A gift Mongolians must handle with care

By bne IntelliNews September 23, 2010

Oliver Belfitt-Nash in Ulaanbaatar -

Once one of the poorest nations on earth, the biggest problem Mongolia will have to face in the near term is coping with too much money arriving all at once.

A raft of mining projects are expected to bring billions of dollars into the $5bn economy over the next decade, with $4.6bn arriving in the next three years alone from the Oyu Tolgoi (OT) copper-gold mine being developed by Ivanhoe mines.

Mongolia was walloped along with the rest of the region by the international economic crisis, and then smacked by a severe winter. Nevertheless, the country continues to enjoy one of the strongest recoveries of any country in the world (albeit from a low base). The agricultural sector was particularly hard hit by a winter so harsh that it killed one in three cows, but the construction and services sectors held up well and actually put in growth of 8.3% and 20% respectively in 2009.

All in all, the Bank of Mongolia is very upbeat on the country's future over the next few years. After the nasty contraction in 2009, the economy is expected to grow by 7-8% for the rest of the year, Naidansuren Zoljargal, deputy governor of the central bank, told investors at a recent conference in Ulaanbaatar. The International Monetary Fund agrees, forecasting 7.1% and 7.2% growth in 2011 and 2012 respectively.

Wonder wall

The major problem facing Mongolia is how to manage the wall of money that will hit once OT starts producing. The fiscal stability law, adopted on June 24, aims to constrain fiscal spending to sustainable levels, as well as keep expenditure under the rate at which the economy is growing. It also demands that a portion of the OT revenue is invested overseas to offset the possibility of rising exchange rates and an increasingly uncompetitive manufacturing sector, a condition commonly known as Dutch Disease.

The rising tide of dollars flowing into the country is already making itself felt on the national currency, the tugrik, and the central bank is trying to reign in the fast appreciation of the currency that could put a brake on growth. In August, the turgik dipped below 1,300 to the dollar, a new record, but had settled at around 1,323 at the start of September after a 17-month period of stability. Longer term, the tugrik is expected to continue to appreciate, which is likely to pull in more investment and imports.

M2 Money supply has also expanded fast as the central bank tries to absorb the incoming capital, but despite concerns raised by the World Bank, Zoljargal insists that "inflation is under control." 2010's inflation rate is forecast by the central bank at 18%, whereas the World Bank predicts over 20% by the end of the year.

Even so, inflation will get a kick as the foreign firms developing OT have promised to grant a 1.5m tugrik ($1,145) "gift" next year to each and every Mongolian as part of the mine's investment deal. The government says it will attempt to soften the blow to the economy by dribbling the money out in the run-up to next year's elections, but the gift is still worrying economists.

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