Mongolia: Year in Review 2011
Last year saw the prospect of Mongolia’s vast untapped natural mineral wealth drive heady levels of investment and growth, with the government aiming to harness the momentum by diversifying the economy and improving infrastructure, employment and housing. However, Prime Minister S. Batbold’s administration will likely face political pressures over protecting the country's resources in the lead-up to this June’s election.
The National Statistical Office of Mongolia (NSO) revealed in October that GDP grew 16.7% in the third quarter of 2011, in line with an annual average expected to outperform the 2010 figure of 7%. However, it is expected that the Oyu Tolgoi copper and gold mine alone will boost Mongolia’s economic growth and GDP by 25% or more when production starts in late 2012 or early 2013.
Confidence in the expected growth due to Oyu Tolgoi and a vast coking coal mine, Tavan Tolgoi, was reflected in government spending, with the government announcing a state budget in October that projected revenues of MNT6.4trn ($4.99bn), some 35.4% of GDP, and expenditures of MNT7.1trn ($5.54bn), or 39.5% of GDP. The projected deficit was MNT700bn ($546m), approximately 4.1% of GDP.
Ulaanbaatar said the budget was aimed at stabilising revenues, ensuring the equitable share of mining revenues among the population, increasing investment in the education and public health sectors and transferring more administrative authority and responsibility to local settlements.
The government also agreed to issue an additional MNT50bn ($39m) worth of bonds for camel and sheep wool producers to support the wool industry, as well as MNT150bn ($117m) in bonds to help small and medium-sized businesses.
The projected mining wealth has also seen growth spread throughout the economy and into the banking sector. In the first 10 months of 2011, government revenues rose to MNT3.47trn ($2.64bn), while total expenditure and net lending amounted to MNT3.29trn ($2.5bn), creating a surplus of MNT189.7bn ($144.17m).
Foreign trade surged by 90% year-on-year (y-o-y), reaching a value of $4.33bn. Tax revenues grew to MNT964.7bn ($733.17m), a 46.7% y-o-y rise, according to the NSO. Meanwhile, the NSO revealed in November that in the first 11 months of 2011, total industrial output increased by MNT175.4bn ($136m), or 10.4%, to MNT1.86trn ($1.45bn) compared to the same period in 2010.
However, this confidence was not reflected in the Mongolian Stock Exchange (MSE) in the latter half of the year, with the MSE Top 20 Index of Mongolia falling 18% from April to December. It is hoped that performance will improve in the coming years in part due to improvements in technology and rules and regulations as part of Batbold’s reform plans.
Such instability has not been evident in the banking sector, which received a boost in December when international ratings agency Standard & Poor’s revised its outlook for a major bank and raised the country’s sovereign credit rating as a whole. In September, the government revealed it was studying the models of nations such as Qatar and the UAE with regard to managing resource-related wealth, as well as being advised by 16 global banks.
The Central Bank of Mongolia spent much of 2011 trying to ensure the stability of the Mongolian financial system and economy amid the high growth. However, despite the central bank’s best efforts — in February, the reserves requirement ratio was increased to 9%, while in April, the policy rate was increased to 11.5% — inflation rose to 10% in September 2011, above the 12-month average of 9%.
Factors certain to impact on inflation are employment and wages, with the former showing marked progress in 2011. The government declared 2011 a “year of employment support” and asked businesses to create jobs for the unemployed to increase household income, with ministries revealing in December that 72,080 new full-time and some 45,000 temporary jobs were created in 2011. A month earlier, the government announced plans to increase wages of state workers by an average of 53% in 2012.
A major contributor to the addition of jobs has been the country’s huge mining projects. An initial public offering (IPO) on the London Stock Exchange of the Erdenes-Tavan Tolgoi coalmine, part of the world’s largest deposit of coking coal, is scheduled for 2012 and expected to raise $15bn.
There are also important developments in store for the vast copper and gold mine of Oyu Tolgoi in 2012, with its 66% owner – Rio Tinto and Ivanhoe (the rest being held by the state’s mining firm) – expecting the Gobi Desert mine's average annual output to be 544.21m kg of copper, 650,000 ounces of gold and 3m ounces of silver in the first 10 years of operation. The vast site employs some 14,000 and is scheduled to begin production in late 2012 or 2013.
While observers agree about Mongolia’s potential, they also tend to echo the same concerns over the pitfalls of high growth. Memories are still raw of the dire effects of the 2008 financial crisis on the economy, which saw the country turn to the IMF for a $224m loan.
Despite the challenges ahead, Mongolia is on steady ground at the moment, with the government aiming to capitalise on its rapid mining growth to diversify and expand other sectors of the economy. Provided it continues to prudently allocate mineral wealth into other promising sectors, Mongolia should be on track to see a growth figure in 2012 that is about as high as 2011’s.