Mongolia

Summary Moody’s B2 / S&P B / Fitch B1 Economy: Agriculture 16%, Industry 34%, Services 50% Mongolia is a country with high short-term growth potential because it is starting to exploit its abundant natural resources. Its economy is growing at one of the fastest rates in the world resulting in rapidly shrinking poverty levels in the country. On the downside the government is overly ambitious, and its aggressive, expansionary fiscal and monetary policy could eventually lead to economic crisis. The government has recently tightened fiscal and monetary policy but it may not be enough. Mining represents the bulk of exports and a large share of revenues, making Mongolia highly dependent on commodity prices. Finally, the economic performance of its main trade partner, China, will play an important factor in determining Mongolia’s future economic performance. We estimate exports to China represent close to 90% of total exports. Economic Indicators 2011

2012

2013

2014

2015E

2.8

2.8

2.9

2.9

3.0

3.0

3,736

4,329

4,365

4,115

4,179

4,300

Nominal GDP (USD Billions)

10.4

12.3

12.6

12.0

12.4

13.0

Real GDP (%)

17.3

12.3

11.6

7.8

3.5

3.6

Year-end CPI (%)

9.4

14.2

11.2

10.7

7.1

6.8

Fiscal Balance (% of GDP)

-4.0

-9.1

-8.9

-10.9

-9.7

-8.0

Nominal GDP (USD Billions) Real GDP (%)

2016F

Interest (% of Revenues)

0.8

2.5

4.5

8.2

10.2

13.1

FC Debt/Public Debt (%)

86.0

85.2

74.4

73.7

68.7

71.2

Government Debt (% of GDP)

32.7

51.3

67.3

76.5

81.5

87.6

Government Debt (% of Revenue)

96.4

172.1

215.7

274.1

337.2

361.6

Current Account (% of GDP)

-26.5

-27.4

-25.1

-8.2

-11.1

-19.5

FDI (% of GDP)

44.4

35.9

16.7

4.5

8.6

17.9

External Debt (% of GDP)

92.5

99.3

148.4

187.8

185.5

187.8

Foreign Reserves/External Debt (%)

23.6

25.5

11.0

7.4

5.4

7.1

Foreign Reserves (Mo. of imports)

4.7

7.9

4.5

2.7

2.3

2.9

21.9

32.0

16.7

12.8

9.7

13.1

Foreign Reserves (% of GDP)

As of November 2015 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: IMF, World Bank, Haver, Central Bank, and Lazard

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Rating History Following is a history of the country’s foreign and local currency ratings by the major agencies dating back to 2000 demonstrating the country’s shifting fundamentals. We have also included the spread history for the country’s hard currency external debt against the JP Morgan Emerging Markets Bond Index – Global Diversified.

Rating History Hard Currency

Local Currency

BB

BB

BB-

BB-

B+

B+

B

B

B-

2000

2007 Moody’s

2015 S&P

Fitch

B-

2000

2007 Moody’s

2015 S&P

Fitch

As of December 2015 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Fitch, Moody’s, Standard and Poor’s, Bloomberg

Bond Spreads 1000 800 600 400 200 0

2007 Mongolia

2011

2015

EMBIGD

As of December 2015 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan

184

Mongolia

Strengths Abundant Natural Resources Mongolia is exceedingly rich in natural resources, especially mining, which remain unexploited and embody large growth potential.2 Globally the country has one of largest copper reserves, 83.8 million tons,3 and coal reserves, 18.5 billion tons.4 It also holds substantial amounts of other mineral deposits including gold and fluorspar.5 Mongolia’s underground resources are estimated to be worth more than $1 trillion6 and are, therefore, a major growth engine. Another important resource, though less relevant now than in the past, is agriculture, largely cereal and animal husbandry. Mongolia is the second largest producer of cashmere in the world after China but it produces the finest.7

