Mongolia, a country with abundant mineral resources but with so much unfulfilled potential, appears to be slowly digging itself out from its economic woes, and most importantly restoring investor confidence.
In this CRU Spotlight, John Johnson, CEO of CRU China who has been visiting Mongolia regularly since 2009, explains what has changed in recent times following a recent visit.
Earlier this year, Mongolia was in danger of defaulting on debt repayments and investor confidence was extremely low. Mongolia turned to the IMF for support, and already there are encouraging signs that the country is turning a corner. The Mongolian economy has stabilised and investor confidence is slowly being restored.
While Mongolia has benefited enormously from exogenous factors such as rising commodity prices and China’s supply-side cutbacks, it is also important to note that improvements have occurred as a result of changes in government policy. Not all of Mongolia’s structural problems have been solved, but CRU thinks that it may have passed a turning point.
This should be of interest to the international mining community keen to unlock Mongolia’s considerable mineral potential.
Not only does the country have some of the world’s largest undeveloped copper, gold and coal reserves, but it has many other undeveloped mineral deposits, in addition to being on the doorstep of the world’s largest commodity consuming market.
POSITIVE DEVELOPMENTS IN 2017
What positive changes have occurred in Mongolia recently?
In 2016, Mongolia’s external debt was 218% of GDP, its fiscal deficit was 20% of GDP, foreign exchange reserves were tumbling, and the Mongolian Tugrik was one of the world’s worst performing currencies. Foreign debt payments were due, and there was a high risk of default. Furthermore, foreign direct investment (FDI) was tumbling and the mining sector was struggling, having been through a period of several years of low prices and falling export volumes.
Fast forward one year later to 2017 and the IMF implementation of a $5.5 billion Extended Concessional Loan Facility appears to have marked a new beginning. Government actions, including fiscal transparency, tax increases and monetary tightening, have started. The budget deficit has been cut, foreign exchange reserves have been replenished and the Mongolian currency has actually started rising again. Bond payments have been rolled over, a new bond offering launched and real GDP growth has recovered from almost zero in 2016 to 5.3% in H1 2017.
Increasing commodity prices and export volumes have clearly helped, since export revenues have increased significantly. In particular, the Mongolian economy has been boosted by an increase in prices for coking coal during 2017, with coal overtaking copper as the largest revenue earner, which was also aided by the collapse of North Korean coal exports to China. Mineral exports are important to the Mongolian economy, accounting for more than 30% of GDP.2 Furthermore, approximately 90% of these exports are destined for China, so Mongolia’s prosperity is unavoidably linked to China’s commodity imports.
Source: Invest Pro Mongolia #4 (2017)