Ulaanbaatar/MONTSAME/ ‘Navigating Uncertainty’, the October 2018 edition of the World Bank East Asia and Pacific Economic Update was presented today in Ulaanbaatar, Mongolia. The economic update underscores, however that in recent months a combination of trade tensions, higher US interest rates, a stronger US dollar, and financial market volatility in many emerging economies has increased the uncertainty around the region’s growth outlook. Despite a less favorable external environment, the growth outlook for developing East Asia and Pacific (EAP) remains positive. Growth in developing EAP is expected to be 6.3 percent in 2018, lower than in 2017 due to the continued moderation in China’s growth as its economy continues to rebalance. In EAP’s smaller economies, growth prospects remain robust, averaging over 6 percent annually in Cambodia, Lao PDR, Mongolia, and Myanmar between 2018 and 2020.

“Robust growth has been and will continue to be the key to reducing poverty and vulnerability in the region,” said Victoria Kwakwa, World Bank Vice President for East Asia and the Pacific. “Protectionism and turbulence in financial markets can hurt the prospects for medium-term growth, with the most adverse consequences for the poorest and most vulnerable. This is a time for policy makers across the region to remain vigilant and proactively enhance their countries’ preparedness and resilience.”

On Mongolia’s recent developments, the Navigating Uncertainty states that the growth momentum has continued in 2018 H1 as real GDP expanded by 6.3 percent from 5.2 percent in 2017 and 1.4 percent in 2016. Despite cross-border bottlenecks with China and weather-related shocks (including heavy flooding during the summer), growth exceeded expectations in 2018 H1, largely supported by a revived coal sector, and strong private investment mainly in mineral and trade sectors. Improved market sentiments following successful implementation of government’s economic recovery plan also contributed to this positive performance. Positive developments in the labor market resulted in a strong recovery of private consumption in 2018 H1, which grew by 5.7 percent (y/y) from 0.5 percent in 2017. Although inflation remained below the central bank rate of 8 percent, it accelerated to 7.7 percent in July 2018 with rising prices of meat, vegetables (both affected by a harsh winter and heavy flooding during summer), fuel, and the effects of excise tax levied on vehicles. Real average household income, which contracted in 2016, increased by 6 percent in 2018 H1. As a result, the poverty rate is expected to fall in 2018. The fiscal stance has continued to improve significantly, with a surplus of 2.8 percent of GDP in 2018 H1 from a deficit 0.8 percent of GDP in 2017 H1. This is explained by a better than expected revenue performance from coal and copper exports, and a commitment to spending control (e.g., reduction in interest payments, streamlining wage bill through hiring freeze, and rationalization of underperforming capital spending). Substantial improvement in fiscal balance ultimately led to a reduction in government debt in 2018 H1. In addition, government successfully repaid the first payment of USD500 million for the USD1.5 billion Chinggis Bond in January and USD160 million Dim Sum Bond in June. Despite positive terms of trade, current account balance slightly deteriorated in 2018 H1 following a surge in the service account deficit. This was mainly explained by the rise in transportation activities following a robust trade performance. Total imports increased by 40 percent in July 2018, with a surge in capital goods imports. The slight deterioration in the current account was compensated by a rise in official sector support and strong FDI inflows. With the bond repayments, gross international reserves slightly fell to USD2.9 billion in June 2018 (4.9 months of imports) from USD3.2 billion reached in May, its highest level since May 2013. Bank of Mongolia (BoM) has emphasized reserves accumulation rather than nominal exchange rate appreciation. However, due to rising inflation, the real effective exchange rate appreciated modestly by about 3 percent (y/y) in June 2018.

Outlook

Supported by strong domestic demand, FDI and relatively robust commodity exports, economic growth is projected to further improve to 5.9 percent in 2018 from 5.4 percent in 2017, and to accelerate to around 6.6 percent in 2019. Private investment supported by FDI and private sector credit will remain a key driver for growth in the medium term, especially in mining, manufacturing, and transport services. Despite reduced depreciation pressure on exchange rate, inflation will likely rise although modestly putting at risk the BOM medium term target of 8 percent amid strong domestic demand and rising food and petrol prices. Private consumption is also projected to further improve over the medium term following improvement in labor market despite efforts by the central bank to cool off strong credit growth. Accordingly, BOM is likely to gradually tighten monetary policy to contain inflation and continue to build up reserves amid fast growing imports and bank credit. Agriculture is projected to grow by nearly 4 percent over the medium term, but below its 2014–16 performance, due to the adverse effects of a harsh winter and flooding of last summer. Industry is projected to grow by about 8 percent in 2018–20, as substantial developments are expected in mining. Services sector growth would continue to be supported by strong linkages between mining and transport. The unexpected revenue overperformance of 2017 supported by mineral receipts will continue in 2018, resulting in a decline in the fiscal deficit to 1.4 percent of GDP from 1.9 percent in 2017. However, although the deficit for 2019–20 will be lower than planned in the original government fiscal adjustment program, it is projected to average 4 percent in 2019–20 as the revenue performance will be slightly offset by a moderate increase in expenditures (wage increase for civil servants and a rise in donor financed investment). Declining path of deficit will likely result in continued reduction on debt over the medium term. Accordingly, the country’s declining debt will gradually help addressing underlying vulnerabilities of the balance of payments. However, despite robust export growth, investment related imports in 2019–20 would rise and put additional pressure on the current account balance. Relatively stabilized exchange rate will continue as the disbursement of donors’ support and further FDI inflows materialize. Gross international reserves are expected to continue to improve. Given the positive economic outlook, poverty rates are expected to decline starting from 2018.

Risks and Challenges

There are substantial domestic and external exogenous risks to the outlook. These risks include political uncertainty exacerbated by the 2020 election which could trigger a delay in the implementation of mega projects in the mining sector; commodity market volatility and weakening global demand; climate shocks; revived bottlenecks at the China border; and effects of poor handling of the deficiencies of the anti-money laundering regime. Growing political uncertainty could induce a sudden relaxation of the government’s commitment to structural reforms. Mongolia’s growth prospects could be adversely affected by the consequences of an escalating trade war and a potential reduction in global demand—mainly from China—for coal, copper and other commodities and the resultant decline in global commodity prices. Weather related shocks, resumption of non-trade barriers at the border with China, could also significantly affect Mongolia’s coal exports. Limited progress on addressing anti-money laundering deficiencies could potentially affect FDI inflows and the financial sector.
source: World Bank Group

Published Date:2018-10-06