Mega Projects The development of the Oyu Tolgoi mine will be a key driver of economic growth in the next couple of years as Oyu Tolgoi will be the third largest copper mine in the world when it reaches full production.8 The Oyu Tolgoi mine is one of the world’s largest untapped copper deposits. Mining companies have already invested over $6.6 billion in this project, and started producing and exporting copper in June 2013, but a dispute between the government and developer Rio Tinto has stalled faster development for the past two years. Both parties reached an agreement in May 2015 to address the dispute, and Oyu Tolgoi’s 2015 production is estimated at 195,000 metric tons of copper and 700,000 ounces of gold.9 Once the mine reaches full production in 202, it is expected to produce an average of 430,000 tons of copper and 425,000 ounces of gold annually over the life of the mine. The IMF estimates that by then, Oyu Tolgoi will generate approximately one-third of Mongolia’s GDP. The government owns 34% of Oyu Tolgoi.10 Another important project is the development of the coal deposits of Tavan Tolgoi (TT), one of the largest underdeveloped coal fields in the world. Its deposits total 7.4 billion tons of coking and thermal coal resources. Extraction of coal in the eastern part of TT has already started and the government initially expected that coking coal production would reach 40–50 million tons by 2017.11 Nevertheless, the government has failed to secure financing to develop it and is selling stakes to Chinese and Japanese companies.12

China Connection Mongolia’s main trade partner, China, will be a key driver behind growth. They are natural trade partners because Mongolia is a producer of mining products and China is a big consumer, accounting for 89% of Mongolia’s total exports and 26% of imports.13 The trade between these two countries will continue to grow as most of the mining product of Oyu Tolgoi and Tavan Tolgoi mines will go to China. Both mines are less than 500 kilometers from the Chinese border and very close to major cities such as Beijing. Mongolia’s ties with China go beyond trade. For example, the Central Bank of China increased the swap line by 50% to RMB 15 billion (USD2.4 billion) until 2017.14 This has helped Mongolia absorb the shock of lower commodity prices.15 Despite government and business sector fondness for closer relations with China, we note that this is not universally shared as there are also concerns among citizens that Mongolia is becoming a satellite state of China.16

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Free and Fair Elections Mongolia has had free elections since the 1990’s and six consecutive successful democratic elections. Prior to the 1990’s, the Mongolian People’s Party (MPP) was the ruling party operating under a one-party system beginning in the 1920’s. The opposition Democratic Party (DP) won the June 2012 parliamentary elections and in June 2013 the presidential election.17 The peaceful transition in 2012 is an indication of strengthening institutions and democratic values. However, towards the end of 2014 there was some political instability when Prime Minister Norov Altankhuyag was removed after losing a no-confidence vote and was replaced by Chimediin Saikhanbileg who formed a coalition government with a heavy emphasis on the economic agenda.18 The next Parliamentary elections are scheduled for June 2016.

Weaknesses Commodity Dependent Mongolia’s economy is very dependent on the mining sector, which accounts for about 50% of revenues and 90% of exports. The IMF points out that as a result of this dependence, the country is vulnerable to commodity shocks that lead to boom-bust cycles.19 Effectively, Mongolia’s growth rate in the past ten years has been relatively volatile averaging 7.8% from 2005-2008, followed by a sharp contraction of -2% in 2009, and then resuming high growth rates average 11.2% between 2010-2014. Between 2015-2017 growth rate is expected to be in the 3.5% range before resuming to more than 6% in 2018 as mining production picks up.20 This highlights the ups and downs of the economy as a function of commodity production and prices.

