SIT Lecture Mongolia

“Mongolia’s economic transition and its

lessons”Ch.Khashchuluun, NUM, 2015

1

How Mongolia economy changedCurrent state and prospects

Challenges and projections for future

Mongolia lies in heart of Asia, between Central Asia and Eastern Asia on east and west, Russia and China on north and south

2

3

Territory18th largest in world

1,565,000 km²

Population3 million citizen Population density 1.8 per km² 180 persons/km² in Ulaanbaatar

Political system A parliamentary democracy since 1992 2 largest parties DP and MPP other parties, also members of coalition governments

which rule the country for last 10 years

Prime Minister Ch. Saikhanbileg, (DP, won most of seats in 2012). Next elections are in 2016

Government DP-led coalition (2nd in 2012-2016 period)President Ts. Elbegdorj (DP, won in 2009 and 2013 presidential

elections. Next presidential elections in 2017)Main Religions Buddhists (90%), muslims (5%),

shamanists, catholics, protestants (5%)Average life

expentancy70 years

Literacy rate 96%

93% of population are

mongols, kazakhs 6%, other ethnic

groups. 4 million mongols live in other countries

Society:

Mongolia:• Traditionally a three sector economy:

•Agriculture (livestock, crops) overall 40 mln of livestock (NZ: 30 mln of sheep, 3.6 million of cattle)

•Mining (gold, copper)

•Light industry (textiles), food, leather

5

Transition hardships• Mongolia’s economy before the transition

• Transition: main stages the initial steps culminating in WTO accession

• Hardships of transition period: industrial collapse, poverty, public infrastructure problems

• International assistance for Mongolia: UN, IMF (structural adjustment programs), World Bank, Japan (largest donor country), US (USAID, Millenium Challenge Fund), trade agreements with EU and Japan

• Revival of economy by beginning of 2000

Just in 2003• Total GDP 0.9 billion dollars, GDP growth rate 5.5% • Annual GDP per capita 385 US dollars • Largest sectors of economy

• Trade 28.8% of GDP • Agriculture 20% of GDP • Hotels and restaurants 15.1% of GDP

• Total export 615 million dollars • Total import 800 million dollars • Total investment: 244 million dollars, total public

investment 30 million dollars • poverty rate 35%

7

Constitution 1992

1993 1996 1997 1998 2000 2001 2002 2004 2005 2006 2008 2009 2010 2012

President P.Ochirbat

N.Bagabandi N.Bagabandi N.Enkhbayar Ts.Elbegdorj

Government MPP DP MPP Coalitions

Parliament MPP 71/76 DP 50/76 MPP 72/76 no majority 37/76 MPP 45/76 DP

8

• Stable yet dynamic political system • Parliamentary republic since 1992, first in Central Asia • Consensus based decision making • Coalitions

Key factors for growth: dynamic stability of democracy

Revival and growth• Asian crisis of 1998 and weather catastrophes (zud)

• Economic growth revived since 2001

• Increasing FDI

• Opening of mining industry

• 2003 Economic growth and poverty alleviation strategy

• 2005 Millenium Development Goals

• 2008 National Development Strategy

• 2011 One of highest growing economies in the world

10

-4.5

0

4.5

9

13.5

18

2008 2009 2010 2011* 2012 2013 2014

7.8

11.512.3

17.5

6.4

-1.3

8.9

GDP growth

GDP growth ratesMongolia’s GDP is about 12 billion US dollars (in comparison Armenia 9 billion, Moldova 7 billion, Kyrgyzstan 6.5 billion dollars).

GDP per capita is 4000 dollars, higher than in Uzbekistan, Georgia, Armenia

GDP 11 billion dollars, with one of highest growth rate 17.5% (2011) GDP per capita 4000 US dollars Investment/GDP ratio in 2012, is 60.6%, one of top 5 in the world Export 4.3 billion dollars

Growth factors: openness to FDI•Mining as a primary pillar of economic growth

•30% of GDP, 80% of exports

•Multi-billion projects starting in 2009

•Just 2 projects (OT, TT) include investment large than size of country’s GDP

•Many more private investment projects

•Largest world companies coming to cooperate: Rio Tinto, Goldman Sachs, Deutsche Bank, Peabody, Xstrata, Vale, Temasek, CIC, etc

11

Mongolia’s mining potentialMongolia’s resources are large and vital to its economic growth

▪ One of the most prospective geologic regions on the planet

▪ 1,000 identified mineral deposits and 8,000 occurrences that include copper, gold, iron, coal, molybdenum, silver, zinc, lead, asbestos, flourspar, nickel, uranium and more

▪ The government has designated 15 deposits as strategically important – Minerals: Au, Fe, Cu, Mo, coal, Pb, P, U, Zn, coal and REE

