REPORT

1. Mongolia Quarterly Economic
Update
The World Bank
The World Bank’s Mongolia Quarterly Economic Update assesses recent economic and social
developments and policies in Mongolia. It also presents findings of ongoing World Bank activities in
Mongolia. The Update is prepared by a team from the World Bank’s Poverty Reduction and Economic
Management (PREM) Sector Unit in the East Asia and Pacific Region Vice-Presidency, consisting of
Munkhnasan Narmandakh, Tehmina Khan and Altantsetseg Shiilegmaa under the guidance of Zahid
Hasnain. This Update also received contributions from Alexander Pankov, Tungalag Chuluun, Trang Van
Nguyen and Juan Feng. Copies can be downloaded from http://www.worldbank.org.mn.
For further information, comments and questions, please contact Munkhnasan Narmandakh
(mnarmandakh@worldbank.org).
June 2012
PublicDisclosureAuthorizedPublicDisclosureAuthorizedPublicDisclosureAuthorizedPublicDisclosureAuthorized
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2. Mongolia Quarterly Update 2012
2
Contents
Executive Summary.......................................................................................................................................5
Real sector developments ............................................................................................................................7
External sector ..............................................................................................................................................9
The Exchange Rate, Reserves and Bond Issuance ......................................................................................11
Banking sector.............................................................................................................................................14
Inflation.......................................................................................................................................................16
Fiscal developments....................................................................................................................................18
Labor Markets and Poverty.........................................................................................................................25
Economic outlook .......................................................................................................................................27
Figures
Fig 1 The economy grew by 16.7 percent in the first quarter of 2012 ........................................................8
Fig 2 Industrial output continues to grow at a healthy pace.......................................................................8
Fig 3 The trade deficit continues to widen .................................................................................................10
Fig 4 although imports are growing much more slowly compared to a year ago .....................................10
Fig 5 while exports fell in April, the first yoy decline in more than two years..........................................10
Fig 6 …as exports to China have fallen back ...............................................................................................10
Fig 7 Commodity prices have fallen sharply since last year.......................................................................11
Fig 8 Although the current account widened, it remained fully funded by FDI inflows............................11
Fig 9 Both the nominal and real exchange rates appreciated in Q1...........................................................11
Fig 10 FX reserves remain high ...................................................................................................................11
Fig 11 The central bank continues to sterilize its accumulation of reserves but at a much slower pace
than last year ..........................................................................................................................................12
Fig 12 Mongolia also successfully debuted its first international bond offering at relatively favorable
yields .......................................................................................................................................................12
Fig 13 Both local and foreign currency deposit inflows are tapering off....................................................15
Fig 14 while real rates of returns on local currency deposits are sharply negative ...................................15
Fig 15 Credit growth has decelerated after peaking in November of last year, and is likely to slow down
further.....................................................................................................................................................15
Fig 16 … But lending remains highly concentrated.....................................................................................15
Fig 17 NPLs are the highest and Tier 1 buffer capital ratios among the lowest in the region....................16

3. Mongolia Quarterly Update 2012
3
Fig 18 and the overall volume on NPLs on bank balance sheets remains large ........................................16
Fig 19 Inflation is accelerating in Mongolia…..............................................................................................17
Fig 20 …in marked contrast to the rest of East Asia ...................................................................................17
Fig 21 Food prices have shot up, notably of meat.....................................................................................17
Fig 22 which constitutes nearly a third of the food CPI basket under the revised CPI weights .................17
Fig 23 Government spending is rising extremely fast, mostly on capital projects .....................................20
Fig 24 while revenue growth has stalled ...................................................................................................20
Fig 25 Despite revenue growth being the strongest, public balances have deteriorated the most in
Mongolia compared to other East Asian economies..............................................................................21
Fig 26 and the deficit has risen sharply......................................................................................................21
Fig 27 Real wages in informal labor markets in UB have increased since January despite the acceleration
in inflation...............................................................................................................................................25
Fig 28 But nearly 60 percent of those surveyed reported that wages were insufficient to meet basic
needs.......................................................................................................................................................25
Tables
Table 1 Mongolia: Key Indicators................................................................................................................28
Boxes
Box 1 Tapping international financial markets: benefits and risks for Mongolia.......................................13
Box 2 Controlling Off-budget Financing for Infrastructure.........................................................................22
Box 3 Key Considerations for setting up a targeted social welfare benefit................................................24
Box 4 2011 poverty level dropped to 29.8 percent in Mongolia...............................................................26

4. Mongolia Quarterly Update 2012
4
Abbreviations and acronyms
bn Billion
BoM Bank of Mongolia
CPI
DBM
Consumer Price Index
Development Bank of Mongolia
FX
FSL
Foreign currency
Fiscal Stability Law
GDP Gross Domestic Product
HDF Human Development Fund
LC Local currency
LHS Left hand side
MFA Mongolian Financial Association
mn Million
MNT Mongolian togrog
MoF Ministry of Finance
mom Month-on-month
mt Metric ton
NPL Non-performing loan
NSO National Statistics Office
OT Oyu Tolgoi
RHS
tn
Right hand side
Trillion
US$ United States Dollar
WPT Windfall Profit Tax
yoy Year-on-year
YTD Year-to-date

5. Mongolia Quarterly Update 2012
5
Executive Summary1
The Mongolian economy is continuing to grow at a very rapid pace, expanding by 16.7 percent year-
on-year (yoy) in Q1. This high growth however, is also fuelling inflation which touched 16 percent in
April, well above the Bank of Mongolia’s (BoM) inflation target of 10 percent. Increasing government
spending on wages and salaries, large cash handouts to the general population, and burgeoning capital
expenditures are adding to the demand pressures. Meanwhile, the worsening global economic outlook,
in particular a faster than expected slowdown in China, Mongolia’s largest trading partner, has
negatively impacted export growth, resulting in a deterioration in external balances. Under these
circumstances, the advice to Mongolian policy-makers is to “hold your horses” and adopt a more
cautious macro-economic stance, tightening both monetary and fiscal policy to prevent further over-
heating of the economy.
Growth is being led by the service sectors, in particular wholesale and retail trade which expanded
by 51 percent yoy in Q1, following an outturn of 70.5 percent in the last quarter of 2011, and transport
which grew by 11.7 percent yoy. The development of the Oyu Tolgoi mine is having strong spillovers into
the rest of the economy, including through lifting consumer and business sentiment. The first quarter
data also revealed that the agriculture sector is finally recovering from the effects of “dzud” (severe
weather conditions) suffered in late 2009/early 2010, growing by 13.6 percent in Q1.
Government spending growth is outpacing revenue growth, resulting in an increasing fiscal deficit.
Spending, in nominal terms, was 32 percent yoy higher in April (year to date, YTD, basis) with capital
spending growing by more than 100 percent. Revenues are failing to grow at the same pace, rising only
21 percent in nominal terms on a YTD basis in April, as a result of weaker growth in receipts from taxes
on international trade, and negative growth in excise taxes, royalties and dividends from mining sector
companies. As a result, the fiscal deficit has climbed considerably, reaching 4.7 percent of GDP in March,
its highest level in nearly two years (although it has since eased slightly in April).
Although the 2 percent structural deficit ceiling under the Fiscal Stability Law becomes binding only
in January 2013, with the structural deficit amounting to 6.1 percent of GDP in April, Mongolia will have
to undertake a substantial amount of fiscal tightening in 2013 if it is not to miss the target. In particular,
the exponential growth in capital spending is straining the absorptive capacity of the economy, as
evidenced by rapidly increasing cement prices. There has also been an increase in alternative sources of
infrastructure financing, through “build-transfer” schemes and project financing by the Development
Bank of Mongolia (DBM) that represent significant fiscal liabilities. The DBM is backed by a full sovereign
guarantee, and rising debt service payments that fall due in the next few years could constrain fiscal
space in the near term. Claims on budgetary resources could also grow with the proposed monetization
of Erdenes TT shares.
Inflation is being pushed up by rising core inflation, which reflects demand side pressures from
higher government spending, and by rising food prices, notably of meat. Recent rate hikes by the BoM
are helping to reduce the pace of bank lending, which had been growing over 60 percent at the start of
the year. Although there is room to hike further, with the interest rates on central bank paper still
1
The analysis is based on Q1 + April 2012 data from the Bank of Mongolia (monthly bulletin, balance of payments, loan
report and monthly consolidated banking system balance sheet), the National Statistical Office (monthly bulletin), relevant
government authorities and international databases.

