6.4 Regulación y control
6.4.2 Cabezal termostático
remain in deficit on the surge of imports for mining works. Cooperation with the international
community is key to addressing financing gaps and preserving economic and social stability.
Strengthening the management of natural resources revenue remains a major challenge.
Economic performance
The economy slowed to 1.0% growth in 2016 from 2.4% in 2015 with a sharp fall in construction and declining household consumption. GDP growth fell by 6.2% in the third quarter, but the economy recovered in the fourth quarter as an unexpected hike in coal prices prompted a steep increase in coal production. This lifted growth in transportation and storage services, raising the service sector contribution to growth to 0.8 percentage points (Figure 3.12.1). Agriculture added 0.6 percentage points as livestock herds grew despite a harsh winter. However, continued decline in construction by 15.9%—the result of oversupply caused by lending subsidized by the Bank of Mongolia, the central bank—dragged down industrial output, subtracting 0.4 percentage points from GDP growth.
External demand was the driver of growth in 2016. Exports rose by 14.7% as coal and gold exports surged (Figure 3.12.2). With imports rising more slowly, net exports grew, adding 1.3 percentage points to GDP growth (Figure 3.12.3). Meanwhile, domestic demand dragged on growth. Consumption contracted by 5.5%, subtracting 3.9 percentage points from growth, as household spending slumped because of lower agricultural incomes as meat prices fell, and because of lower wages and salaries with downsizing in construction and transport, which together provide 10.6% of employment. Meanwhile, gross capital formation reversed the falling trend of the previous 2 years to increase by 14.3% as restocking of inventories surged, adding 3.6 percentage points to growth.
Average consumer price inflation fell to 1.1% in 2016 as meat prices dropped by 8.2% on higher supply resulting from the accelerated culling of cattle. The Mongolian togrog depreciated by 24.8% against US the dollar, mostly in the second half of 2016, but the pass-through to prices started to emerge only this year, with inflation rising by 2.1% year on year in February (Figure 3.12.4).
Fiscal policy remained expansionary. Budgetary expenditure rose by 33.4% to equal 39.9% of GDP as capital expenditure surged before
3.12.1 Supply-side contributions to growth
12.3 11.6 7.9 2.4 1.0 -5 0 5 10 15 2012 2013 2014 2015 2016 Percentage points
Gross domestic product Agriculture
Mining Other industry Services
Source: National Statistics Office of Mongolia. 2017.
Monthly Statistical Bulletin. January. http://www.nso.mn
This chapter was written by Akiko Terada-Hagiwara of the East Asia Department, ADB, Manila and Amar Lkhagvasuren of the Mongolia Resident Mission, ADB, Ulaanbaatar.
3.12.2 Components of merchandise exports
Gold Coal Copper concentrate Other exports 0 1 2 3 4 5 6 7 2012 2013 2014 2015 2016 $ billion
Sources: National Statistics Office of Mongolia. 2017.
Monthly Statistical Bulletin. January. http://www.nso.mn; Bank of Mongolia.
the election in June and large off-budget spending was consolidated into the budget by the newly-elected government. Revenue meanwhile slid by 2.2% on lower income tax receipts to equal 24.5% of GDP. The fiscal deficit widened to 15.4% of GDP. However, including off-budget government expenditure financed by loans from the Development Bank of Mongolia, the deficit soared to 17.7% of GDP. Interest payment on government bonds accounted for more than 10% of total expenditure in 2016, a jump from 1% in 2010. Total public debt including the central bank’s foreign liabilities reached the equivalent of 111% of GDP (Figure 3.12.5). As debt rose, the Fiscal Stability Law was amended again in 2016 to lift the government debt ceiling from 55% of GDP to 88%, with the requirement that it should be gradually lowered to 60% by 2021.
The togrog depreciated sharply in the face of balance-of-payment pressures, prompting the central bank to terminate all off-budget activities except for the subsidized mortgage program and to raise the policy rate by 450 basis points to 15% in August (since then reduced to 14%). Nevertheless, net domestic credit increased by 15.0% in 2016. In addition, through its practice of purchasing gold from the local mining companies, the central bank added to domestic liquidity. Broad money (M2) rose by 10.4% in the year.
Rapid credit growth without strict bank supervision or adequate reserve provisioning has eroded the quality of bank assets, undermining their soundness. The nonperforming loan rate has doubled since 2014, reaching 7% of all loans outstanding at the end of 2016 (Figure 3.12.6).