– Examples: Oyu Tolgoi (Cu, Au), Tavan Tolgoi (coal), Nariin Sukhait

▪ Half are being mined, often by foreign-owned firms

▪At least $1.3 trillion in potential future revenue 12

WWW.MMRE.GOV.MN 5

Bigger deposits: Erdenet, Oyu tolgoi, Tsagaan suvarga, Boroo, Tavt, Tsagaanchuluut, Asgat, Mungun Undur, Tumur tolgoi, Tumurtei, Tumurtei Ovoo andUlaan etc. of copper-gold, copper-molybdenum, gold, silver, iron, zinc, lead, uranium deposits have beendiscovered.

METAL RESOURCES DEPOSITS AND OCCURRENCES OF MONGOLIA

Source: MRAM

WWW.MMRE.GOV.MN 23

•Resource: 5,9 mln.t•Probable resource: 14 mln.tZinc

•Resource: 324,8 thous.t•Probable resource: 620 thous.tMolybdenum

•Resource: 61,3 mln.t•Probable resource: 1,8 bln.tLead

•Probable resource: 2.3 bln.t /Al2O3/Aluminum

•Resource: 1619.9 t•Probable resource: 5125.0 tGold

•Resource: 227.4 thous.t•Probable resource: 980.3 thous.tSilver

RESOURCES OF SOME NON FERROUS METALS AND PRECIOUS METALS

Source: MRAM

ULAANBAATARErdenet Tumurtoi

Shivee Ovoo

Tavan TolgoiOyu TolgoiNariin Sukhait

Baganuur

Gurvanbulag

Tsagaan Suvarga

DornotMardai

Asgat

TumurteinOvoo

BorooBurenkhaan

Silver 6.4 mm tons

Uranium0.016 mm tons

Copper / molybdenum ore –

1.2 bn tons(1)

Iron ore 229.3 mm tons

Metallurgical coal125.5 mm tons

Coal 7.4 bn tons

Lignite coal646.2 mm tons

Lignite coal600.0 mm tons

Phosphorite 300 mm tons

Copper – 37mm tons

Gold – 1,431 tons

Copper / molybdenum ore 10.6 mm tons of

oxides; 240.1 mm tons

sulphides

Zinc 7.7 mm tons



Mongolia has vast and diverse under developed mineral deposits, providing the economy with significant long-term upside potential

This slide outlines the 15 strategic deposits that have been identified by the Mongolian government. The deposits cover a broad basket of minerals, ranging from coal, copper, gold,

iron ore, molybdenum, phosphorite, rare earth oxides, silver, uranium, and zinc (1) Figure represents total ore deposits at 0.51% Copper/0.012% Molybdenum content

Gold ore 0.025 mm tons

Strategic Deposits: coal, copper, uranium, iron and gold ore, silver

15

16WWW.MMRE.GOV.MN 4

ROLE OF MINING SECTOR IN THE NATIONAL ECONOMY

2002 2003 2004 2005 2006 2007 2008 2009 2010

GDP 12.6 12.6 18.8 24.4 30 29.5 22 22.1 21.8Industrial product 47.3 54.9 64.7 66.8 71.9 67.8 64.5 65.4 70.6Export 56 57.5 70.8 75.8 75.7 78.4 80.7 84.6 87.7

12.6

12.6 18

.8 24.4 30

.0

29.5

22.0

22.1

21.8

47.3 54

.9 64.7

66.8 71

.9

67.8

64.5

65.4 70

.6

56.0

57.5

70.8 75

.8

75.7

78.4

80.7 84

.6 87.7

0

10

20

30

40

50

60

70

80

90

100

Source: MRAM

Summary of trends• Economic growth in 2010: 6.4%

• Economic growth in 2011: 17.5%, one of highest in world

• Economic growth in 2012: 12.3 %, one of highest in the region

• Economic growth in 2013: 11.5%

• Economic growth in 2014: 7.8%

• Forecast: average growth rate of 12-14% for next decade

• GDP per capita reached 3500 USD from up from 1700 in less than 3 years, increased 10 times in 10 years

• Poverty rate is down from 39% to 27% in 3 years

• Unemployment is down to 8% from 11% in 2 years

• Doubling of exports in 2 years

• Growth aiming to reach approximately 6000US$ per capita by 2016

18

From agricultural economy

Economic structure

Agriculture

Mining

Industry

Trade

Transport

Real estate

Communications

Education

Finances

0 7.5 15 22.5 30

Share in GDP (%)

Agriculture50 million of livestock, including 3 million horses, 3.4 million cattle, 23 million sheep, 22 million goats