6. Mongolia Quarterly Update 2012
6
negative in real terms, monetary tightening needs to be complemented by fiscal restraint in order to be
effective.
On the external front, exports contracted by 2.8 percent yoy in April. This was the first fall in more
than two years, and reflected weaker global economic conditions, sliding commodity prices and slowing
growth in China which is Mongolia’s largest trading partner. Coal, which is the largest export earner, is
barely growing, while copper exports have been performing poorly for some time now. On a four-
quarter rolling sum basis, the current account deficit widened to 35 percent of GDP in Q1 2012 from 18
percent in Q1 2011 but was financed by the record levels of FDI inflows of US$ 4.4 bn or roughly half of
GDP, and FX reserves remain high. The Togrog has appreciated in recent months, in both nominal and in
real terms which will undermine the competitiveness of Mongolia’s non-mineral traded sector.
Recent poverty analysis, conducted jointly by the World Bank and the NSO, finds that the national
poverty headcount rate declined from 39.2 percent in 2010 to 29.8 percent in 2011. This progress took
place against the backdrop of strong economic growth, sizeable social transfers, and large investments
to help the recovery from the 2010 dzud. However the recent acceleration in inflation is worrying since
it will impact the poor disproportionally, and rising food inflation is particularly worrying since food
constitutes 49 percent of expenditures among households in the lowest quintile of the income
distribution.
The global economic outlook has deteriorated considerably in recent months. Financial conditions in
high-income Europe, higher oil prices, and, most importantly, the slowing Chinese economy pose risks
for Mongolia. The channels through which these operate include financial and trade linkages – namely
volatility in commodity prices and through demand from China for its mineral exports. Indeed, signs of
these are already visible as demonstrated by the decline in exports in April. Other financial market
linkages should also not be discounted: Mongolia’s banking system, which has shown signs of
overheating over the past year, is highly dollarized, with about a third of deposits denominated in
dollars and easy convertibility out of the Mongolia Togrog. A sharp economic slowdown and/or an
increased macroeconomic instability could expose the liquidity and asset quality vulnerabilities in
individual banks and system overall.
Given these risks, Mongolian policy-makers need to adopt a cautious macro-economic stance. This
will entail limiting the build-up of vulnerabilities in the banking sector, reining in the growth of
government expenditures, minimizing off-budget financing activities and ensuring that the lending of
the DBM is within the framework of the FSL. Adjusting the policy stance in this manner will address the
internal imbalances that are already evident as well as position Mongolia better to deal with the risks to
the regional and global economy. It will also ensure that the money spent is well spent, namely on
activities that help to build the public and human capital infrastructure of Mongolia and maximize the
returns of the country’s mineral wealth to its people.

7. Mongolia Quarterly Update 2012
7
Real sector developments
2012 started with first quarter growth of 16.7 percent…
The economy continues to grow at a furious pace, expanding by 16.7 percent year-on-year (yoy, Fig
1) in the first quarter. This makes Mongolia one of the fastest growing countries in the world.
… fuelled by the development of the mining sector as well as highly expansionary fiscal
policy
Growth is being fuelled by the development of the Oyu Tolgoi mine which has had strong spillovers
into the rest of the economy, including through lifting consumer and business sentiment. Government
spending is also growing extremely fast, further boosting domestic demand through growing outlays on
wages and salaries, large cash handouts to the general population and capital projects.
As a result, the service sectors of the economy are booming: wholesale and retail trade expanded
by 51 percent yoy in Q1 and added 5 percentage points (pp) to GDP growth, much larger than the
growth contribution of any other sector; transport, communication and other services added another
4.2 pp with the transport sector growing by 11.7 percent in Q1 following a contraction of 29 percent in
Q4 last year.
The mining sector also performed well during the first quarter with a positive contribution to GDP
growth of 1.6 pp. After showing signs of strong overheating during the summer of last year,
construction sector activity has weakened considerably: the sector contracted for the second quarter in
a row, with output falling by 20.5 percent in Q4 and 12.5 percent in Q1. The sector appears to have hit
capacity constraints in the form of shortages of skilled labor, construction materials and equipment.
Local supply of construction materials was affected by the closure of several companies mining for
construction materials (gravel, limestone producers) due to the law regarding mining activities near
forests and riverbed areas. Transport delays meanwhile have also worsened, with reports indicating that
the amount of time required to import material has increased from 15 days to around 45. Finally, wages
are reported to be rising fast in the construction sector (this is also borne out in World Bank surveys of
informal labor markets, see next section) with companies struggling to pay higher wages while
borrowing costs have increased due to a tightening of monetary policy. Going forward, capacity
constraints are likely to prove a significant impediment in implementing the massive road building and
social housing plans announced by the government and the private sector housing developments.
First quarter data also revealed that the agriculture sector has finally recovered from the effects of
“dzud” (severe weather conditions) suffered in late 2009/early 2010. The sector grew by 13.6 percent
following barely positive growth during 2011 and a contraction of 16.6 percent in 2010. This bodes well
for low-income families in rural areas that had been particularly hard hit by the dzud, many of whom
had been forced to migrate to urban areas to look for employment opportunities.
Industrial output continues to grow at a healthy pace …
Mongolia’s industrial output remains healthy, with total output rising by 12 percent yoy in April
(three-month moving average basis. This strong performance is mainly driven by manufacturing sector
which makes up almost 30 percent of total output and which rose by 20 percent, supported by
manufacturing of basic metals (up 94 percent) and food and beverages (up 16 percent) in April. Mining
and quarrying sector accounts for 60 percent of total output and also grew by 10 percent.

8. Mongolia Quarterly Update 2012
8
Fig 1 The economy grew by 16.7 percent in the first
quarter of 2012
Fig 2 Industrial output continues to grow at a healthy
pace
% point contributions to GDP growth, yoy Industrial output, 3 month moving average % yoy, 2005
constant prices
Sources: NSO, WB staff estimates.* Preliminary GDP
estimates
And the development of the Oyu Tolgoi mine remains on track …
With the completion of 87 percent of the first phase of the development of the Oyu Tolgoi mine in
April, the mining and stockpiling of ore from the open pit has already begun. Meanwhile, commercial
production is expected to start in the first half of 2013.
Looking ahead, the slowdown in China and deteriorating conditions in the Eurozone may
have a strong impact on demand for Mongolia’s mineral output
The global economy is facing renewed headwinds. The sovereign debt crisis in the Euro area is
intensifying again. Economic activity data from China, to which Mongolia ships the bulk of its coal and
copper output, suggest that growth is continuing to moderate and that the investment boom that had
underpinned strong Chinese demand for global commodity imports and kept commodity prices high is
coming to an end2
. Turbulence in international financial markets could also affect financing needed to
develop Mongolia’s mineral wealth while delays in building railway networks to transport mineral
output (due to capacity constraints in the construction sector) could affect revenues from the mineral
sector. The continued demand softening for commodity imports by China and lower prices will impact
negatively demand for Mongolia’ mineral output and revenues. Indeed, as discussed in the trade
section, growth in Mongolia’s exports has been weakening since the start of the year and turned
negative for the first time in more than two years in April.
2 It is important to bear in mind that while Chinese demand for commodities related to export manufacturing and
investment will likely turn weaker, private consumption growth remains strong. This will support prices for imports such as
palm oil, vegetables, fish and meat, rubber for the production of tires, and other consumption-related commodities
-10
-5
0
5
10
15
20
25
Q3-08 Q1-09 Q3-09 Q1-10 Q3-10 Q1-11 Q3-11 Q1-12
Agriculture Mining
Other services Manufacturing
Construction Wholesale & retail trade
Electricity, comm. & residual Transportation
GDP
-20
-10
0
10
20
30
40
50
Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12
Mining and quarrying
Industrial output
Manufacturing
Utilities

