Үндэсний Стратегийн Хүрээлэн

Institute for National Strategy

Achieving Macroeconomic Stability (part1)

INS Problem Statement

 After 3 years of record economic growth, huge inflows of foreign investment and strong national currency, the economy now looks to be in poor shape with poor macroeconomic fundamentals.

Why is economic growth so important and what are the economic fundamentals that need to be achieved to get sustainable and diversified growth of the Mongolian economy for the broadest possible impact for Mongolians and Mongolian organisations?

 Authors Opinion

In Mongolia leaders focus on GDP growth. From 2011 to 2013, economic growth climbed by 17.3%, then 12.3% and by 11.6%.  However in 2014 economic growth fell to 5.3%, which was lower than 2010’s rate when the GFC plagued so many economies.

 While 2011-13 economic growth was impressive other measures now tell a worrying story.

  • The economic growth rates have fallen each year
  • prices rose by 14.9% this last year on already high inflation rates
  • the 2013 Government budget deficit exceeded 10% of GDP (according to the World Bank April report)
  • Mongolia still runs a trade deficit
  • Mongolia’s foreign currency reserves have dropped and currency value has fallen 30%;
  • Public debt (as estimated by IMF), reached 67% of GDP (June 2014).
  • Non-performing loans and past-due debts in banking sector reached 1 trillion MNT; a huge future headache for the sector.

 There are many signs that economic slowdown has caught up with Mongolia. Mining factors should be looked at separately from the rest of the economy when trying to understand how the economy is growing and diversifying. This is because of the large portion of GDP that mining holds and its almost exclusive role in exported commodities.

 Leaving out the mining sector and real estate development, many other sectors are ailing:

  • in spite of huge price increases, volume of wholesale and retail trade grew by very small margin and in country side, sales are actually falling;
  • railway freight and passenger turnover for January-July 2014 fell by 7% and 12% accordingly from last year;
  • restaurants and cafes reported 14% drop in sales,
  • catering is down by 62% and hotels revenue fell by 21%.

 Employment and real wage statistics are worrying

  • Compared with 2012, the number of unemployed seeking jobs has increased from 39 thousand to 55 thousand and the number of new jobs being created has halved
  • 69% of unemployed are young people aged 15-34 years

 One of our largest privately owned airlines, Eznis, collapsed this year and it is feared that continued economic slowdown will bring bankruptcy to more sizable businesses.

 In 2011 and 2012 Mongolia grew its mineral/oil exports significantly but these have shrunk back with coal and other mineral revenues falling drastically in 2013 and 2014. Oyu Tolgoi copper and gold concentrate sales are now playing a positive role but are a solitary light on the horizon.

 The World Bank highlight GDP growth rates with and without mining in the following chart. When the mining sector is excluded the rest of economy growth rate (blue line) is increasingly stagnating and close to negative growth rates.

 Mining and non-mining economic growth in Mongolia (2014, Word Bank)


 It is clear that economic diversification policies are not yet contributing strongly and without a strongly performing mining sector overall growth rates will not be high. The potential of the agricultural sector is yet to be truly leveraged – either domestically or internationally.

 Parliament only talks about “macro-economic stability” once or twice a year (when next year’s budget and monetary policies are discussed). For most ordinary folk, “macroeconomic stability” is not something usually discussed – until prices of your favorite products rise, value of national currency falls and jobs of family members or friends suddenly disappear.

 High GDP growth rates do not guarantee “macroeconomic stability”. Mongolia does not have “macro-economic stability” when it has huge budget deficits, high levels of debt, rising prices, falling living standards and shrinking employment.

 Growing the economy through high levels of government funded economic activity is not a sustainable formula – when the mining sector remains stalled and with FDI now at low levels.

 Attracting genuine investors with foreign money is needed – because Mongolia does not have the national savings pools in place. These investors (and lenders) closely look at “macroeconomic stability” conditions as a guide to their decision-making. The European Union’s fundamental Maastricht treaty provides guidance on four policy measures that are regarded as critical:

 Condition 1 – Low and stable inflation is essential

 Taming inflation and keeping value of the national currency is, therefore, a key policy goal for maintaining economic growth and creating more jobs. The stability of prices (controlling inflation) and national currency is a major obligation of the Central Bank of Mongolia.