140 thousand private livestock farmer households

Mongolian nomads

• Mongolian nomads are one of main nomad civilizations in the world

Private farms• Using modern technology as

John Deere Mongolian private farms

• use about 380 thousands of hectares producing 470 thousands tons of grain, 250 thousand tons of potato, 100 thousand tons of vegetables and fully supply domestic market

• new tecnologies, 80% of tractors are modern

• Fruits, berries increasingly exported

A leading world cashmere producer

• More than 30 companies

• Exports to many world destinations

• Italian design, Japanese technology, Mongolia products

To increasingly urbanized economy (more than 60% of population lives in urban

areas)

Increasingly open to global trade and

investment

Foreign trade

2000.0

4750.0

7500.0

10250.0

13000.0

-1800.0

325.0

2450.0

4575.0

6700.0

2005 2006 2007 2008 2009 2010 2011

Exports Imports Trade turnover Foreign trade balance

11307.233

6108.555

4023.059

5779.000

4009.300

2977.0002241.2002241.200

2977.000

4009.300

5779.000

4023.059

6108.555

11307.233

Oyutolgoi, one of leading copper projects in the world

Source: UNCTAD FDI/TNC Database and UNCTAD report of Investment Policy Review

2001: Oyu Tolgoi discovers mineral deposit

2005: Oyu Tolgoi project receives approval

2008: Oyu Tolgoi completion of first construction phase

2010: Oyu Tolgoi construction budget of $758 million

2011: Oyu Tolgoi progression

Total FDI Non-mining FDI

0

1000

2000

3000

4000

5000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$ million

30

FDI and global market• Rio Tinto as a main development and economic growth partner

• Largest packages of financing through OT project

• One of most promising areas for mining in future (oil shale, rare metals, coal, copper, gold etc)

• Trying to reach not only Chinese but also other global markets

• Various vulnerabilities some typical for developing countries such as excessive dependance on resource exports, large income disparities and shocks of world market

• Landlocknedness as one of barriers for development yet being close to huge markets

• Some are more Mongolia-specific with giant neighbors and need for third neighbor

• Learning rules of the game

Mongolia’s growth drivers

• Copper

• Coal

• Oil shale, rare earth, CBM

Long-term copper fundamentals remain strong

Electrification of large emerging markets will further support demand

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

0 10,000 20,000 30,000 40,000 50,000

UK USA ChinaJapan South Korea GermanyRussia Brazil India

GDP/Capita US$

Per capita electricity consumption (GWh/capita) 1970-2010

Source: Enerdata, Global Insight, World Bank, Wood MacKenzie

142

319

473

506

2013

2014

2015

2016

1.4Mt production loss between 2013 – 2016 due to closures

Production loss due to closures kt Cu

1.8Mt annual production will be lost due to grade declines between 2013 – 2016*

-2.6 Mt

-0.10%

-0.1 Mt-0.03%

-0.09%

-1.8 Mt

-0.05%

-1.1 Mt

2001-2004 2005-2008 2009-2012 2013-2016

While supply side faces increasing constraints

* Estimate of potential production loss from concentrate supply only

3

Дэлхийн хөгжил зэсийн эрэлтийг нэмэгдүүлдэг

One of top 10 world copper enrichment plants OT

Source: Brook Hunt.(1) Top 15 producing copper mines in 2020 include: Andina, Antamina, KGHM, Cananea, Cerro Verde, Chuquicamata, Collahuasi, El Teniente, Escondida, Grasberg, Norilsk, Los

Pelambres, Kansanshi, Morenci, Oyu Tolgoi, Radomiro Tomic.(2) Production and 10 years average cash cost from 2013 Oyu Tolgoi technical report.

2020E Copper Production (kt)

2020

E C

1 C

ash

Cos

t ($/

lb)

Top 15 producing copper mines (2020)(1)

Bubble size reflects contained copper resources (kt)

Turquoise Hill Resources/ Oyu Tolgoi(2)

Independent copper producer and publicly tradedOwned by diversified miner or private

4

Unique North America-listed pure copper and gold exposure

Oyu Tolgoi long section

10

Source: 2013 Oyu Tolgoi technical report.

Significant expansion potential and execution flexibility

9

Phase 1 Phase 2 Future phases

• Southern Oyu Deposit:9 1.0bt reserve

9 1.3bt M&I resource9 0.5bt Inferred resource

• Hugo North Deposit :9 0.5bt reserve

9 0.9bt M&I resource9 1.2bt Inferred resource

• Hugo North (Lift 2)• Hugo South Deposit:9 0.8bt Inferred resource

• Heruga Deposit:9 2.0bt Inferred resource

• Conventional open pit truck and shovel operation

• Secondary source of ore feedstock once underground operations have ramped up

• Cash flow generation from 2013

100ktpd concentrator

Potential concentrator expansions to accelerate productionSource: 2013 Oyu Tolgoi technical report.Note: Reserves and resources stated on 100% ownership basis. The mineral reserves reported above are not additive to the mineral resources.