9. Mongolia Quarterly Update 2012
9
External sector
The trade deficit continues to widen although imports are growing at a much slower pace
compared to last year
Trade data show a further widening of the trade deficit in April, as import growth outpaced that of
exports (Fig 3). The latest data show a deficit of almost US$ 2.1 bn in March 2012 (on a 12 month rolling
sum basis3
), up from US$ 0.7 bn a year ago. Imports reached US$ 7.0 bn in April, a 74 percent increase
from a year ago, while exports climbed to US$ 4.9 bn from US $3.3 bn a year ago.
However, import growth has slowed considerably from last year as mining transport and machinery
equipment and fuel imports related to the development of the OT mine (these accounted for 70 percent
of total imports in 2011) have fallen back (Fig 4). April data show an increase of 25 percent yoy in total
imports. In part this likely reflects base effects, namely the surge in equipment, fuel and transport
imports last year as the development of the OT mine gathered pace, and also the effect of growing lead
times to import goods, which have increased from around 15 days to 45.
On an annual basis, exports fell for the first time in April compared to year ago
Exports fell by 2.8 percent yoy in April, the first negative number in more than 2 years and further
weakness is likely as more rapid than expected slowdown in China pose the largest risks to the outlook
(Fig 5). Mongolia’s exports over the past year have been supported almost entirely by large coal
shipments to China, where Mongolia sells 93 percent of its exports. Total exports to China fell slightly by
0.2 percent yoy in April, with overall coal exports, the largest export earner for Mongolia, barely
increasing (Fig 6) on a monthly basis. On a year-to-date basis, coal is up 51 percent with unit prices still
strong at 32.2 percent increase. Exports of copper fell for the fourth consecutive month in April, down
by 19 percent yoy, due to 18 percent drop in unit price. Copper prices have been falling since January
and registered a 10 percent fall between the end of April and the middle of May (Fig 7).Exports of gold
also performed poorly but due to 47 percent drop in volume while unit prices increased by 12 percent in
April.
Cashmere season started in March with herders and traders attempting to push up prices of greasy
cashmere by limiting the volume of greasy cashmere being sold on the market and available for export.
As a result, export earnings from greasy cashmere were down by 57 percent yoy on YTD basis in Q1
while export volumes were 36 percent lower. Chinese buyers currently dominate buyers for cashmere,
with local dehairers and spinners remaining on the sidelines. However, combed goat down increased in
volume terms by 4 times since Q1 2011, outperforming greasy cashmere. With global economic
prospects looking dim as the euro area crisis drags on, global commodity prices are becoming
increasingly volatile. Meanwhile the momentum of global trade is slowing, and with China trying to
engineer a soft landing for its housing market and its economy, the risks only lie to the downside.
Renewed volatility in global financial markets or any shift in risk appetite, in both domestic and overseas
investors, suggests that demand for Mongolia’s commodity exports is unlikely to remain robust. Indeed
this is already being borne out in the export data.
3
Monthly trade data tends to be highly volatile and also is affected by seasonal factors. For this reason, 12-month rolling
sums are illustrated.

10. Mongolia Quarterly Update 2012
10
On a four-quarter rolling sum basis, the current account deficit widened to 35 percent of GDP4
in
March 2012 from 18 percent the previous year (Fig 8), but was financed by the record levels of FDI
inflows of US$ 4.4 bn or roughly half of GDP. Net remittances declined to US$ 60.5 mn in Q1 2012 from
US$ 121.6 mn in Q1 2011 mainly due to rising outflows from the private sector.
Fig 3 The trade deficit continues to widen Fig 4 although imports are growing much more slowly
compared to a year ago
US$ mn, 12-month rolling sum*
Percentage point contributions to year-on-year growth
Fig 5 while exports fell in April, the first yoy decline in
more than two years
Fig 6 …as exports to China have fallen back
Exports, percentage point contributions to year-on-year growth Exports, percentage point contributions to year-on-year growth
4
Monthly and quarterly trade data tends to be highly volatile and also is affected by seasonal factors. For this reason, 4-
quarter rolling sums are illustrated
-2500
-2000
-1500
-1000
-500
0
500
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Mar-06Mar-07Mar-08Mar-09Mar-10Mar-11Mar-12
Exports
Imports
Trade balance (right axis)
-50%
0%
50%
100%
150%
200%
Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12
Mineral products
Transport equipment
Machinery and equipment
Food products
Base metals
Other
Total imports
-60%
-10%
40%
90%
140%
190%
Apr-10 Oct-10 Apr-11 Oct-11 Apr-12
Other
Greasy cashmere
Coal
Gold
Copper concentrate
Total
-80%
-40%
0%
40%
80%
120%
160%
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Other
China
Russia
Total

11. Mongolia Quarterly Update 2012
11
Fig 7 Commodity prices have fallen sharply since last
year
Fig 8 Although the current account widened, it remained
fully funded by FDI inflows
Jan 2010=100 US$ mn, 4-quarter rolling sums
Sources: BoM, MoF, NSO and WB staff estimates.
The Exchange Rate, Reserves and Bond Issuance
The Togrog has appreciated in recent months, in both nominal and real terms, and this
undermines the competitiveness of Mongolia’s non-mineral traded sector
The Mongolian Togrog has appreciated slightly in recent months after losing value towards the end
of last year. At the beginning of May, the exchange rate had appreciated by nearly 6 percent compared
to the start of the year. The real exchange rate – which essentially measures the price of a basket of
Mongolian goods against the similar basket of goods in its main trading partners and hence is a key
indicator of competitiveness in international markets – has also resumed its upward trends, appreciating
by 11 percent in Q1 compared to the end of last year (Fig 9). This reflects significantly higher inflation
pressures within Mongolia even as inflation has fallen in its main trading partners, and will take a toll on
the already small manufacturing and agricultural sectors’ exports.
Fig 9 Both the nominal and real exchange rates
appreciated in Q1
Fig 10 FX reserves remain high
Index=100 in Jan 2006 US$ mn, stock US$ mn, mom change
80
90
100
110
120
130
140
150
160
170
180
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
Copper
Gold
NewCastle Coal
-4000
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
CAbalance
NetFDIinflows
Netportfolioinflows
Othernetinflows
Remittances
Q1 2011
Q1 2012
60
70
80
90
100
110
120
130
140
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
REER
USD vs MNT, Jan 2006=100
appreciation
-200
-100
0
100
200
300
400
500
400
900
1,400
1,900
2,400
2,900
Apr-10 Oct-10 Apr-11 Oct-11 Apr-12
Stock of BoM international reserves
month on month change, RHS

12. Mongolia Quarterly Update 2012
12
Fig 11 The central bank continues to sterilize its
accumulation of reserves but at a much slower pace than
last year
Fig 12 Mongolia also successfully debuted its first
international bond offering at relatively favorable yields
MNT mn % Selected Debt Issuances, YTD March 2012, East Asia, Left axis shows
issuer with announcement date and maturity in brackets
Sources: BOM, Bloomberg, World Bank.* month/day
Foreign exchange reserves have risen in recent months, in part reflecting the deposit of the
proceeds from DBM’s bond issuance
Meanwhile the Bank of Mongolia had accumulated some US$ 440 mn of foreign exchange reserves
by April, following a sale of some US$ 245 mn in the first quarter to stem volatility in currency markets
at the end of last year. Net international reserves (NIRs) -- excluding commercial banks’ NIR -- have
consequently hit new highs at US$ 2.63 bn in April, up from US$ 2.3 bn in December (Fig 10). However it
should be noted that in March 2012, the DBM deposited the US$ 580 million proceeds of its successful
bond issuance with the BoM which helped to raise NIRs. Excluding this amount (as per the definition of
NIRs by the IMF used in the 2009-10 IMF program), reserves amounted to US$ 1.8 billion at the end of
April 2012. This is roughly the same as the level first achieved in January 2011 and is down from about
US$ 2.2 billion in mid-2011, presumably reflecting domestic demand pressures and the BoM’s relative
preference for exchange rate stability. Finally, the outstanding stock of central bank paper has fallen
considerably compared to the start of 2011. As a result, the BoM has been injecting liquidity into the
financial system through the net redemption of central bank paper (Fig 11).
Bond offerings in international markets attracted strong investor interest, but with global
uncertainty mounting once again, Mongolia should maintain a cautious approach
The DBM, backed by a full sovereign guarantee, debuted its first foreign currency bond offering on
international financial markets in March, worth US$ 580 mn (Fig 12). The bonds are rated B1 by Moody's
and BB- by S&P, which is the same rating as the Mongolian sovereign. Along with an earlier US$ 20 m in
a private placement at the end of 2011, the DBMs latest offering completes its US$ 600 mn program of
issuance to fund infrastructure projects. This has been followed by the sale of US$ 600 mn 5 year bonds
by the Mongolian Mining Corporation, which is Mongolia’s largest coking coal producer, in late March
0
2
4
6
8
10
12
14
16
0
200
400
600
800
1000
1200
1400
09/08 03/09 09/09 03/10 09/10 03/11 09/11 03/12
Central Bank bills (net)
7-day CBBs rate, RHS
0.58
1.75
1.50
1.25
1.00
1.00
1.00
1.00
5.75
5.20
5.00
4.00
3.13
1.63
2.35
5.00
0 1 2 3 4 5 6 7
Dev. Bank of Mong (3/15,5)
Rep. of Ind (1/9,30)
Rep of Ph (1/4,25)
EXIM Bank Korea (1/4,5)
Korea Nat. Oil Co. (3/26,5)
Overseas Ch. Banking (3/6,3)
DBS Bank Ltd/ Sing (2/21,5)
EXIM Bank Korea (1/4,10)
Coupon (%)
US $ bn
Issuer (announcement date *,
maturity in years)

