MONGOLIA QAURTERLY ECONOMIC UPDATE ISSUED BY WORLD BANK

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Growth in China, a key driver of Mongolia's exports, has been robust and, although expected to moderate, will remain strong
The strength of construction and industrial production in China is a key determinant of global demand for commodities, including copper and coal, and hence for Mongolia's export products. The downturn and recovery in Mongolia's exports over 2008 to 2010 tracked developments movements in the Chinese economy which has become an even more important export market for Mongolia over the past two years. The share of Mongolia's exports to China rose from around 65 per cent in 2008 to 75 per cent in 2009. In the first five months of 2010 it increased even further to around 86 per cent.

With the strength of the global recovery clouded by concerns over the need for sharp fiscal adjustment in many developed economies, how has the economic outlook for China, and therefore Mongolia's exports, changed in recent months?
First, as discussed in the latest World Bank's China Quarterly Update, June 2010, economic growth in China continues to be robust, with real investment strong, although it is projected to soften slightly. Second, the measures taken by the Chinese government in mid-April to restrain housing price increases may lead to a lagged impact on construction activity, and hence demand for raw materials. Third, the overall economic outlook for China remains favorable. Growth is expected to ease somewhat due to moves towards normalization of the macro policy stance, the property-related measures and the potential drag on global growth from the problems in Europe. That said, GDP growth in 2010 is still projected at 9.5 per cent and 8.5 per cent in 2011.

But Mongolia's sensitivity to shocks has also increased substantially over the past decade, in part due to the growing importance of the mineral sector
However, the overall vulnerability of the Mongolian economy to external shocks has increased substantially over the last decade. And compared to other emerging economies in the region, currently its levels of net indebtedness are much higher15 which can leave it vulnerable in the near term to commodity price changes and or financing constraints.

The exchange rate against the USD remains broadly stable
The exchange rate against the US dollar has been stable since April 2009 (Figure 23), when the Bank of Mongolia (BoM) raised its policy rate substantially and introduced an auction system for foreign exchange. In May 2010, the average monthly exchange rate against the USD appreciated by 0.3 per cent, compared with April but depreciated by 2.6 percent compared to May 2009.
The stabilization of the exchange rate has been accompanied by a rise in international reserves of the Bank of Mongolia to a record high level of USD 1.2 trillion as of May. Since the start of the year, the BoM purchased USD 30.9 million from commercial banks through the exchange rate auctioning. Other sources for reserves increases are monetary gold, project funding from international institutions and deposits from commercial banks.
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