Weakening Fiscal Position In part because of its dependency on commodities, Mongolia’s fiscal position is weak. The government approved a Fiscal Stability Law (FSL) in 2012, placing a fiscal deficit limit of 2% starting in 2013,21 but its 2014 fiscal deficit was more than double this level at 4.25% and is not expected to return to the 2% threshold until 2019. However, off-budget items are not part of this FSL, and large expenditures have been incurred by the Development Bank of Mongolia (DBM), a state-owned enterprise (SOE) development bank established in 2011. While it is a for-profit enterprise, the projects the DBM undertakes require parliament and government approval and bonds issued by the DBM have been generally guaranteed by the government. As such, DBM’s expenditures are effectively off-balance sheet transactions from the government and the IMF recommends including the DBM’s expenditures as part of the fiscal deficit. Adjusting for DBM expenditures, the 2014 fiscal deficit increases considerably to 11% GDP and is projected to be 7.8% GDP in 2016.22 Mongolia also has a debt ceiling totaling 50% of GDP in 2013 and 40% of GDP in 2014, but it has missed this target and has both raised the ceiling to 58.3% GDP in 2015 and has extended the target date to reach 40% debt-to-GDP to 2018.23 However, this debt ceiling excludes SOE debt and government-guaranteed debt, which opens the possibility for continued off-balance sheet financing.

External Sector and Low Level of Reserves Mongolia’s current account deficit has been fairly high historically at more than -25% GDP in the period 2011-2013 although it has since then improved considerably to an expected deficit of -11.1% in 2015.24 One of the reasons for this large current account deficit is due to the small size of the economy. With the decrease in FDI and less export revenue, the current account has been increasingly been financed by FX reserves. We note that Mongolia’s reserve levels are traditionally fairly low; it peaked at $3.8 billion at the beginning of 2013 and since 186

Mongolia

then it has fallen sharply to its current level of $1.2 billion as of September 201525 which is worth about 2 months of imports. In addition, it is estimated that the Bank of Mongolia has already tapped about 91% of its RMB$15 billion swap line as of September,26 highlighting the difficult external situation. This in turn has weakened considerably the Mongolian togrot, which went from $1390 per US dollar at the beginning of 2013 to $1986 per US dollar by November 2015.27

Infrastructure The country’s infrastructure, roads, railways and airports, are in poor condition, and water and electricity supplies remain a problem. Mongolia is in the process of carrying-out major infrastructure projects including $8 billion in railway repairs to improve train connections to Russia and China, $2 billion to build highways across Mongolia connecting Russia to China, $270 million for a new international airport, and $1.4 billion to construct an electric generation facility. Delays in execution of these projects may result in potential bottlenecks.28 On the more positive side, Mongolia is aligned with China’s ambitious One Belt One Road geographical reach, and therefore Chinese investments should accelerate.

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Country Background

Size

1,564,115 KM2 (19th)

Capital

Ulan Bator

Population

3.0 Million

Ethnic Groups

Khalkh 81.9%, Kazak 3.8%,

Religion

Buddhist 53%, Muslim 3%, Christian 2.2%

Median Age

27.5 Years

Literacy Rate

98.4%

Independence

July 11, 1911

Political System

Parliamentary

President

Tskhiagliin Elbegdorj

Prime Minister

Chimed Saikhanbileg

Presidential Elections

June 2017

Legislative Elections

June 2020

Legislative Branch

76 Members (Democratic Party 33, MPP 27)

Economy

Agriculture 16.3%, Industry 33.5%, Service 50.2%

Labor Force

Agriculture 28.6%, Industry 21.0%, Service 550.4%

Merchandise Exports

Copper, Apparel, Livestock

Export Partners

China 95.3%

Currency

Togrog (MNT)

As of November 2015 Source: CIA

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Mongolia

Country Timeline International recognition 1945-46 Yalta conference agrees to preserve the status quo–Soviet control–in Mongolia. Mongolians vote for independence in a UN plebiscite. Mongolia is recognised by the Republic of China. 1949-55 Relations established with the People's Republic of China. Railway built across Mongolia linking Russia and China. 1952

Choybalsan dies, and is replaced as prime minister by Tsedenbal, the MPRP general secretary since 1940.

1961-63 UN Security Council approves Mongolia's UN membership. Diplomatic relations established with the UK.

Soviet buffer against China 1966

Soviet Communist Party General-Secretary Brezhnev signs a friendship treaty in Ulan Bator allowing secret stationing of Soviet troops in Mongolia.