  •  When prices rise at a higher speed than incomes, companies and households will purchase less products, technology or make less investment simply due to lower real income. They just can’t afford to invest or grow more.
  • Lower purchases means that less is produced, shops and retailers have lower sales, households became poorer and businesses investments are lower due to reduced earnings and cashflows.
  • High inflation rates also act to depreciate the national currency
  • The Maastricht criteria capped inflation at 3%. Currently, Mongolian inflation is estimated to be around 14.9% – this means that purchasing power of all Mongolian companies and households fell by 1/7 in one year.

Condition 2 – low Government debt relative to size of GDP

Low debt levels means the Mongolian government has flexibility to use its tax revenue to address domestic needs instead of paying domestic and foreign lenders. Between 2003 and 2012, Government debt was small; meaning international creditors knew that national debt can be repaid easily by tax revenue.

However, since 2012 the government incurred foreign debts which exceed 2.4 billion US dollars; for a country with less than 10 billion of US dollars GDP. The future burden of repayment is now significant and is the responsibility of future governments.

It is now critically important to contain total government debt and maximize the benefit of this debt on GDP growth, jobs and increasing the tax base. Otherwise, the repayment of the principal, which starts from 2017, will slow down execution of the national development strategy. The external cost of additional government borrowing has increased significantly in the past two years. Very clear strategies for debt management are now needed.

  • Reducing Mongolia’s sovereign risk profile and improving its credit rating will reduce the cost and increase availability of debt finance. If the country’s debt continues to increase, investors and banks will evaluate sovereign risks as very high and lend only at extremely high interest rates – if such lenders can be found at all.
  • Future lenders will want to see extreme clarity and discipline of government spending and only wise government support for major value-creating industries is needed.
  • The debt management strategy should also give guidance on the best form of finance – DBM, bonds or public private partnership (concessions).

Condition 3 – low budget deficits 

Fact – Government budget surpluses and small deficits prevent growth of the national debt. The Maastricht criteria capped the government budget deficit at 3% of GDP; for 2013 the World Bank estimates Mongolia at a budget deficit of 10% of GDP.

So Mongolia has high public debt and runs high budget deficits – both as a % of GDP. If this continues there will eventually be catastrophic consequences for the government and the economy, which is called “default”. Default happens when a country can’t repay its debt anymore and no one is willing to extend loans on reasonable commercial terms.

In order to prevent a default a very good planning of all tax revenue and government expenditures is needed; tax revenue can only grow in a growing economy so rapidly stimulating the private sector is vital for national prosperity.

Should a default occur – it will require an “exit strategy” – requiring major sacrifices in living standards, lower wages and income for most of the population; everybody will have to pay for the policy and budgetary decisions made by a small group of bureaucrats or politicians.

Countries like Greece have faced default – but Greece was a member of EU and it was saved by Germany; Mongolia is not a member of EU and can’t expect someone else to pay-off our debts or deficits.

Condition 4 – currency stability;

A stable exchange rate allows importers and exporters to develop long-term growth strategies and reduces investors’ needs to manage exchange-rate risk. Currency stability also reduces the threat posed by governments who raise debt in a foreign currency (such as the Chinggis bond). A devaluing currency is a major threat to project developers and governments who borrow money in a foreign currency.

The Maastricht criteria permitted fluctuation of exchange rate at most 2.5%. Currently, the MNT has depreciated almost by 30% since early 2013; and this makes current economic situation, already hit hard by inflation, much worse.

In Mongolia, all of the diesel and gasoline fuel, 100% of machinery, most of spare parts, important industrial inputs, raw materials and most of consumption goods such as electronics, clothing and food is imported. Any industrial production involves large number of imported materials and technology, so depreciation of the currency leads to high input costs and hardships for Mongolian based industries.

INS commentary

Recently Mongolia’s government has spent significantly more to stimulate the economy, as the non-mining private sector has struggled, but this is not sustainable and cannot continue.

The author has highlighted macro-economic issues that are a cause for serious concern and immediate action by the parliament. Ensuring Mongolia’s citizens and business organizations understand the need for government to address these issues urgently is critical.

Article 4 will continue this analysis and look at what can be done to rectify the situation.

Khashchuluun Ch., Executive director of NCPSS and Board member of INS

Cameron McRae, President of INS

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