• Underground block cave mine• Ore grade 4x higher compared to

open pit• Ramp up from 2016 to 95ktpd• FS to be completed in H1 2014

• Ongoing optimization of production schedule and expansions sequencing

• Analysis of drill data to generate exploration targets

World largest 15 deposits of copper

ОТ

Multiple development options are available

11

� All options to be evaluated to ensure optimum development pathway� Actual operating performance to be evaluated prior to committing to expansions� A decision to expand the concentrator not required before 2015

OYU TOLGOI DEVELOPMENT OPTIONS

Plant Expansion Decision Point

Mine Decision Point

Plant Expansion at Capacity

2013 2015 2020 2024 2032 2037 2040 2050 2060 2070 2090Project Year

100 ktpd / 36.5 Mtpa Capacity

~300 ktpd / 109.5 Mtpa Capacity

Hugo North Lift 2

Hugo North Lift 2 Hugo South Heruga

Hugo South Heruga

HerugaHugo South


Hugo North Lift 2

160 ktpd / 58.4 Mtpa Capacity


Heruga

Hugo South Heruga

Hugo North Lift 2

Hugo North Lift 1

SW Pit

Source: 2013 Oyu Tolgoi technical report.

NOW

Projections of copper output, thousands tonn, (2005-2020)

Зэс,

мян

.тн

0

250

500

750

1000

2005 2007 2009 2011 2013 2015 2020

775

205

111 7050135141122117126130126

Erdenet (existing)

Tsagaan suvarga (new) OT, from 2013

Projections: Ernst and Young, 2013

Mongolia is a top 10 world countries in coal reserves,

No 10

Mongolia, coal projections

39

About the Tavan Tolgoi mining

• Tavan Tolgoi mining is located in South Gobi aimag, 540 km south of UB and 270 km from the Chinese border

• The reserve of TT mining is 6.4 billion tons of coal of which 1.8 billion tons of coking coal and 4.6 billion tons of thermal coal

• TT deposit consists of Tsankhi, Ukhaa khudag, Bor tolgoi, Borteeg, Southwest and Eastern coalfields. Tsankhi is the main coalfield and contains most of its coking coal resources.

Source: Report on Tavan Tolgoi, NDIC, 2011

• in Tsanhi, Tavan Tolgoi Co. (local) has been operating for years and its production is about 3 million tons of coking coal and 1 million ton of thermal coal a year

• In Ukhaa hudag, Energy Resource LLC, a Mongolian mining company have been operating since 2009 and production is about 10 million tons of coking coal and 3 millions of thermal coal a year

40

41

Findings: The impact on export

Indirect impact

Direct impact

• With TT project, export will increase by ~20% mostly due to coking coal and thermal coal production of TT.

With TT

0

5

10

15

20

25

30

35

2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Without TT

0

7.5

15

22.5

30

2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Thermal coalMet coalCOPPER_OREGOLDOilOther miningOther export

| 42

Bulgan

Zamiin Uud

Ereen Tsav

Oyut Ovoo (2.5 Mtpa)

Ulaanbaatar

Bargilt (1.1 Mtpa)

Tayannuur (9 Mtpa)

Ereeny (1.1 Mtpa)

Beren Mining (0.1 Mtpa)

Border crossingRailway

Iron ore mine

Export destinationDomestic destinationBeneficiation plantMetallurgical plant

Iron concentrate mine

Darkhan Metallurgical Plant (Operating)

Darkhan Beneficiation (0.04 Mtpa)

8 Mtpa

9 Mtpa Burgastai

Altanbulag

ShiveekhurenGashuun Sukhait

Eruu gol (8 Mtpa)

Tumurtei (1 Mtpa)

Tolgoi (1.1 Mtpa)

Ervei Khushuu (0.5 Mtpa)

*Sainshand Industrial Park (SIP) – Iron Pelletizing Plant

Selenge (5 Mtpa)

Sainshand Iron Plant* (Planned)

Sainshand Beneficiation (4 Mtpa)

13.7Mtpa

Mongolian Iron ore industry in 2020 (Mtpa)

| 43

Rest 0.560

Iron 0.03

TT 0.1

EMC 0.05

OT 0.26

Iron ore 5% of GDP

CONTRIBUTION* TO THE MONGOLIAN ECONOMY (GDP)

DIRECT TAX PAYMENT TO GoM^ (2012 MNT

trillion)

2010 2020

Rest 89%

Iron Ore 1%

EMC 10%

*Direct and indirect impact ^Indirect impact on tax revenue is not considered

Impact on the economy and state budget revenue (2012 MNT trillion)

Rest 0.715

Iron 0.005

TT 0.08

EMC 0.03

OT 0.17

2030

MNT 11 trillion

MNT 42 trillion

MNT 68 trillion

0

150

300

450

600

EMC Iron Ore Industry

99

535

0

250

500

750

1,000

EMC Iron Ore Industry OT TT

565

998

280340

0

200

400

600

800

EMC Iron Ore Industry OT TT

415

767

86

252

www.eri.mn

http://www.eri.mn

3!