1973-81 Mongolia accuses China of planning annexation, protests against Chinese leaders' call for withdrawal of Soviet troops, accuses China of "aggressive intentions" and expels some Chinese residents. 1984

Mongolia's Brezhnev, party General-Secretary Tsedenbal, head of state since 1974, is forced out of office by the MPRP Politburo.

1986

Gorbachev's Vladivostok speech opens the way to detente with China and the withdrawal of Soviet troops from Mongolia.

Democracy 1990

Street demonstrations force resignation of the MPRP Politburo. Political parties are legalised. Elections to the Great Hural (parliament) are won by the MPRP, but 19 of the 50 seats in a new standing legislature go to non-communists.

1992

Mongolia's new constitution gives first place to human rights and freedoms. In the first democratic elections the MPRP wins 71 of the 76 seats in the new single-chamber Great Hural.

1993

The first direct presidential elections are won by Ochirbat, nominated by the National and Social Democrats.

1996

The National and Social Democrats win 50 seats in the Great Hural elections, but the MPRP can deny a quorum, hindering passage of legislation.

1997

MPRP candidate Bagabandi wins presidential election.

2000

After the democrats form three new governments in two years the MPRP wins 72 seats in the Great Hural elections. The National and Social Democrats and three other parties form a new Democratic Party.

2001

February—UN launches appeal for $8.7m (£6m) to support herders suffering in worst winter conditions in more than 50 years.

2001

May—President Bagabandi re-elected.

2001

October—IMF approves nearly $40 million in low-interest loans over next three years to help tackle poverty and boost economic growth.

2002

November—Dalai Lama visits. China denounces trip and warns Mongolian leaders not to meet the Tibetan spiritual leader.

2003

July—It is announced that 200 soldiers will be sent to Iraq to contribute to peacekeeping.

2004

January—Russia writes off all but $300 million of Mongolia's debts.

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Power-sharing 2004

June-August—Parliamentary elections, in which the opposition performs strongly, result in political deadlock over contested results. Tsakhiagiin Elbegdorj is eventually appointed as prime minister following power-sharing deal.

2005

March-April—Protesters in the capital demand the government's resignation and an end to poverty and official corruption.

2005

May—MPRP candidate Nambaryn Enkhbayar wins presidential election.

2005

November—President George W Bush becomes the first serving US leader to visit Mongolia.

2006

January—Coalition government headed by Tsakhiagiin Elbegdorj falls after the MPRP pulls out, blaming the leadership for slow economic growth. Parliament chooses MPRP's Miyeegombo Enkhbold as the new prime minister.

2007

November—Prime Minister Miyeegombo Enkhbold resigns. He is replaced by MPRP leader Sanjagiin Bayar.

2008

July—President Enkhbayar declares a state of emergency to quell riots in the capital which left five dead and hundreds injured. Violence erupted after the opposition accused the governing party of rigging elections.

2009

May—Former Prime Minister and candidate of the opposition Democratic Party, Tsakhiagiin Elbegdorj, wins presidential election, defeating incumbent Nambaryn Enkhbayar by a narrow margin. Governing MPRP says it accepts the result.

2009

October—Prime Minister Sanjagiin Bayar of the MPRP resigns for health reasons. Foreign Minister Sukhbaataryn Batbold succeeds him.

2010

February—Extreme cold kills so much livestock that the United Nations launches a programme to pay herders to clean and collect carcasses. This will help maintain living standards while disposing of possible sources of disease.

2010

April—PM Sukhbaataryn Batbold takes over as head of governing MPRP from former PM Sanjagiin Bayar.

2010

September—Mongolian spy chief Bat Khurts is arrested on landing in Britain, sparking a diplomatic row. A court later rules that he can be extradited to Germany on kidnapping charges.

2010

November—Controversy as Mongolian People's Revolutionary Party reverts to Communistera name of Mongolian People's Party. Ex-President Nambaryn Enkhbayar sets up small breakaway Mongolian People's Revolutionary Party.

2011

July—Mongolia selects the US Peabody Energy, China's Shenhua and a Russian-Mongolian consortium as partners to develop the highly sought-after Tavan Tolgoi coal deposit in the Gobi desert. Spy chief Bat Khurts loses appeal in Britain against extradition to Germany on kidnapping charges.