13. Mongolia Quarterly Update 2012
13
which marked the country’s largest international corporate bond issuance so far.5
The bulk of the money
is intended to be used to upgrade transport links, notably to finance a railway link to the Chinese border
to substitute for road networks currently used to transport the company’s coal to China.
Mongolia is expected to continue tapping international financial markets in the near future. In this
context the DBM is expected to return to the markets and market reports suggest that major banks
including Xacbank, Khan Bank and Golomt Bank are also planning to issue debt in international markets
in the next few years.
However, while international capital markets are undoubtedly an important source of financing for
Mongolia with regard to developing its infrastructure, policy makers should remain cognizant of risks
and returns. These are discussed in Box 1.
Box 1 Tapping international financial markets: benefits and risks for Mongolia
As international financial market strains dissipated in Q1, a number of countries across East Asia took
advantage of extremely low yields and continued investor appetite to issue large volumes of debt. In Mongolia’s
case the five year US$ 580 mn bond offering by its Development Bank in March drew orders of US$ 6.25 bn with a
yield of 5.75 percent, much lower than the initial guidance of 6-6.25 percent reflecting investor interest in the fast
growing economy.
Mongolia has some of the world’s largest untapped mineral deposits, including copper, uranium, coal and
gold. Close proximity to fast-growing China means that there is a ready market for these commodities. However,
significant investment is required to get these mineral resources out of the ground and to market. For example, an
estimated US$ 5 bn is required in the Southern Mongolia region by 2015 for investment in railways, electricity,
towns, and water.
6
The largest investment needs are in electricity generation to meet the energy needs of the
population and mining projects. Considerable investment is expected in railways and road transportation links and
for urban development around mining centers to house workers and their families as well as associated service
providers. Domestic capital markets are nascent and thus international financial markets are an important source
of funding given the scale of financing required.
However it is crucial that money raised by the DBM, which is backed by a full sovereign guarantee, is used to
finance projects with high rates of return. These returns should accrue to the government in the form of higher
revenues associated with developing potential mining sites and infrastructure projects and higher mineral exports.
Although some 40 percent of the funding raised by the DBM is to be used for setting up much needed mining
related railway links and corridors, the remainder is targeted towards projects that may have high social returns
but limited economic ones. These include the construction of new aimag roads that are not part of any major
transport network, housing construction and mortgage loans as discussed later in Box 2.
Although Mongolia’s debt sustainability is enhanced by the strong growth prospects of the country and it has
accumulated a large buffer of FX reserves, debt issued by the DBM (and the Mongolian Mining Corporation) is of
relatively short duration, raising exposure to external shocks or to unexpected delays in major mining projects that
impact commodity revenues. The international financial climate continues to be clouded by uncertainty and with
the eurozone crisis flaring up again there remains the potential that international commodity prices may fall
5
The Trade & Development Bank of Mongolia, the country’s third largest bank was the first Mongolian bank to tap
international debt markets with US$ 75 mn bond placement in 2007. This was followed by a placement of US$ 150 mn senior 3-
year debt and a US$ 25 mn subordinated 5-year bonds issuance in December 2010.
6
World Bank (2009) Southern Mongolia Infrastructure Strategy. World Bank Report

14. Mongolia Quarterly Update 2012
14
sharply in the near term, hurting government receipts. Added to this, a bunching of repayments on public sector
debt fall due in the near term.
7
In this climate of global financial uncertainty, Mongolia would be wise to manage its revenues in a prudent
manner by saving more in the Fiscal Stability Fund, and on the expenditure side, ensure that money is spent well in
order to maximize the returns to the government and ultimately to the Mongolian people.
Source: World Bank Staff
Banking sector
Both domestic and foreign currency deposit inflows into the banking system show signs of
leveling off
The total volume of deposits in the banking system appears to have peaked in February, as net
inflows of both domestic and foreign currency deposits have tapered off in recent months (Fig 13).
Interest rates offered on these deposits tend to be highly sticky, but have edged up since the start of the
year. The average weighted interest rate on local currency deposits has for instance increased from 10.7
during 2011 to percent to 11 percent in April. The weighted average rate on FX deposits, meanwhile, has
risen from an average of 4.7 percent in 2011 to 5.6 percent in April, with the maximum rate on offer
rising from 14 percent to 15.2 percent.
Domestic lending rates have correspondingly increased, from about 15-16 percent at the end of last
year to 18.4 percent in April. However with inflation accelerating, real deposit and lending rates have
trended lower – the former are now sharply in negative territory at minus 6.7 percent and the latter are
barely positive at 0.6 percent (Fig 14).
Lending growth has slowed
With growth in deposit funding sharply down compared to the middle of last year, lending growth
has also decelerated to 50 percent yoy in April from 75 percent in November last year. A further
deceleration looks likely given the recent tightening of interest rates and reserve requirements by the
BOM, and given that growth in deposits, which leads lending growth by some three months or so, is also
slowing ((Fig 15). Lending however continues to be highly concentrated with the 50 largest borrowers in
the banking system accounting for more than a quarter of all loans (Fig 16).
Continued vigilance on financial sector risks remains important
Compared to other countries in the region, Mongolia has some of the lowest Tier 1 capital buffers in
the East Asia region and also some of the highest NPL ratios that date back to the banking sector crisis
from 2008-09 when 2 large banks failed (Fig 17). Admittedly, the ratio of NPLs to gross loans has fallen
to 4 percent (excluding the NPLs of the two failed banks) in April from 8 percent a year ago. But this
improvement is mainly due to the rapid growth of loan portfolios: the total stock of outstanding NPLs
amounted to MNT 235 bn at the end of April 2012, only slightly lower than MNT 303 bn in April 2011
(Fig 18).
7
IMF-World Bank 2011 Debt Sustainability Analysis for Mongolia

15. Mongolia Quarterly Update 2012
15
Meanwhile high rates of lending growth over the past year have raised concerns about the quality of
bank assets, with exposure to real estate which is showing signs of overheating and construction sectors
(which contracted for the second quarter in a row in Q1) of particular concern. Although there have
been improvements in the risk supervision regime, it remains weak as are internal risk management
procedures and corporate governance.
Fig 13 Both local and foreign currency deposit inflows are
tapering off
Fig 14 while real rates of returns on local currency deposits
are sharply negative
MNT bn, month-on-month change MNT bn, stock Percent (annual rate)
Fig 15 Credit growth has decelerated after peaking in
November of last year, and is likely to slow down further
Fig 16 … But lending remains highly concentrated
% year-on-year change MNT bn lending to 50
largest borrowers as % of total
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
-300
-200
-100
0
100
200
300
400
04/10 10/10 04/11 10/11 04/12
FX deposits, stock RHS MNT deposits, stock RHS
FX deposits, change MNT deposits, change
-20
0
20
40
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
CPI inflation
Maximum rate on LC time deposits, real
Weighted av. rate on LC time deposits, real
Real LC short term loan rate
-20
0
20
40
60
80
100
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Loans outstanding
Deposits, 3 months ahead
0%
5%
10%
15%
20%
25%
30%
35%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
MNT billion
Share of total loans outstanding RHS