Oyu Tolgoi: Copper & Gold •  Oyu Tolgoi alone will bring in

$5 bln in investments by 2013

•  Over the next 27 years the mine will generate $51 bln

Tavan Tolgoi: Coking Coal •  Estimated to operate for

200+ years •  Over the next 29 years the

mine will generate $87 bln

Other mineral resources: •  15 Strategic Deposits with

estimated resources valued at over $1.2 trn

•  Yet to be tapped resources include Silver, Uranium Gold, Phosphates, Iron ore and Zinc

•  Only 30% of the country is prospected

Infrastructure: •  Infrastructure investments to

further boost GDP •  Pipeline investments needed

to build/update infrastructure through 2015: $8.4 bln

0"

5"

10"

15"

20"

25"

1989"1990"1991"1992"1993"1994"1995"1996"1997"1998"1999"2000"2001"2002"2003"2004"2005"2006"2007"2008"2009"

2010F"

2011F"

2012F"

2013F"

2014F"

2015F"

!2.3!!!3.2!!!3.9!!!5.1!!!4.2!! !5.8!!

!7.2!! !7.7!!!9.5!!

!11.0!!!12.4!!!5.3!!!7.4!! !6.9!! !7.6!! !7.2!! !7.4!! !8.1!! !9.1!!

!11.3!!!10.3!!

!12.4!!

!2.9!!!5.2!!

!11.6!!

!16.6!!

!20.9!!!22.1!! !21.6!!

!17.0!!!18.3!!

!22.1!!!24.6!!

Mongolia!2005!4!2015! Qatar!1989!41999! Kazakhstan!1992!4!2002!

GDP!in!USD!Billions!

2010 Qatar GDP = $110 bln

2010 Kazakhstan GDP = $126 bln

2025 Mongolia

GDP = $100 bln

Source: IMF

Mongolia’s GDP Growth Parallel with Qatar & Kazakhstan

Essential steps: building policy infrastructure

•

• Signing mega investment contracts: copper in 2009 with Rio Tinto

• Preparation for next mega projects in coal (Tavantolgoi) and other investment projects (copper, coal, oil shale, etc)

• Creating development financing: Development Bank of Mongolia (2010): Law, agency (bank), training, management team, raising finances (2012, allocated 2.1 billion US dollars)

• Amending fiscal system for better managing fiscal resources (Integrated Budget Law, 2011)

• Using fiscal resources for social development (Human Development Fund 2010) and poverty alleviation

• Creation of Fiscal stability legal framework (2011)

• Creation of Stability Fund (2011) and preparation for Sovereign Wealth Fund

• Creating PPP or Concessions Framework (2009) for infrastructure projects: law, agency, training

• Support for higher value in agro-industry: cashmere bonds, SME funding (direct financing, guarantee system) 2010-2013, new industrial policy (2015)

• Continuing partnership with Rio Tinto on OT Phase 2: 6 billions dollars, a largest single project investment financing packet

45

62

Total Public investment (million US dollars)

budget MDF DBM Chingis bonds

INFRASTRUCTURE

Public road network

Supply routes: railways

25

Railway project, Samsung, MCS, GOM

Transit: Eurasia East-West Corridor, North-South corridors

AH4 AH32

AH3

TT

T

T

T

T

T

T

T

T T

T

T

Terminal

Power Station No 5 0.8 GWT of energy

TT, OT power station 1 GTW of energy

Эрчим хүч, цахилгаанPower stations, total investment of 3 billion dollars

International airport of UB

2016-2017 completion time1.5-2 million passenger capacityCurrently on construction stage

Simultaneous expansion of urban infrastructure is to support the affordable housing program.