The current account deficit narrowed to 4.0% of GDP by the end of the year as the merchandise trade balance improved. Foreign borrowing at high cost staved off the risk of a crisis in the balance of payments, but it added to the problem of long-term debt sustainability. The current account deficit has been financed increasingly by external borrowing owing to capital flight and plummeting foreign direct investment. Thus, net foreign assets declined by 19.5% to a liability of $3.2 billion. However, gross international reserves remained unchanged at $1.3 billion at the end of 2016, supported by external borrowing.
Economic prospects
The outlook is for improvement enabled by higher commodity prices, the successful refinancing of a $580 million bond in March 2017, and the expected approval of an economic adjustment program supported by the International Monetary Fund (IMF) and the international community at large. Continued efforts by the new government to preserve economic and social stability remain key. Growth is forecast to accelerate to 2.5% this year but moderate slightly to 2.0% in 2018 on the base effect of the surge in coal production in 2017 (Figure 3.12.7). The forecast assumes that investment in the second phase of the Oyu Tolgoi mine will rise from $200 million last year to $1.0 billion in 2017 and $1.2 billion in 2018. However, large household debt and income contraction will depress household consumption, and fiscal consolidation will drastically reduce public capital expenditure and some transfers. Net exports will add to growth in 2017 as strong momentum in coal exports continues
3.12.4 Inflation and exchange rate
-3 0 3 6 9 12 -7 0 7 14 21 28 Jan
2015 Jul 2016Jan Jul 2017Jan
%
%, year on year
Inflation
Change in MNT/$
Source: Bank of Mongolia. 2017. Monthly Statistical Bulletin. http://www.mongolbank.mn 3.12.5 Public debt 0 1 2 3 4 5 6 0 20 40 60 80 100 120 2012 2013 2014 2015 2016 % of GDP % of GDP Interest payments Domestic debt External debt
Source: Ministry of Finance. http://www.mof.gov.mn; Bank of Mongolia. http://www.mongolbank.mn
3.12.3 Demand-side contributions to growth
-30 -15 0 15 30 2012 2013 2014 2015 2016 Percentage points
Gross domestic product Private consumption Government consumption Total investments Net exports
Source: National Statistics Office of Mongolia. 2017.
before subtracting from it in 2018 as coal exports level off and imports rise on capital-intensive investment in Oyu Tolgoi.
On the supply side, agriculture and services are expected to support growth modestly during the forecast period. Steady growth in livestock will be the major driver of growth in agriculture, while services will benefi t from higher demand for transport and storage from rising coal exports and imports for Oyu Tolgoi. Construction will likely remain fl at as the increase in mining-related construction off sets an expected reduction in subsidized mortgage lending, following the reformulation of the program by the new government. As coal production reaches full capacity in 2017, growth in 2018 will be solely driven by steady expansion of agriculture and service sectors, and a pickup in construction activity.
Average infl ation will rise to 3.5% in 2017 and 3.9% in 2018 as prices for imported goods increase when converted into a weaker currency (Figure 3.12.8). Fuel prices will edge higher as excise taxes are raised, but meat prices are expected to remain stable on the combined eff ect of improved supply and the depletion of government reserves.
Fiscal policy will be less expansionary during the forecast period. The budget under the proposed revision targets a defi cit equal to 8.8% of GDP in 2017. Monetary policy will also be less expansionary this year and the next. Money supply growth must halve in 2017 from 2016 to remain consistent with macroeconomic objectives agreed under the IMF program.
The current account defi cit will narrow to 2.1% of GDP in 2017 on strong coal exports but widen again to 6.3% in 2018 as imports continue to expand while exports stabilize. The expected larger infl ows evidenced from a pickup in foreign direct investment at the end of 2016 will ease pressure on the balance of payments.
Downside risks to the outlook derive from uncertainty regarding macroeconomic management. Borrowing options will narrow, and costs will rise, if debt obligations are not met, or in the absence of a fi rm commitment to policy reform or agreement on the IMF program, or if there is slippage in program implementation. Any of these risks would necessitate additional fi scal retrenchment and weaken growth. The proliferation of nonperforming loans presents another risk to the outlook as it can threaten fi nancial stability. There is also a risk that the Oyu Tolgoi investments may be delayed, undercutting economic activity.