16. Mongolia Quarterly Update 2012
16
Fig 17 NPLs are the highest and Tier 1 buffer capital ratios
among the lowest in the region
Fig 18 and the overall volume on NPLs on bank balance
sheets remains large
% MNT bn
Sources: BoM, MoF, NSO, WB staff estimates, Finstats. Notes for Figure 27: Data is from Q2 and Q3 2011, with the exception of China for
which data is from 2010.
Inflation
In marked contrast with the rest of East Asia, inflation continues to rise in Mongolia
The headline inflation rate in Ulaanbaatar8
climbed to 17.8 percent yoy in April from 9.4 percent
rate in December (Fig 19). The national inflation rate meanwhile is 16 percent yoy, much higher than the
Bank of Mongolia’s inflation target of 10 percent. Overall the trend is in marked contrast to the rest of
East Asia where inflation has been falling since the final quarter of last year. Indeed, in much of the
region, inflation is in the low single digits (Fig 20), allowing central banks considerable room to support
growth and for policy easing in case the euro area crisis intensifies and global economic growth
deteriorates.
Higher inflation is being driven by both core inflation (which excludes all food and energy) and
higher food prices. Core market prices - excluding all food items and those goods whose prices are
administered9
- rose by nearly 13 percent yoy in April contributing roughly half the increase in the
headline index and reflecting generalized wage and price pressures in the economy. Food prices
meanwhile have been pushed up on the back of a steep increase in meat prices. The overall food index
rose by 31 percent yoy in April, up from 7.6 percent in December. Meat inflation soared to 80.6 percent
in April, up from 17 percent in December (Fig 21).
8
CPI weights were recently revised for both Ulaanbaatar and the national CPI index. In the absence of complete data for
the national index, changes in the UB CPI index, for which breakdowns are available are discussed in the text.
9
Education, communication, passenger transport by rail and bus, water and electricity
0
2
4
6
8
10
12
14
16
18
Mal.
Indon.
Ph.
Sg
HK(SAR)
Mong
Kor
China*
EAPAv.
ECA
LAC
Tier 1 Capital Ratios
Regulatory Capital to Risk-Weighted Assets
Non-performing Loans to Total Gross Loans
0
100
200
300
400
500
600
700
800
900
1,000
Mar-09 Mar-10 Mar-11 Mar-12
Loans with principal in arrears
NPLs to non-residents
NPLs to residents
NPLs of failed banks

17. Mongolia Quarterly Update 2012
17
Fig 19 Inflation is accelerating in Mongolia… Fig 20 …in marked contrast to the rest of East Asia
Percentage point cont’ns, % yoy, UB Headline CPI, % yoy, East Asia
Fig 21 Food prices have shot up, notably of meat Fig 22 which constitutes nearly a third of the food CPI
basket under the revised CPI weights
% yoy %
Sources: NSO, BoM, WB staff estimates. * Data for March
in case April data not available.
The government has previously intervened to keep meat prices in check, most recently in 2011
when it subsidized more than 2,000 herders and meat vendors in order to encourage the preparation of
more meat reserves (16,000 tonnes in 2011 vs. 2,800 tonnes in 2010). While the additional supply of
reserve meat helped to contain food inflation in 2011, prices rose again shortly after the sale. For 2012,
12,000 tonnes of meat was available from reserves accumulated during 2011, and in February, the
government decided to accumulate another 15,000 for precautionary purposes, with MNT 40 bn budget
allocated for the meat subsidy program. However, so far only about 5,000 tons of meat has been
reserved and about MNT 4 bn has been disbursed to meat traders according to the City Municipality.
This constitutes a small share of the total supply of meat in the market and has not been sufficient to
keep prices down. Moreover, lingering effects of the dzud in late 2009 have limited the supply of
-5
0
5
10
15
20
25
30
35
40
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Food
Market (ex food & adm'td
prices)
Administered Prices
Headline CPI
2.5
3.4
4.4
1.9
3.0
5.3
1.1
2.5
10.5
4.9
17.8
0 5 10 15 20 25
Kor
Ch.
Idn
Mal.
Ph.
Sing
TW, PRC
Th
Viet
HK, SAR
Mng (UB)
Jun 11
Dec 11
Apr 12*
-40
-20
0
20
40
60
80
100
Overall Food
Meat and meat products
Bread, flour, cereals 30
10
41
17
0
5
10
15
20
25
30
35
40
45 Food
ofwhich:Meat
ofwhich:Breadand
cereals
Education
Housing,Waterand
Elect.
Transport
Restaur.&Hotels
New 2010 weights Old 2005 weights

18. Mongolia Quarterly Update 2012
18
livestock available for slaughter, while large cash handouts have also allowed herders to delay selling
stock and concentrate instead on increasing the size of their herds.
It is worth noting that the NSO has revised the weights attached to the different components of the
CPI basket. The most significant change is a reduction in the weight for food items which has dropped
from 41 percent in 2005 to 30 percent from 2010 onwards, and a fall in the share of meat prices from
roughly 17 percent to 10 percent in the overall basket.
The BoM has acted to contain the inflationary effects of the expansionary fiscal policy, but it
would be more effective for both policies to work in tandem
The BoM has reacted to rising inflation over the past few months by tightening policy. The
benchmark rate was raised by 50 basis points in March and another 50 basis points in April to 13.25
percent and credit growth has eased considerably compared to the start of the year as discussed in the
next section. But with inflation at 17.8 percent, the real policy rate is negative in real terms and further
tightening is needed.
That said, as discussed in previous Quarterlies10
, government spending also needs to be reined in if
monetary policy is to be successful in subduing inflation. Government spending in 2011 was a staggering
56 percent higher than in 2010 and outlays rose by a further 34 percent yoy in Q1 2012. The growing
excess demand and overheating pressures in the economy are showing up in rising prices, both of goods
and services as indicated by rising core inflation, and also of wages as indicated by the World Bank’s
informal labor market surveys. In the absence of fiscal restraint, there is a growing risk of higher
inflation expectations becoming entrenched and of repeating the high inflation episode of late 2008
when inflation rose to nearly 35 percent. High domestic inflation also causes the currency to appreciate
in real terms, hurting agricultural exports, on which the rural population depends.
The poor are impacted the most by high inflation. Rising prices erode their purchasing power,
incomes and the real value of their already meager savings. In addition, they have limited opportunities
to hedge against inflation unlike the rich, for instance by investing in long-term assets which are
unaffected by inflation, e.g. real estate. In Mongolia’s case, the rise in food inflation is worrying since
food constituted 30 percent of household expenditures in 2011 among the households in the bottom 20
percent of income distribution. Because it is difficult to substitute away from essential food items,
households tend to cut back on other discretionary expenditures such as health and education which
could have long term consequences on the accumulation of human capital and skills.
Fiscal developments
Despite the economy showing signs of overheating, government spending continues to grow
extremely fast
Government spending in the first four months of the year was 32 percent higher in nominal terms
and 13 percent higher in real terms compared to the same period last year (Fig 23). Capital expenditures
grew by 103 percent yoy in April on a YTD basis, contributing to two-thirds of the overall growth.
Current spending on wages and salaries11
and the purchase of goods and services rose by 28 and 27
10
www.worldbank.org/mongolia
11
As part of the second phase of the government's plan to increase public sector wages are to be raised by 23 percent on
May 1, 2012 following an increase in February of MNT 80,000.

19. Mongolia Quarterly Update 2012
19
percent respectively (in nominal terms, year to date (YTD) basis). With delays in the disbursement of
subsidies for meat reserves, spending on subsidies fell 30 percent yoy in the first trimester.
Such high levels of spending represent a significant injection of demand into an already overheating
economy. Furthermore, as highlighted in previous Quarterlies12
, the extraordinarily large expansion in
capital spending is stretching the already limited capacity of the government to effectively plan,
appraise, and implement projects, raising concerns about the quality of this spending. There are also
signs that the construction sector has been unable to scale up to meet this rising demand resulting in
rapid increases in the prices of construction materials, again pointing to the limited absorptive capacity
of the economy.
But revenues are failing to grow at the same pace as expenditures…
Revenues are not keeping pace with the increase in spending (Fig 24). Revenues were 4.2 percent
higher in real terms (21 percent in nominal) on a YTD basis in April. This mainly reflects weaker growth in
receipts from taxes on international trade, and negative growth in excise taxes, royalties and dividends
from mining sector companies. The withdrawal of customs tax and excise taxes on imported petrol and
diesel fuel in May and November of last year has reduced the excise tax base and resulted in a loss of
revenues (importers of petrol only pay VAT). Meanwhile, receipts from royalties and dividends fell by 26
percent and 50 percent yoy in April (YTD basis), a substantial loss given that together the two items
accounted for nearly 8 percent of total revenues in 2011.
However, personal, corporate and domestic goods and service tax revenues generally remained
buoyant reflecting strong economic growth. Mongolia has earned substantial revenue from VAT taxes
on the imports of mining sector related inputs (equipment and machinery), helping to compensate for
the loss in revenue associated with the withdrawal of the Windfall Profits Tax last year. Indeed revenues
from this source amounted for nearly a fifth of total revenues in 2011, with receipts growing by 40
percent yoy YTD in April, 2011.
… resulting in a deterioration of the fiscal balance …
Even though Mongolia has experienced the largest growth in fiscal revenues compared to other
economies in the region, its public sector balances have deteriorated by the most, reflecting the highly
expansionary fiscal stance of the government (Fig 25). On a 12 month rolling basis, the fiscal deficit rose
to 4.2 percent of GDP in April. Meanwhile the structural deficit which takes into account structural (or
long term) mineral revenues stood at 6.1 percent of GDP in April (Fig 26). Although the 2 percent
structural deficit ceiling under the Fiscal Stability Law becomes binding only after January 2013, the
trend in the current structural deficit suggests that Mongolia will have to control expenditure growth in
order to meet the target. The government adopted FSL in 2010 to promote the needed budget discipline
in turning mineral wealth into economic prosperity with sustainable and equitable growth with low
inflation.
… as claims on budgetary resources could increase with the monetization of Erdenes-Tavan
Tolgoi shares
As part of fulfilling campaign promises of distributing MNT 1.5 mn to every citizen in Mongolia, the
government allotted a notional 20 percent of the equity of the state owned mining company, Erdenes
12
www.worldbank.org/mongolia