HOUSING PROJECT

5,000 household housing in the Western region

10,000 household housing in the Central region

5,000 household housing in the Eastern region

75,000 household housing in Ulaanbaatar city

5,000 household housing in the Khangai region

Project Sponsor Ministry of Construction and Urban Development of Mongolia (MCUD)

Project Description

Construction • 75,000 households in Ulaanbaatar • 25,000 households in regional centers

Project Amount $6.2 bln - Engineering/Social

Infrastructure Work $2.5 bln

- Construction $3.7 bln Technology Concrete, high-rise buildings

• In June 2010, Cabinet Resolution #36 approved The New Development Mid Term Program for 2010-2016 aimed at addressing the socio-economic and environmental concerns

• 100,000 Housing Project was approved under the Mongolian Cabinet Resolution #341, in November 2011.

• Government of Mongolia considers housing and urban infrastructure to be a high priority area.

Source: Former Ministry of Road, Transportation, Construction and Urban Development, 2010

13

• The 100,000 Housing Project aims to provide 75,000 affordable housing units for citizens living in ger areas. It is estimated that successful implementation of the project will bring down percentage of residents living in ger are from 60% to 36%, improving living conditions and reducing air pollution of Ulaanbaatar.

• In addition a mortgage program with 8% fixed rate with duration of 20 years has been approved by the Government of Mongolia in 2013, cutting interest rates almost in half.

Government of Mongolia

And entering population bonus era: highest share of young people in population

Male population Female population2020 population projection (grey zone) and 2000 population

Total population

55

High literacy rate

Real gender equality

100 universities and colleges

60 technical vocational training colleges

Hundred thousands educated overseas

Europe: Germany and UK North America: US Asia: Japan Eastern Europe: Russia, Czech Republic Australia

Cambridge education standards◆ Pilot for 30 schools and continuing ◆ If successful, all high school education will move to Cambridge standards (same as Singapore)

56

Essential government steps: building software infrastructure

• Building a network of skilled labor - vocational professional training colleges (70) – partially through cooperation with investors (2010)

• Setting up a modern labor market

• Set up a specialized Labor Ministry and affiliated research institutes (2012)

• Building better foundations for higher education in mining and engineering

• Mongolia-Germany Technology institute

• Mongolia-US Mining engineering private college project

• Mongolia-Japan technology college

• Regional and urban development: public-private cooperation, regional development index, better redistribution of tax revenue

• Using mining revenue for social development (extensive investment in education and health)

57

58

GE, Newcom project, 110 million dollars

Softbank, Newcom two additional plants in

Gobi

Policy issues

4

Figure 2. Mongolia: Overview of Macroeconomic Developments

Expansionary fiscal policy in 2012 supported growth but also put pressure on inflation and the current account. The successful international bond issuance boosted reserves.

Strong demand growth in recent years may have outstripped the growth of Mongolia’s production capacity….

…contributing to double-digit inflation in 2012. Inflation in Ulaanbaatar was 9.5 percent in October (y/y).

Expansionary fiscal policy was the main driver of the acceleration of inflation in 2012.

It also kept the current account significantly in deficit even as imports for the FDI-financed OT mine wound down.

The real effective exchange rate appreciated through June. In recent months there has been a correction.

Chinggis bond proceeds raised reserves in late-2012. Gross reserves amounted to US$2.4bn in October.

-18-16-14-12-10-8-6-4-2024681012141618

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Mineral Output Gap (in percent of mineral GDP, RHS)Non-mineral Output Gap (in percent of Non-mineral GDP, RHS)GDP (in bil Tog, LHS)Potential GDP (in bil Tog, LHS)Output gap (in percent of GDP, RHS)

Sources: Mongolian authorities; and IMF staff estimates.

Output Gap Estimates(based on HP filter)

-10

0

10

20

30

40

-10

0

10

20

30

40

Dec

-07

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Non-food items (contribution to headline CPI)Food items (contribution to headline CPI)Headline CPI (y/y)Non-food CPI (y/y)Food CPI (y/y)


Consumer Price Inflation (in percent, December 2007-October 2013)

-25

-20

-15

-10

-5

0

-25

-20

-15

-10

-5

0

2005 2006 2007 2008 2009 2010 2011 2012

Non-mineral (NM) on-budget balanceLarger NM deficit due to DBM spending


Non-mineral fiscal balance(in percent of non-mineral GDP)

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

-4,000

-3,500

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Transfers, netIncome, netGoods and services, netCurrent accountCurrent account (RHS, in percent of GDP)

Current Account (2003-2012)


60

70

80

90

100

110

120

130

140

150

60

70

80

90

100

110

120

130

140

150

Jan-

05

Jul-

05

Jan-

06

Jul-

06

Jan-

07

Jul-

07

Jan-

08

Jul-

08

Jan-

09

Jul-

09

Jan-

10

Jul-

10

Jan-

11

Jul-

11

Jan-

12

Jul-

12

Jan-

13

Jul-

13

REER NEER


Exchange rates of the togrog(Index, 2005=100, Jan. 2005-Oct. 2013; an increase is an appreciation)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Jan-

09Ap

r-09

Jul-

09O

ct-0

9Ja

n-10

Apr-

10Ju

l-10

Oct

-10

Jan-

11Ap

r-11

Jul-

11O

ct-1

1Ja

n-12

Apr-

12Ju

l-12

Oct

-12

Jan-

13Ap

r-13

Jul-

13O

ct-1

3

Source: Mongolian authorities.