2011

October—Mongolia and Rio Tinto-owned Ivanhoe Mines reach agreement on stakeholding in the massive Oyu Tolgoi copper mine. Mongolia settles for a 34% share, as previously agreed, dropping demands for parity.

2011

November—Germany releases Mongolian spy chief Bat Khurts ahead of Chancellor Angela Merkel's visit to Mongolia.

2012

June—Parliamentary elections. Democratic Party wins most seats but not enough to govern without forming a coalition.

2012

April—Mongolia puts Tavan Tolgoi coal mine deal on hold while it decides whether to go it alone on developing the project. It had earlier agreed to work with a group of US, Chinese and Russian companies.

2012

August—Former president Nambaryn Enkhbayar is sentenced to four years in jail for corruption.

2012

December—Mongolian People's Revolutionary Party threatens to leave governing coalition in protest at its former leader Enkhbayar's jail sentence.

2013

June—Tsakhiagiin Elbegdorj, from the Democratic Party, wins a second term as president.

2013

August—Mining giant Rio Tinto says it will lay off up to 1,700 workers at the massive Oyu Tolgoi mine in Mongolia following a dispute with the government.

190

Mongolia

2014

November—Prime Minister Norov Altankhuyag is dismissed by a vote of parliament. He had been under fire for alleged corruption and economic underperformance. Deputy Prime Minister Dendev Terbishdagva takes over as acting head of government. Parliament elects Chimed Saikhanbileg as prime minister in a vote boycotted by the opposition Mongolian People’s Party.

2015

January—The opposition Mongolian People's Party agrees to form a coalition government with the Democratic Party and the Justice Coalition.

2015

August—Prime Minister Chimed Saikhanbileg removes the Mongolian People's Party from the coalition government by dismissing six of its ministers.