20. Mongolia Quarterly Update 2012
20
Tavan Tolgoi13
, to all Mongolians born before March 31, 2011. The new shareholders have the option of
holding on to the shares or selling them once Erdenes TT completes its IPO, planned for March/April
next year14
. The first disbursement of MNT 1 million began in May, with 240,000 elderly, 130,00 disabled
and 130,000 students receiving their payments to be paid in a set of three installments in 2012 with
MNT 334.2 bn set aside in the budget for this purpose. Of the remaining population, over 1.5 million
people have voted to trade their shares for cash, with the money expected to be paid by the
government in during 2013. (The remaining population has chosen to receive shares in Erdenes TT) To
meet these claims, the government has started selling 10 percent of Erdenes TT shares (from its 51
percent shareholding) to local companies. A successful sale which raises sufficient cash should not lead
to any fiscal liabilities. If however the sums raised are insufficient, then the government would be liable
to pay MNT 1 mn per person promised from budgetary resources. Either way, the handout will
exacerbate domestic demand and inflation pressures.
Fig 23 Government spending is rising extremely fast,
mostly on capital projects
Fig 24 while revenue growth has stalled
% yoy increase in expenditures, YTD April 2012 % yoy increase in revenues, YTD April 2012
13
The Tavan Tolgoi coal deposit, in Mongolia’s south Gobi region, has estimated reserves of as much as 7.5 bn tonnes of
coal, including the world’s largest untapped deposit of coking coal used to make steel. The deposit is owned by Erdenes MGL, a
new state owned company set up in December 2010 which in turn has a 51 percent stake in Erdenes TT which owns the eastern
block of Tavan Tolgoi.
14
The company is planning to float 29 percent of its equity in an IPO estimated at around USD3bn, in London, Hong Kong
and Ulaanbaatar.
13.5
31.7
103.5
-40
-20
0
20
40
60
80
100
120
Totalexp.&netlending
Curr.Exp
Wages&salaries
Goods&services
Subsidy
Transfers
CapExp.
real nominal
4.2
20.9
-26.4
-60
-40
-20
0
20
40
60 Totalrev.&grants
Corp.incometax
Personalincometax
VATdomestic
VATonimports
Excisetaxes
Taxesonforeigntrade
Royalty
real nominal

21. Mongolia Quarterly Update 2012
21
Fig 25 Despite revenue growth being the strongest,
public balances have deteriorated the most in Mongolia
compared to other East Asian economies
Fig 26 and the deficit has risen sharply
change in revenues and fiscal balance, from 2010 to 2011,
as share of GDP
% of GDP, 12 month rolling balances
Sources: NSO, BoM, Haver, Datastream, WB staff estimates.
…and fiscal space looks constrained in the near term
Mongolia has successfully saved some of the windfall (2 percent of GDP) from the mineral sector in
a rainy day Fiscal Stability Fund. However, rising fiscal deficits increase vulnerability at a time when
global economic uncertainties are mounting. In particular, with Chinese growth (a key driver of global
commodity prices) slowing, a softening in commodity prices will bear down on government revenues, at
least in the bridging period until net revenues from the Oyu Tolgoi mine begin to flow into the budget
starting in Q3.
Furthermore fiscal space will likely remain constrained in the near term. For one, the government
has already received a share of future tax revenues in the form of pre-payments from OT and TT. In
addition, as OT mine construction winds down, taxes derived from the imports of construction
equipment and materials will dry up too. Such a deterioration in budget balances undermines the
credibility of the FSL and more importantly it undermines the credibility of the government in wanting to
adopt prudent fiscal policies for the future.
Actual 2012 expenditures should therefore be lower than budgeted both to prevent further
overheating and to control expenditure growth once the Fiscal Stability Law’s structural deficit rule goes
into effect. In addition there are growing concerns that infrastructure spending by the Development
Bank of Mongolia (DBM), which issued US$ 600 mn of debt in international financial markets for this
purpose, earlier this year will bypass fiscal limits. It is therefore important that projects financed by the
DBM generate sufficient returns on those borrowings as they will otherwise add to the government’s
contingent liabilities (Box 2).
-4
-3
-2
-1
0
1
2
3
4
5
Vietnam
Cambodia
China
Indonesia
Philippines
Malaysia
Thailand
Fiji
LaoPDR
PNG
SolomonIs.
Mongolia
Government revenues, change
fiscal balance, change
Manufacturing exporters Commodities exporters
-20
-15
-10
-5
0
5
Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11
Non-mining balance
Fiscal balance
Structural fiscal balance

22. Mongolia Quarterly Update 2012
22
Box 2 Controlling Off-budget Financing for Infrastructure
Mineral-rich countries need to effectively deal with the volatility of mineral prices and to take care to avoid
real-exchange rate appreciation due to over-spending. Mongolia has already suffered from the consequences of a
“boom-and-bust” cycle, and is currently risking another one with the real exchange hitting a new record high in
April 2012. The FSL, passed by the parliament in June 2010, recognized this problem and put in place fiscal rules to
smooth volatility by using long-term prices to estimate mineral revenues and required budgets to comply with a
structural deficit of less than 2 percent of GDP (which comes into effect in 2013); to control expenditure growth to
less than nominal GDP growth and therefore avoid over-heating of the economy; and to ensure long-term fiscal
solvency through caps on public debt. There is a risk that the FSL will not be effectively implemented due to the
growing volume of off-budget financing of infrastructure that bypasses the fiscal rules, in particular the
expenditure growth rule.
In 2008, a Mongolian parliament resolution allowed “build-transfer” (BT) projects in the roads and energy
sectors that were financed by construction companies themselves on the condition of repayment from the budget
at a later date. The number of such schemes increased from 3 percent of the total cost of the budget funded
projects in 2008 to over 25 percent in 2009 and 2010, and continue to be sizeable today (Box Figure 1).
A bigger source of contingent liabilities may come from the DBM, established in 2011, which is fast becoming a
major source of public financing for infrastructure projects. As per the Law on the Development Bank (2011), and a
subsequent parliamentary resolution, the DBM is meant to finance the development of the new railways to
transport minerals, roads connecting the aimags to Ulaanbaatar and each other, energy sector projects, public
housing, including subsidized mortgages to low income households, and the Sainshand industrial park. The DBM’s
project plan for 2012 amounts to approximately US$ 1 bn or 19 percent of the 2012 capital budget in terms of cost
(Box Figure 1) and expanding to US$ 4 bn by 2015. It has also issued a guarantee on a US$200 mn loan from the
China Export-Import Bank for a housing development project.
The DBM, if it operates under a sound macroeconomic and corporate governance framework, can play an
important role in Mongolia’s infrastructure
development. The logic of development banks is
one of compensating for market failure whereby
commercial banks underfund socially beneficial
projects such as long gestation infrastructure
projects, or do not provide access to finance to
small borrowers. Implicit in the Government’s
decision to establish the DBM is also the issue of
timing. While revenues from the mines will start
flowing in the future, the infrastructure needs are
great, and it is believed that borrowing now to
meet these needs is a sensible decision given that
in the future revenues will be sufficient to meet
the costs of financing these projects.
This view is understandable, and there are a
few prominent examples of well-functioning
infrastructure development banks — in Korea,
Brazil, Turkey, and South Africa — that
demonstrate that under a proper framework
these institutions can indeed be instrumental in providing finance to address market gaps. However, the history of
development banking is also littered with examples where these institutions were used as a non-transparent way
to finance pet infrastructure projects, or to bypass fiscal limits, which ultimately required costly budget-funded
bailouts as the projects financed by the development banks did not generate sufficient cash to pay back the
Box Figure 1: Alternative forms of infrastructure financing
have been prominent recently
Source: Bank staff estimates using MoF and DBM data
3%
29% 25%
15%
14%
19%
2008 2009 2010 2011 2012
Contractor funded and DBM projects as a percentage
of budget-funded projects
Contractor funded DBM funded