Gross international reserves(In millions of U.S. dollars, January 2009-October 2013)

Budget deficit

FDI was a main driver of growth and financed the CA deficit for the last three years but continues to drop in 2013 and 2014.

FDI dropped to an half in 2013…

Annual FDI inflow (in percent to GDP, %)

… and continues to decline in 2014.

Monthly FDI trend (in millions of US$, 3 month moving average)

-5%

0%

5%

10%

15%

20%

0%

10%

20%

30%

40%

50%

60%

2008 2009 2010 2011 2012 2013

Net FDI Inflow inpercent to GDP (%):Left Axis

GDP Growth (%):Right Axis

5

Figure 3. Mongolia: Fiscal Developments

Expansionary fiscal policy pushed the deficit (including operations of the Development Bank of Mongolia (DBM)) to 10.9 percent of GDP in 2012.

Including DBM spending, the deficit reached 10.9 percent of GDP in 2012.

The 2012 non-mining deficit topped the 2008 record.

Spending now exceeds 57 percent of non-mineral GDP. Fiscal policy has been pro-cyclical.

The Chinggis bond and DBM bond raised public debt by US$2.1bn.

During the first 10 months of 2013, the budget has run a small deficit (MNT 144bn or 0.9 percent of GDP). But this excludes DBM spending.

-15

-10

-5

0

5

10

-15

-10

-5

0

5

10

2005 2006 2007 2008 2009 2010 2011 2012

On-budget overall balanceIncrease in deficit owing to DBM spending


Fiscal balance(in percent of GDP)

-25

-20

-15

-10

-5

0

-25

-20

-15

-10

-5

0

2005 2006 2007 2008 2009 2010 2011 2012

Non-mineral (NM) on-budget balance

Larger NM deficit due to DBM spending


Non-mineral fiscal balance(in percent of non-mineral GDP)

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

2005 2006 2007 2008 2009 2010 2011 2012

Non-mineral revenue

On-budget expenditure

DBM spending 1/

Sources: Mongolian authorities; and IMF staff estimates.1/ The Development Bank of Mongolia provided loans of US$ 190 million for non-revenue generating public investment projects such as roads ("social benefit projects") in 2012. The budget will need to repay these loans.

Non-Mineral Revenue and Expenditure(in percent of non-mineral GDP)

-10-8-6-4-202468101214

-10-8-6-4-202468

101214

2005 2006 2007 2008 2009 2010 2011 2012

Annual change of non-min. GDP gapAnnual change of CAB (inverse)

Sources: Mongolian authorities; and IMF staff estimates.2/ The cyclically adjusted fiscal balance is the overall balance net of cyclical effects. Cyclical effects are computed using country specific elasticities of aggregage revenue and expenditure series. In this case, the elasticity assumptions are 1 for revenue and 0 for spending.

Cyclically-adjusted fiscal balance (CAB) vs. Output gap(in percent of potential non-mineral GDP)

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

2005 2006 2007 2008 2009 2010 2011 2012

Nominal public debt NPV of public debt

Public debt(in percent of GDP)

Sources: Mongolian authorities; and IMF staff esimates.

-40

-20

0

20

40

60

80

100

-40

-20

0

20

40

60

80

100

Jan-

08A

pr-0

8Ju

l-08

Oct

-08

Jan-

09A

pr-0

9Ju

l-09

Oct

-09

Jan-

10A

pr-1

0Ju

l-10

Oct

-10

Jan-

11A

pr-1

1Ju

l-11

Oct

-11

Jan-

12A

pr-1

2Ju

l-12

Oct

-12

Jan-

13A

pr-1

3Ju

l-13

Oct

-13

Revenue

Expenditure


Revenues and expenditure (excl. DBM, incl. carryover)

(Twelve-month percentage change in 3mma, Jan. 2008-Oct. 2013)

Large balance of payments imbalance put pressure on currency value and international reserve.

External financing gap became significant due to large CA deficit and dropping foreign capital inflow.

As a result, currency value weakened and international reserves dropped.

