HONG KONG—Mongolia’s economy is set to rebound in 2014, the country’s central bank governor said Tuesday, even though foreign investment flows have slowed because of the continuing weakness in coal and copper prices.
Central bank head Naidansuren Zoljargal said gross domestic product could expand as much as 17% next year from around 11% this year. Though the forecast is upbeat, it is well below levels predicted by the World Bank, which in an early November report revised its 2013 Mongolia growth figure to 12.5% from its April prediction of 13%.
“I am pretty confident [this year] it will be around 11ish percent. And for next year we are a bit more optimistic than in 2013,” Mr. Naidansuren told The Wall Street Journal in an interview. “I’m pretty sure the  number can go higher than 11%, somewhere between 11% and 17%.”
Mongolia’s economy expanded 12.2% last year and 17% in 2011, when it topped world growth rankings, according to World Bank data.
A major stimulus will come from a renewed flow of direct foreign investment and particularly an expected agreement with Mongolia’s international partner which will launch the second-stage development of the Oyu Tolgoi copper and gold mine, said Mr. Naidansuren.
Oyu Tolgoi is an important piece of the FDI puzzle and “it looks as if it is going to work, it is just a question of the timing. Maybe it is going to come next month, in two months or three months from now, but I am pretty confident that the second phase will happen and that is about $4 billion we are talking about,” he said.
Around 90% of the Mongolia’s revenues come from mine-product exports. Falling prices for these exports have worsened the balance of payments and slowed the country’s growth.
“Oyu Tolgoi is a huge project for the size of the economy we have, it is a $10 billion-a-year economy, so it is going to have a major impact on the GDP,” said Mr. Naidansuren, who was in Hong Kong for a Mongolia investment conference. Mongolia’s foreign investment slid by 47% in the first eight months of this year from year-earlier levels.
Canada-based Turquoise Hill Resources Ltd. TRQ.T -4.28% , which owns 66% of Oyu Tolgoi, plans a rights issue of $2.4 billion to pay its main shareholder Rio TintoRIO.LN -1.62% PLC, after failing to secure financing needed to continue developing the project’s huge copper and gold reserves.
Plans to build an underground mine to complement current open-cast mining have been delayed because of disagreements on the scope of the project and financing arrangements.
In a statement Tuesday, Mongolia’s state-run Erdenes Oyu Tolgoi LLC, which owns 34% of the project, said it remains fully committed to the open-cast mine and the financing and development of the underground mine, and that the government “is flexibly available to continue the discussions” with Turquoise Hill and Rio Tinto.
The CEO of Oyu Tolgoi LCC, Craig Kinnell, speaking at the same conference Tuesday, said that while he wasn’t going to comment on progress in talks with the government on developing what could be the world’s third-largest copper and gold mine, it “is better to take longer now to get it right.”
Mr. Naidansuren noted that Mongolia’s currency, the tugrik, has fallen 20% against the dollar so far this year, and while declining to forecast future trends, said this demonstrated how the authorities “are committed to the flexibility of the exchange rate.”
A combination of the currency fall and weaker commodity prices seen in the past 20 months had driven the consumer-price index higher, he said.
“Our target number is 8%, we might not reach it but still we will be very close to it. We are near 10% today,” which he said was a far better figure than the World Bank and other forecasters had suggested a year ago, when they were predicting an inflation rate of 16% or more.
In its November report, the World Bank said that given recent exchange rate trends and pressures from expansionary macroeconomic policies, “the monetary authorities will likely face increasing difficulties keeping inflation at single-digit levels.”