Source: BBC

Notes 1 As of December 2015. 2 Wacaster, Susan, “2011 Mineral Yearbook Mongolia,” US Geological Survey, December 2012, http://minerals.usgs.gov/minerals/pubs/country/2011/myb3-2011-mg.pdf as of December 2103, Source: Lazard. 3 “Presentation by Foreign Ministry of Mongolia L.Bold at the 25th APEC ministerial Meeting,” Infomongolia, accessed on December 20, 2013, http://www.infomongolia.com/ct/ci/6824 ; “Copper,” US Geological Survey, http://minerals.usgs.gov/minerals/pubs/commodity/copper/mcs-2013-coppe.pdf; and as of December 2103, Source: Lazard. 4 “Mongolia Bond Prospectus,” BofA Merrill Lynch, Deutchse Bank, HSBC, and J.P. Morgan, November 2012. 5 World Economic Outlook Database,” International Monetary Fund, accessed on December 20, 2013, http:// www.imf.org/external/pubs/ft/weo/2013/02/weodata/index.aspx and as of December 2103, Source: Lazard. 6 “Rio Tinto and Mongolia sign multibillion dollar deal on mine expansion,” The Guardian, May 19, 2015, accessed on November 30, 2015, http://www.theguardian.com/global/2015/may/19/rio-tinto-and-mongoliasign-multibillion-dollar-deal-on-mine-expansion. 7 “Cashmere,” NaturalFibres.org, accessed on November 20, 2015, http://www.naturalfibres2009.org/en/ fibres/cashmere.html. 8 “Oyu Tolgoi,” Turquoise Hill, August 2015, accessed on November 20, 2015, http://www.turquoisehill.com/i/ pdf/ppt/TRQ-SiteVisit-Aug2015.pdf. 9 Kohn, Michael, “Rio, Mongolia Agree to Restart Oyu Tolgoi Development,” Bloomberg Business, May 18, 2015, accessed on November 20, 2015, http://www.bloomberg.com/news/articles/2015-05-18/rio-mongoliaagree-to-restart-oyu-tolgoi-development. 10 “Oyu Tolgoi,” Rio Tinto, accessed on November 20, 2015, http://www.riotinto.com/copperandcoal/oyutolgoi-4025.aspx. 11 “Mongolia: 2012 Article IV Consultation and Third Post Program Monitoring,” IMF Country Report No.12/320, November 2012, http://www.imf.org/external/pubs/ft/scr/2012/cr12320.pdf and “Mongolia Bond Prospectus,” BofA Merrill Lynch, Deutchse Bank, HSBC, and J.P. Morgan, November 2012. 12 Brletich, Samantha, “Mongolia struggles to develop Tavan Tolgoi coal mine,” Mining.com, September 21, 2015, accessed on November 20, 2015, http://www.mining.com/web/mongolia-struggles-to-develop-tavantolgoi-coal-mine/. 13 Han, Bochen, “The Trouble With China-Mongolia Relations,” The Diplomat.com, November 18, 2015, accessed on November November 20, 2015, http://thediplomat.com/2015/11/the-trouble-with-china-mongolia-relations/. 14 “IMF Staff Concludes 2014 Article IV Mission to Mongolia” International Monetary Fund, IMF Press release No. 14/443, Sepetmber 26, 2014, accessed on November 20, 2014, http://www.imf.org/external/np/sec/ pr/2014/pr14443.htm. 15 Edwards, Terrence, “CORRECTED-Mongolia leans on China as it waits for copper mine-led revival,” Reuters, May 21, 2015, accessed on November 8, 2015, http://www.reuters.com/article/2015/05/21/mongolia-economy-rio-idUSL3N0YB1UY20150521. 16 Hornby, Lucy, “Lunch with the FT: Saikhanbileg Chimed,” The Financial Times, FT.com, May 15, 2015, accessed on November 8, 2015, http://www.ft.com/intl/cms/s/2/b5c4fa94-f885-11e4-8e16-00144feab7de. html. 17 “Elbegdorj scrapes home” The Economist, June 29, 2013, http://www.economist.com/news/ asia/21580207-foreign-investors-will-cheer-incumbents-narrow-triumph-elbegdorj-scrapes-home. 18 Edwards, Terrance, “Resource-rich Mongolia ousts prime minister amid economic downturn, Reuters, November 5, 2014, accessed on November 20, 2014, http://www.reuters.com/article/2014/11/05/us-mongolia-politics-idUSKBN0IP0WV20141105.

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19 “Mongolia: 2015 Article VI Consultation,” International Monetary Fund, IMF Country Report: 15/109, April 2015, https://www.imf.org/external/pubs/ft/scr/2015/cr15109.pdf. 20 “Mongolia,” International Monetary Fund, “World Economic Outlook 2015, October 2015, accessed on November 30, 2015, https://www.imf.org/external/pubs/ft/weo/2015/02/weodata/index.aspx. 21 “Macroeconomic Policy Framework for Resource Rich Developing Countries,” International Monetary Fund, August 24, 2013, http://www.imf.org/external/np/pp/eng/2012/082412a.pdf. 22 “Mongolia: 2015 Article VI Consultation,” International Monetary Fund, IMF Country Report: 15/109, April 2015, https://www.imf.org/external/pubs/ft/scr/2015/cr15109.pdf. 23 “Mongolia raises debt ceiling as foreign investment dips,” Reuters Africa, January 21, 2015, accessed on November 20, 2015, http://af.reuters.com/article/commoditiesNews/idAFL4N0V03JG20150121. 24 “Mongolia: 2015 Article VI Consultation,” International Monetary Fund, IMF Country Report: 15/109, April 2015, https://www.imf.org/external/pubs/ft/scr/2015/cr15109.pdf. 25 As of November 2015, Sources: Bloomberg, IMF. 26 “Emerging Markets Macro and Strategy Outlook,” Citi Research, October 2015. 27 As of November 2015, Source: Bloomberg. 28 “Mongolia Bond Prospectus,” BofA Merrill Lynch, Deutchse Bank, HSBC, and J.P. Morgan, November 2012 and as of December 2013, Source: Lazard.

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