23. Mongolia Quarterly Update 2012
23
creditors.
In a natural resource context such as Mongolia’s, the decisions on volume and timing of project financing need
to take into account the following two critical factors. First, while in general public investments in infrastructure,
education, and health, together with straight savings in foreign currency, are the best use of natural resource
revenues, they need to be phased in a way so as to avoid Dutch disease effects from an investment boom. Public
investments will over the medium to long-term increase the productive capacity of the economy and help to
diversify economic activity away from the natural resource sector. However, in the short run if investments
increase at a pace much higher than the absorptive capacity of the economy then this will result in inflation and an
appreciation of the real exchange rate with its consequent negative macroeconomic effects. In Mongolia, this
effect is visible today with the soaring prices of construction materials as the construction sector is unable to
expand capacity at a commensurate pace. An optimal strategy would therefore, be to priorities and sequence
investments over time by limiting the growth in annual investment spending to avoid such over-heating of the
economy, which is precisely the logic of the expenditure growth rule of the FSL.
Second, these alternative forms of financing are sensible only if the projects undertaken generate a sufficiently
positive cash flow to justify the higher cost of capital as compared to budget funding. The BT schemes for rural
roads are an expensive financing option as construction companies need to borrow at commercial rates to finance
them, rendering these projects an estimated 25 percent to 30 percent more expensive than the equivalent budget-
funded project. These BT schemes also involve very little transfer of risk from the government to the private sector
partner, and the increase in the financing costs of the project — which will eventually be passed back to the
budget — is therefore not compensated with any efficiency gains in delivering the services involved.
For the DBM, arguably only the new railway project, which accounts for roughly 40 percent of the current loan
portfolio, meets these criteria. The other projects, in particular roads connecting the aimags, which are generally
non-toll roads, and mortgage loans to low income households, will never generate sufficient funds to recover the
borrowing costs. Therefore, these projects should be funded from tax revenues in the state budget and not from
more expensive borrowing from international capital markets that will eventually require to be repaid from the
budget.
In addition to these clear criteria on how much to spend and on which projects to spend, the successful
development banks have been characterized by sound corporate governance principles, a clear mandate, strong
supervision, regular performance assessments, and a supportive enabling environment. It is therefore, important
for Mongolia to learn from the lessons of the many failures, and the few successes, to avoid repeating the costly
mistakes made by other countries.
Source: World Bank Staff
In July, Mongolia’s universal cash transfers is scheduled to be replaced by a system of proxy
means tested benefits targeted to the poorest households.
The Social Welfare Law (SWL) passed in January 2012 was a significant achievement in terms of
legislating the provision of targeted benefits to poor households, and setting in place a system for a
fiscally sustainable social welfare system. In July, Mongolia’s universal cash transfers is scheduled to be
replaced by a system of proxy means tested benefits targeted to the poorest households. While the
level of benefits to be provided to each beneficiary is yet to be determined (Box 3), the program is likely
to be targeted to the bottom 20 to 30 percent of income distribution of the population and is expected
to reach about 130,000 households, over one-fifth of total households in Mongolia.

24. Mongolia Quarterly Update 2012
24
Box 3 Key Considerations for setting up a targeted social welfare benefit
In January, Parliament approved a set of Amendments to the Social Welfare Law, paving the way for a benefit
targeted to members of households in need of assistance. The program, to be implemented starting in July 2012,
will select beneficiaries using a Proxy-Means-Testing (PMT) approach. The poverty status of a household is thus the
key determinant of eligibility for the program. The size of the benefit and the coverage of the program are yet to
be determined by the government.
International experience reveals that there are some tradeoffs and key principles to be taken into account
in setting the level of the transfers. In particular:
 Transfers should be meaningful but modest. On one hand, the benefit should help improve the lives of
the beneficiaries (that is, transfers should not be “too small”). On the other hand, transfers should not be
“too large”, as generous payments may create disincentives for employment and contribute to
inflationary pressures. In many countries the benefit size is set at about 15-20% of either average
consumption of poor households or of the poverty line.
 Benefit size should be set against a benchmark that can be easily explained and understood by
beneficiaries and population. In most countries the benefit size is set up as a percentage of a well known
and understandable benchmark (such as the poverty line, the minimum living standard, the minimum
wage, etc). This makes the benefit more intuitive to understand, and provides the basis for adjusting
transfer size over time. For instance, as the poverty line increases in nominal terms over time to keep up
with inflation, by setting the benefit level at a fixed percentage of a poverty line amounts to building a
clear indexation rule into the social transfer over time.
 There is a clear trade-off between benefit size and coverage. Under a fixed budget there is always a
trade-off between the benefit size (per beneficiary) and coverage (the portion of the population receiving
the benefit). Under a given budget, higher benefits mean smaller coverage (i.e. reaching only the most
vulnerable); lower transfers allow to cast the safety net more widely (more beneficiaries). At the same
time, setting benefits and coverage at unrealistically high levels can result in unsustainable budgetary
costs (and hence inflationary pressures) as Governments attempt to maintain their promises to the
people.
 Administrative costs need to be included when budgeting for the program. Many developing countries
fail to budget for the administrative costs of social programs. This results in lower benefits for the poor
and overstretches the capacity of administrative staff. While the amount of administrative cost depends
on country-specific factors, international evidence suggests that such costs often range from 7% to 9% of
total program budget.
 The size of the poverty benefit should take into account other benefits and overall economic
conditions. The poverty benefit cannot be considered in isolation from other social assistance benefits
received by a single household. The role of the program should therefore be considered in the context of
the cumulative income transferred to households.
 The introduction of a new benefit should go hand-in-hand with a clear information/communication
campaign. A strong communication campaign explaining the rationale behind transfer size, targeting
method and selection of beneficiaries is vital. This is especially true for Mongolia, given that the
introduction of the poverty benefit will coincide with the elimination of the HDF supported universal
transfer.
Source: World Bank Staff

25. Mongolia Quarterly Update 2012
25
Labor Markets and Poverty
Registered unemployment is falling
Formal unemployment figures which include only those who are registered with the Labor and
Social Welfare Service Center show a decrease in the unemployment rate to 4.4 percent in March down
from 5.5 percent in November 2011. The overall number of registered unemployed decreased to around
50 thousand persons from 63 thousand since November 2011. However these numbers have tended to
underestimate the true extent of unemployment, which is better gauged through labor force surveys15
.
The last survey from the NSO for Q4 2011 estimated the unemployment rate at 9 percent, down from 13
percent in Q4 2010.
Fig 27 Real wages in informal labor markets in UB have
increased since January despite the acceleration in
inflation
Fig 28 But nearly 60 percent of those surveyed reported
that wages were insufficient to meet basic needs
No of workers Av. real wages, MNT % of total surveyed
Sources: NSO, WB staff estimates
Real wages in informal labor markets are increasing
Informal surveys conducted by the World Bank in informal labor markets in May 2012 show on
average, real wages reported by workers are some 11 percent higher than in January despite a sharp
acceleration in the rate of inflation over the same period (Fig 27). But nearly 60 percent of those
surveyed also indicated that, notwithstanding the increase in real earnings in these markets, their
earnings were insufficient to meet their basic needs - a substantial increase from the 39 percent figure
reported in January (Fig 28). The survey also indicated that a quarter of the survey participants were
unskilled workers from rural regions (compared to 30 percent in January) and that nearly 40 percent of
surveyed workers were working in the informal sector because of the unavailability of formal jobs.
Following a recent collaboration on poverty analysis and statistical capacity building, the Mongolia
National Statistical Office and the World Bank jointly announced the 2010 and 2011 poverty estimates16
.
15
These also take into account those who are not officially registered as unemployed with the Labor and Social Welfare
Service Centers.
16
http://www.worldbank.org/en/news/2012/04/17/poverty-level-estimated-at-nearly-30-percent-in-
mongolia
0
1000
2000
3000
0
1000
2000
3000
Railway cargo unloading in UB "44" area: Triangle bridge district
Container loading and unloading for freight companies
Cement loading at “Botanic” market at Amgalan district
Supermarket shipments loading and unloading at “Bars” market
Merchandise carter Narantuul “Black market” in UB
Construction materials delivery “100 family” district
Average real wage per hour (MNT thousand) RHS
May-12
May-12
May-12
Jan-12 Jan-12
Jan-12
0%
10%
20%
30%
40%
50%
60%
70%
Wages don’t meet
basic needs
Wages meet only
basic needs
Wages sufficient for
living

