Terrence Edwards in Ulaanbaatar -

Mongolia finally passed a budget on November 15, just a day before the legal deadline, but the country is still without a permanent prime minister, and a battle is taking place within the ruling party at a time of faltering economic growth.

Mongolia's parliament passed a budget with MNT7.6tn (€3.3bn) worth of spending and a MNT500bn deficit after twice striking down proposals by former prime minister Norov Altankhuyag's government. Spending is up by about 36% from this year, despite projections that growth is on a downward slide. The budget was passed without a finance minister and with Deputy Prime Minister Zandaakhuu Enkhbold filling in as the acting head of government.

Mongolia's flagging economy in November hit a political breaking point after over two years of declining foreign investment. Mongolia's central bank reported a 59% decline in foreign investment for the year to the start of October from the year before, in part because of delays to the giant Oyu Tolgoi copper-gold mine, which is a large reason why the growth of the mining-based economy has yet to come close to 2011's stellar 17.5%. “We first got an inkling that there would be trouble ahead for our commodities' exports in the second half of 2011, which was the peak year of economic growth,” says Badral Munkhdul, head of the Ulaanbaatar-based market intelligence firm Cover Mongolia.

China, the main consumer of Mongolia's coal and copper resources, has reduced consumption as its economy also slows. That has contributed to a price decline of 21.7% for coking coal in the year to November, according to data from Mongolia's Khan Bank. “We can see now that Mongolia is one of the most-impacted economies from the China slowdown, if not the most affected,” Munkhdul says.

In 2011, new jobs were being created as money poured in from around the world into Mongolia-based businesses. Today, however, companies are scaling back and introducing cost-cutting measures to stay afloat.

Government reshuffle

Altankhuyag's solution to Mongolia's economic woes was a complete government overhaul. Seven ministers were kicked out in October, including the ministers of finance and mining, while parliament approved Altankhuyag's proposal to consolidate government ministries to 13 from 16, and replace key positions in his cabinet.

However,  the parliament didn't quit there and next voted Altankhuyag out of office. A caucus held by Altankhuyag's Democratic Party quickly selected a replacement in Rinchinnyam Amarjargal, but a committee that runs the party ignored that vote and has put up the cabinet secretary Chimed Saikhanbileg as its choice for the parliament to vote on instead. Amarjargal was seen as the candidate to steer the country in a new direction, while Saikhanbileg is seen as someone to maintain Altankhuyag's policies.

Though some will protest if Saikhanbileg is confirmed, it might save Mongolia the strain of having to rebuild its government from the ground up. “The fact that Saikhanbileg has been part of the government for the past two years suggests that he may well leave many ministerial posts [beyond the ministers themselves] alone, while Amarjargal’s maverick instincts might lead him to replace more people,” blogs Julian Dierkes, an associate professor at the University of British Columbia who observes politics in Mongolia closely.

He also reckons that the Democratic Party might swap its current grand coalition partners for the now-opposition Mongolian People's Party (MPP). That would allow for “more decisive action that would have a broad enough majority to not be threatened by caucus-internal debates,” he says.

Mongolia had a similar set-up under the Sukhbaatar Batbold government from 2009 to 2012, with the MPP as the majority party in the parliament.

Troubles ahead

The World Bank has predicted 6.3% economic growth for 2014 – still buoyant but nowhere near the stratospheric growth rates of a few years ago.

Altankhuyag had hoped to turn the economy around with measures such as a new investment regime, a cut in the royalty tax for gold, and new laws for mining and pumping oil that he hoped would entice back investors. But little has changed.

Parliament had to pass a budget that pegs foreign debt below 40% of GDP. The debt ceiling is a new restriction for next year that Altankhuyag had attempted to raise, but parliament wouldn’t budge. Mongolia currently has a debt/GDP ratio of about 49%, a civil servant familiar with this year's budget-making process told bne.

The cap on foreign debt can be kicked down the road, says the civil servant. The law won't be enforced until the government reviews the 2015 budget in April, which will give whoever succeeds Altankhuyag time to make another attempt to raise the debt ceiling or bring down the external debt level. “They are taking action to bring it down by the end of the year,” says the civil servant, “but they have expressed some concern that they might not be able to do so – they say it would be very hard to bring it down below 40%.”