop in construction activity in the fourth quarter of last year, which fell 20.5 per cent from a year earlier. The report noted that this was worrying given the concerns that “a bubble has been brewing in the construction sector”.

Source: www.ft.com

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