26. Mongolia Quarterly Update 2012
26
The poverty headcount was estimated to be 29.8 percent in 2011, down 9.4 percentage points from
2010 (Box 4).
Box 4 2011 poverty level dropped to 29.8 percent in Mongolia
Recent poverty analysis conducted by the NSO, with technical support from the World Bank, finds that the
national poverty headcount rate declined from 39.2 percent in 2010 to 29.8 percent in 2011, a decrease of 9.4
percentage points. Rural areas experienced an even faster pace of poverty reduction, from 47.8 percent in 2010 to
33.3 percent in 2011, a decrease of 14.5 percentage points (Box Figure 2). This remarkable progress in poverty
reduction took place during one year of GDP per capita growth of 15.4 percent, sizeable social transfers, and large
investments to help recovery from the 2010 dzud--especially in livestock in rural areas.
Box Figure 2 Poverty levels have dropped sharply in Mongolia in
recent years
Official Poverty Headcount Rate (%)
Source: NSO, World Bank Staff
These official 2010 and 2011 poverty estimates are comparable, and the estimation follows the international
standard practice for consistent poverty estimation over time. Poverty comparison over time requires using a
constant poverty line in real terms, in other words, adjusting poverty lines for inflation only
17
. NSO estimated the
2011 poverty headcount based on the 2010 national poverty line, fixed in real terms, to allow for comparison.
Specifically, the food component of the poverty line is adjusted using a food price index estimated from the 2010
and 2011 Household Socioeconomic Surveys. The non-food component of the poverty line is adjusted using the
non-food CPI.
The adoption of this methodology for poverty analysis allows for inter-temporal comparisons of poverty
numbers, which will help policy makers in Mongolia monitor social progress and evaluate the impacts of growth
and public policies on poverty. The collaboration between the NSO and the WB on the 2011 poverty analysis has
also set the stage for future collaboration in other areas of poverty and inequality analysis.
Source: World Bank Staff
17
http://www.worldbank.org/en/country/mongolia/research/all?qterm=&lang_exact=English&os=20
39.2
32.2
47.8
29.8
26.6
33.3
0
10
20
30
40
50
60
National Urban Rural
2010 2011

27. Mongolia Quarterly Update 2012
27
Economic outlook
The global economic outlook has darkened in recent months following a respite in Q1 due to the
orderly restructuring of Greek debt in February and actions by policy makers to supply liquidity to
European banks. The euro area is expected to experience a recession this year, core issues regarding the
sustainability of its monetary union are yet to be fully addressed, and the banking sector is expected to
deleverage to the tune of some US$ 2.6 tn. China, the growth engine of Asia, too seems to be slowing
and incoming data suggest that activity may be weakening further.
Accordingly, Mongolia remains vulnerable to headwinds from the Euro zone and from related
developments in the global economy. The channels through which these operate include financial and
trade linkages —namely volatility in commodity prices and through demand for its mineral exports from
China. Signs of this vulnerability are already visible as demonstrated by the yoy decline in exports in
April, the first fall in more than two years. Other financial market linkages should also not be
discounted: Mongolia’s banking system, which has shown signs of overheating over the past year, is
highly dollarized, with about a third of deposits denominated in dollars and easy convertibility between
the Mongolia Togrog and the US dollar. Any shock to confidence or a deterioration in NPLs (which are
already large) could adversely impact bank balance sheets.
On the domestic front, rising debt service payments that fall due in the next few years could
constrain fiscal space in the near term. Claims on budgetary resources could also grow with the
monetization of Erdenes TT shares. The rapid increases in government expenditures, as well as the
significant investments planned by the Development Bank of Mongolia, do not provide for any cushion
in the event of a negative external shock. Although Mongolia has saved some of the windfalls from the
mineral sector in a rainy day Fiscal Stability Fund, the amount saved as yet is fairly small – only 2 percent
of GDP.
In this climate of global economic uncertainty, Mongolia needs to manage its public finances in a
prudent manner, in lines with the rules of the Fiscal Stability Law, and to keep a close eye on financial
sector risks and strengthen macroprudential regulation and supervision. In particular, this entails the
“hold your horses” metaphor; controlling the growth in expenditures, minimizing off-budget financing
activities and ensuring that money spent is well spent, namely on activities that help to build the public
and human capital infrastructure of Mongolia and maximize the returns of the country’s mineral wealth
to its people.

28. Mongolia Quarterly Update 2012
28
Table 1 Mongolia: Key Indicators
2008 2009 2010 2011 2012f 2013 f
Output, Employment and Prices
Real GDP (% yoy change) 8.9 -1.3 6.4 17.3 17.2 11.8
Industrial production (2006=100) 113 109.6 120.5
% yoy change 2.7 -3.3 10 132.2 145.4 159.9
CPI Ulaanbaatar (% yoy change, eop) 23.2 1.9 14.3 11.1 17.8 (Apr) 12.0
Public Sector
Government expenditures (as % of
GDP)
37.6 35.2 36.6 44.2 39.1* 34.1
Government revenues (as % of GDP) 33.1 30.2 36.6 40.6 38.1* 33.1
Government balance (% of GDP) -4.5 -5 0 -3.6 -1.0* -1.0
Non-mineral govt balance -14.1 -12.4 -10.5 -16.0 -11.4 (Apr) -13.1
Public Sector Debt (% of GDP) (1) 31 49.4 42.2 38.6 37.1 27.3
Foreign Trade, BOP and External
Trade balance (US$ mn) -613 -229 -379 -1747.0 -700.0 265.0
Exports of goods (US$ mn) 2534.5 1903 2899 3825.0 4680.0 5288.4
(% yoy change) 30 -25 52 31.9 22.4 13.0
Imports of goods (US$ mn) 3147 2131 3278 4874.0 5290.0 4761.0
(% yoy change) 57.1 -32.3 53.8 53.4 8.5 -10.0
Current account balance (US$ mn) -690.1 -592.0 -886.7 -2586.9 -2663.6 -269.4
(% of GDP) -12.3 -12.9 -14.3 -15.1 -13.6
Foreign direct investment (US$ mn) 838.5 1037.6 1629.7 5309.5 1500.0 1200.0
External debt (% of GDP) (2) 31 43.3 30.3 22.8 19.8 14.7
Foreign exchange reserves, net (US$
mn)
637 1145 2091 2407.0 2635.7 (Apr) ..
In month of next years imports
of g&s
3.6 4.2 5.1 5.6 .. ..
Financial Markets
Domestic credit (% yoy change) 59.11 -9.33 26.69 72.8 49.4 (Apr)
Base policy rate (eop) 9.75 10.00 11.00 12.25 13.25 (Apr)
Exchange rate (MNT/USD, avg) 1267 1443 1257 1264.8 1316 (Apr)
REER (real effective exch rate) (% yoy
eop, +app)
13.7 -15.5 26.9 -4.6 …
Stock Market Top 20 index (2000=100,
eop)
1182 1229 2931 4059.0 …
Memo:
Nominal GDP (MNT bn) 6556 6591 8414.5 10829.7 14207.7
Nominal GDP (US$ mn) 5174 4567 6694 8562.5 …
GDP per capita (US$) 1946 1685 2434 3066.8 …
Notes: 1) Total public sector debt. (2) On public and publicly guaranteed debt. * 2012 Budget projections. Sources: NSO, BoM, World Bank, IMF