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30.10.2012 Mongolia's Macro Economic Outlook: Challenges and Opportunities, B. Tuvshintugs

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B. Tuvshintugs, Director, Economic Research Institute, Mongolia

Published in: Business
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30.10.2012 Mongolia's Macro Economic Outlook: Challenges and Opportunities, B. Tuvshintugs

  1. 1. Mongolian Economic Outlook TUVSHINTUGS Batdelger Economic Research Institute, November 2012
  2. 2. Economic Overview: Growing, but volatile • Average Growth Rate between 1997-2011 of 6.3% • Nominal GDP per capita has increased 6 fold between 1997-2011 503 3056 17.3 -5 0 5 10 15 20 0 1000 2000 3000 GDP per capita and growth (1997-2011) GDP per capita (current US$) GDP growth (annual %) Source: World Development Indicators,World Bank MONGOLIA: country profile Population: 2 811 600 Labor force: 1 124 700 Area (km2): 1 564 115 Neighbor countries: China and Russia HDI 0.653 (110th) Source:Yearbook 2011. NSO, Mongolia 2
  3. 3. Economic Overview: Growing, but volatile Economy almost quadruples by 2020 with average growth of 14.8%. Mongolia will be the fastest growing economy in the world between 2010- 2030 with average growth rate 9.7% (Citigroup Global Markets, 2011) Source: SES, NUM and BAEconomics Pty, 2011 8.6 1.1 2.5 0.0 2.0 4.0 6.0 8.0 Nominal and real GDP (bln US$, 1997-2011) GDP (current US$) GDP (constant 2000 US$) Source: World Development Indicators,World Bank 16.4 31.8 35.2 0 10000 20000 30000 40000 GDP with 7.2% growth GDP BASE PRICES GDP OPTIMISTIC PRICES 3
  4. 4. Contributors to GDP: mining as a main driver Economy is highly reliant on the mining sector In the Future (copper $5,300; gold $965/oz; coking coal $ 54): Mining sector will be even more dominant (29% as of 2040) and Agriculture not so much (16% as of 2040) Policies remain the same Source: SES, NUM and BAEconomics Pty, 2011 25% 12% 3% 7% 8% 9% 22% 2% 29% 15% 2% 4% 7% 13% 18% 1% Mining Livestock and other agri Manufacturing Transportation Construction Health, educ. and defence Other service Oil, gas and electricity 2011 base 2020 base 2030 base 2040 base 4
  5. 5. Future major developments in the mining sector Oyu Tolgoi: reaches 800,000 tonnes of copper concentrate by 2020 and 28 tonnes of gold. Estimates suggest, 25% of GDP in 2020 (price $5,300) Tavan Tolgoi: reaches 10 mln tonnes of coking coal by 2020 and 40 mln tonnes of thermal coal (~40 mln tonnes, yesterday) 5
  6. 6. However, there are challenges: Dutch Disease and Resource Curse Many experiences of Dutch Disease and Resource Curse in resource rich countries Dutch Disease: RER appreciation combined with high labor cost => dominant Non-tradable and mining sectors; lower economic growth potential; susceptible to high economic fluctuations Resource Curse: Low quality of institutions and governance => Rising inequality, low economic growth, rampant corruption These challenges are real for Mongolia! Why? 6
  7. 7. Challenges for Mongolia : Institutional and Governance Quality Review of various surveys point to following major difficulties in conducting business, negatively affecting country’s competitiveness in general: Corruption: ranked 120 out of 183 (Transparency International, 2011) Index of Economic Freedom: ranked at 81 out of 179 (Heritage foundation, 2012) Doing Business: ranked 86 out of 183 (World Bank, 2012) World Competitiveness Index: ranked 93 out of 144 (World Economic Forum, 2012-2013) 7
  8. 8. Challenges for Mongolia : Institutional Quality and Infrastructure Major hurdles to conducting business in Mongolia: -Inefficient government bureaucracy: Taxes, supervision and regulations -Access to financing -Government policy instability -Law and contract enforcement -Corruption Infrastructure is another major hurdle for businesses: Bottlenecks at border Quality of roads and air transport infrastructure
  9. 9. Challenges for Mongolia : Macroeconomic policies Main purpose of macroeconomic policies: Stable and sustainable growth However, past Fiscal and Monetary policies have been pro- cyclical: — Exacerbates economic volatility and uncertainty — Dutch disease effects are more prominent — Increasing vulnerability from volatile commodity prices — Limited policy room when needed: 2008/2009 crisis 9
  10. 10. Strongly Pro-cyclical Fiscal Policy Average growth rate of nominal GDP is 22% while government revenue growth is 26% and expenditure growth is 25% Fiscal Stability Law was ratified in 2010. Fully operational from 2013 There are risks: Development bank was established to finance big infrastructure and industrial projects – $1.5 bln. government bonds for 2013 being discussed. Off-budget? Source:Yearbook 1998-2011, NSO Mongolia -20% 0% 20% 40% 60% 80% 1997 1999 2001 2003 2005 2007 2009 2011 GDP and Fiscal nominal change (%) GDP nominal growth Government revenue growth Government expenditure growth 10
  11. 11. Economic vulnerability 11 08/09 crisis clearly showed the country is extremely vulnerable to TOT shocks (25% decrease) Transmission: Export prices decrease => Drop in currency inflow into the economy => Pressure on Togrog to devaluate and Stagnant government revenue TOT shocks exacerbated by Pro-cyclical monetary and fiscal policies: i.e. when gov’t revenue is tight, expenditure is even tighter, leads to worsening economic downturn
  12. 12. What is Economic Outlook ? Unless Institutional and economic policy challenges are addressed: High Economic growth Rising Inequality Dominant Non-tradable and Mining sectors Volatile economy with many uncertainties 12
  13. 13. Thank you for your attention!

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