Mongolia: Eyeing economic horizons

Oct 30 • Business, Economy, News • 618 Views • No Comments on Mongolia: Eyeing economic horizons

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Healthy trade figures and predictions that Mongolia will rank among the world’s top-10 fastest-growing economies in the next 40 years has been the source of confidence in the country’s long-term financial potential. However, concerns over trade, regulatory uncertainty and budget deficits threaten the outlook for the near term.
In late August, Knight Frank, an international property consultancy, and Citi Private Bank’s collaborative 2012 Wealth Report predicted that Mongolia will have an average yearly GDP growth of 6.9% from 2010 to 2050, placing the country 7th in the report’s list of global growth generators – countries that can look forward to decades of “catch-up growth”. The firms based their predictions on optimism over revenues from massive coking coal and copper mines in Mongolia.

The report noted that countries in the Asia-Pacific region would become the “new world players” in global growth and ranked Mongolia ahead of Indonesia, which is predicted to register 6.8% growth in the 2010-50 period.

While investors continue to be concerned that growth could be affected by this year’s elections – amid speculation that key contracts would be renegotiated and legislation passed to limit foreign ownership of mineral deposits – newly elected Prime Minister Norov Altankhuyag has moved quickly to reassure them, emphasising the importance of foreign investment when meeting with heads of diplomatic missions and international organisations on September 9.

Altanhuyag said that the new government will remain open to foreign investment, as it plays a significant role in the development of the Mongolian economy. The PM also stated that the government would continue to improve transparency and strengthen the legal framework for foreign investors, stressing that his administration would maintain cooperation with China and Russia.
Optimism raised by Altankhuyag’s remarks has been backed up by trade figures revealed by the National Statistical Office of Mongolia (NSO) in September. External trade turnover reached $7.53bn in the first eight months of 2012, a rise of 7% year-on-year (y-o-y). Meanwhile, exports, which were dominated by coal (44.5%), reached $2.87bn y-o-y, an increase of 0.8%.

However, there are signs that Altankhuyag’s administration will need to carefully manage resource revenues to ensure the country stays on track to meet long-term growth predictions. The NSO also revealed that the foreign trade deficit grew by $1.78bn in the first eight months of this year, a 33.1% increase over the same period in 2011, while the state budget deficit grew to MNT483.1bn ($348.31m).

Critics have argued that the trade shortfall can be eased by adding value to mineral resources before they are exported. However, a number of global financial institutions say that tackling the budget deficit will require a reduction in government spending. Despite tax revenue increasing 18.7% to MNT437.5bn ($315.43m), total expenditure and net lending rose to MNT1.05trn ($757.03m), an increase of 41.6%.

According to the World Bank’s Quarterly Update 2012, published in June, “Government spending growth is outpacing revenue growth, resulting in an increasing fiscal deficit… the exponential growth in capital spending is straining the absorptive capacity of the economy”.

The World Bank has warned that the potential wealth created by resource extraction remains hostage to demand from China, the country’s biggest customer. “Mongolian policy-makers need to adopt a cautious macroeconomic stance. This will entail limiting the build-up of vulnerabilities in the banking sector, reining in the growth of government expenditures, minimising off-budget financing activities and ensuring that the lending of the Development Bank of Mongolia is within the framework of the Fiscal Stability Law.”
To reduce the trade deficit, officials have told OBG that the government has implemented several measures to encourage and promote value-added production in the country by differentiating value-added tax and applying royalty rates to the exportation of raw commodities. The $10bn Sainshand Industrial Complex, announced in June, will also have mineral processing facilities, which should help improve the country’s value-added production. Construction is slated to begin in 2013.

Effective from January 1, 2011, Mongolia imposed a progressive royalty regime in addition to the flat-rate royalty rate of 5%, with rates from 0% to 5% that vary by the market price of the mineral and the level of processing, as a partial replacement for a 68% windfall-profits tax on copper and gold. That step followed the parliament’s approval in 2009 of an amendment to the Law on VAT that states “processed mineral products” are subject to 0% VAT rather than 10% only if exported.

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