Mongolia’s economy on track to register first contraction in eight years

By bne IntelliNews November 16, 2016

Mongolia’s economy shrank 1.6% y/y in the first nine months of 2016, the statistics office said on November 15.

The figures raise concerns the economy is heading for its first annual contraction since the financial crisis in 2008. It was a boom in FDI that helped Mongolia rack up an astronomical GDP growth of 17.5% in 2011. But stalled talks over the underground development of the giant Oyu Tolgoi gold and copper mine in 2013-2015 and the subsequent freefall in commodity prices have badly hit the economy, reliant on mining coal, copper and gold. In addition, Mongolia registered a net foreign direct investment (FDI) outflow of $4.28bn in the first nine months of 2016.

With repayments worth $1bn in debt due by January 2018, Mongolia's leaders have met with representatives of the IMF, China and Japan for crisis relief talks. In particular, the IMF discussed policies that could become part of an IMF-supported financial and economic programme during a visit to Mongolia in late October.

The Mongolian government is hopeful that an agreement with the IMF will be in place by February. Since coming to power by a landslide victory in June parliamentary elections, Mongolian People’s Party (MMP) has embarked on an anti-crisis plan that will seek to return the budget to surplus, boost foreign reserves and increase investment. The parliament is currently reviewing the plan with a vote expected by the end of November.

Led by Prime Minister Jargaltulga Erdenebat, the government has, nonetheless, struggled to control a downward spiraling currency and a balance of payments crisis since being elected into office.

The IMF has urged Mongolian authorities to focus on fiscal consolidation in the October edition of its Regional Economic Outlook. Mongolia’s current account deficit is seen widening to 11.1% of GDP in 2016 and further to 19.2% in 2017, according to the IMF.

The country is expecting FDI to sway the economy back to growth thanks to the $6bn underground expansion at Rio Tinto's Oyu Tolgoi copper mine, which began this year, following a deal reached in May 2015 that ended two years of stalled talks between the Mongolian government and the Anglo-Australian miner Rio Tinto.  

However, the underground expansion is only set for completion by 2019. Rio believes the mine, when launched, will account for 30% of the economy.

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