Annual Balance of Payments (in millions of US$)

USA• Visits by President Bush and vice-president Biden (2005, 2011)

• Mongolia is a member of Asia-Pacific democracy Partnership

• Chaired the Commonwealth of Democracies in 2012-2014

• Joint military exercises Khaan Quest are expanding

• 1300 Mongolian students are studying in USA; 700 alumnies of US universities are working actively; including President Ts. Elbegdorj

• Mongolian military base is granted a status of NATO facility in 2014

• Transparency agreement with USA is signed at the end of 2013; expected to accelerate talks on free trade agreement; USA has such agreements only with 9 countries

• 450 million dollars of assistance from Millenium Challenge Foundation and USAID, second phase of MC is under consideration

• US companies are investing in oil shale in Mongolia, approximately 700 billion tonnes of reserves; the Oil Law is changed to accomodate investments in oil shale and coal bed methane.

• Need to join TPP, free trade agreement with USA

To bring investors back• Japan: free trade agreement (Economic Partnership

Agreement) is slated for 2014

• 2000 students are studying in Japan; in current cabinet 2 ministers have background of Japanese education

• Japan approved low cost funding for 1000 more Mongolian students in engineering to study in Japan; in addition Mongolia-Japan joint technology university is opened in Ulaanbaatar in 2014

• Japanese investment in coal-to-liquid, powerplants is sought. Total volume sought is approximately 3.5 billion US dollars. Leading Japanese banks opened their representative offices in Ulaanbaatar in 2012 and 2014

• In addition, Japan is assisting on urban development planning for Mongolia; feasibility studies for railways and Ulaanbaatar metro; currently engaged in building new Ulaanbaatar airport (Mitsubishi Heavy industries)

• Japanese experts are consulting Mongolia on mining and heavy industry, public private partnership, development financing and Samurai bonds

China• Recent visit by President Xi Jinpin

• 30 billion dollars of investment into coal-to-gas plants project is pledged, annual output of 15 billlion cubic meters per annum for export to China. That’s twice of amount of gas Russia exports to France. Working group is preparing a feasibility study for the project which 3 times larger than national GDP

• Increase bilateral trade to 15 billion US dollars from current 6 billion by 2020

• Export credits of 500 million dollars; modernization of 48 hospitals and electronic equipment for schools Electronic education projects; credits for large tractors purchases from China for agriculture; scholarships for 1000 Mongolian university students; swap agreement between central banks for 20 billion RMB or 3 billion US dollars

• 2 power plants will be built with participation of Mongolian and Chinese private companies. Plans for coal-based mega power plant with capacity of 4800 megawatt is revived for export to China (state level)

• Access to 8 Chinese sea ports; Gobi railway is being built together with Mongolian companies on border to facilitate transportation; easier access to sea using Chinese railways is promised;

• China pledges support to Mongolia’s entry into APEC; participation in the East Asia Dialogue (Japan, S. Korea, China)

Russia• Joint work on modernization of the railway to double its capacity,

to finish by 2020 (approximately 1000 km)

• No visa agreement to boost Russian tourists from end of 2014

• Supply of Mongolian agricultural products to Russia is urged. Mostly meat, possibly also vegetables. Mongolia was a leading meat exporter to Russia before 1990

• Free trade zone on Mongolia-Russia border is completed (Altanbulag free trade zone).

• Joint investment into a large silver deposit Asgat in western Mongolia

• Mongolian fuel companies pledge to purchase 1 billon US dollars of oil products from Russian companies (Saint Petersburg summit)

• Russian universities will provide more schorships to Mongolian students

• Mongolia and Russia hosted largest-scale military exercises together this year; Selenga-2014; included for first time aerial strikes, heavy tanks and 1000s of ground troops; further military assistance is promised, in particular supplies of weapons

Challenges• Environmental problems

• Social divide: urge to enrich quickly at any price, very materialistic society in a traditionally buddhist country

• Therefore, populist politics

• Rapid growth - losing the direction, searching for an appropriate social model.

• Society looking for guidance and leadership

• Gradually preparing for 2016 elections

68

Lessons• Doing both economic and political reforms at same time resulted in economic

hardships

• However, the possilibity of actually doing right choice as in 10 years both new economy and governance systems matured and stabilized

• Next 10 years became years of economic growth and political sophistication and collaboration

• In 20 years the country is reborn as a democratic, vibrant, growing and dynamic

• Strong move towards cooperation with democracies (ASEM summit, Chair of Community of Democracies)

• Next 10 years will result in more tuning-up of economy and governance, higher growth, tighter links with multinationals from developed countries (Rio Tinto, 16 international banks) as well as with East Asian giants of Japan (EPA agreement), Korea and China.

• Free trade agreement with USA and TPP are crucial to further the deveopment of Mongolia towards market economy/global market

SIT Lecture Mongolia

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Transcript of SIT Lecture Mongolia