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180960
Mon, 05/09/2011 - 16:31
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http://m.oananews.org//node/180960
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WORLD BANK: MONGOLIA'S MEDIUM-TERM OUTLOOK MIGHT BE IMPROVING
Ulaanbaatar, Mongolia, /MONTSAME/ Mongolia's prospects in the medium-term look excellent from a growth perspective as well as a fiscal management perspective. Staying the course in the medium-term means implementing the landmark Fiscal Stability Law (FSL) passed last year, and adopting a supportive integrated budget law this spring session of parliament.
This ensures a path of counter-cyclical budgets, thereby avoiding some of the macroeconomic "Dutch Disease" issues typically seen in resource rich countries. Unfortunately, the crux of the FSL-abiding by a structural fiscal deficit of 2 percent of GDP calculated using long-term mineral price projections does not come into force until 2013, after the 2012 election year. Until that time significant risks exist, emanating from both domestic as well as external sources.
The economy grew 6.1 percent year-on-year (yoy) in 2010, following a contraction of 1.3 percent in 2009. The last quarter of 2010 ended with a broad-based recovery, supported by transportation, construction and wholesale and retail trade. Unfortunately for the employment of the poorest segments of society, the agriculture sector (down 17 percent yoy in 2010) experienced double digit contractions in all four quarters in 2010. However, the upward trend in consumer prices was broken by declining meat prices--the result of sales under a government-subsidized meat reserve scheme. March data show a moderation in the headline UB inflation to 7.4 percent yoy, following a 11 percent yoy increase in the previous month. However, food prices are rising in Russia and China, from where Mongolia imports the bulk of its main food commodities.
The latest fiscal data show continued improvement in the budget outturns. On a 12-month rolling basis, the fiscal surplus increased to 2.4 percent of GDP in March 2011, up from a 5 percent deficit in March last year. This reflects the recovery in broad based economic activity, imports and favorable commodity prices. Revenues have improved markedly, increasingly annually by 56 percent in real terms in March. However, the 2011 Budget of Mongolia envisages a steep increase in government spending to an unprecedented MNT 779 billion (over 52 percent of GDP). The financing of the resulting deficit (around US$400 m) will be difficult as it depends mostly on yet uncertain revenues to be received from the Tavan Tolgoi (TT) agreement (discussed in Box 1). If the agreement fails to fund the deficit, and given that the government is cognizant of the difficult environment for sovereign bonds, the funding would have to come from the domestic market in its entirety. This could crowd out the private sector which is especially in need of credit during this period of economic expansion.
Imports increased to record levels of 86 percent yoy in March as the trade deficit continued to widen reaching US$ 646 million. Exports were up 71 percent yoy supported by the upward momentum in metal prices and large coal and copper imports by China, which absorbs 90 percent of Mongolia's exports. As a result of the increased goods trade deficit, the current account deficit is expected to widen further in the first quarter of 2011. The average monthly exchange rate against the US$ appreciated by a percent in April, before depreciating by 6 percent in early May. The accumulation of reserves by the Central Bank leveled off as there was no need to intervene in the market.
In the banking sector, the steady rise in NPL ratios in 2009 has been reversed. However, there continue to exist solvency concerns for small and medium banks. Loans in arrears declined to MNT 81 billion in March from MNT 90 billion in December. However, the ratio of NPLs and loans in arrears to total outstanding loans still stand at high at 13 percent, and the actual stock of NPLs increased in March by 3.2 percent from February. Excluding the two failed banks, whose NPLs largely remain unresolved, NPLs increased to MNT 204 billion, up 8 percent in March from MNT 189 billion in February. In the meantime, the stock of loans outstanding is on the rise since December 2009, up 35 percent yoy in March 2011 or 29 percent in real terms. With credit growing this fast, as was the case prior to the 2008 crisis, regulatory and oversight issues among Mongolian banks (along with capital adequacy) remain crucial. MNT deposits continued to rise, and hit a new peak of above 2.3 trillion in March, fuelled by currency appreciation expectations and supported by the blanket deposit guarantee. Out of the total banking sector liabilities of MNT 6.3 trillion around MNT 4.5 trillion comprises deposits and current accounts for which the government has issued a blanket guarantee. Further reforms are needed to create an efficient, adequately capitalized and well-regulated banking sector.
The latest survey conducted in informal labor markets in March 2011 revealed no changes in the total number of casual workers compared to December. However, due to the increased activity in the construction sector, the number of informal workers in construction material markets rose while the number of informal workers declined in the other markets. Workers' real informal market wages on average increased by about 18 percent from December to March 2011. The previous decline in real wages is attributable to reduced job opportunities during the winter months and rising inflation. This situation has improved with better weather and moderated inflation. However, of the most vulnerable in society, about 40 percent of those surveyed continue to indicate that their earnings do not meet their basic needs, while the rest rely on these markets for food and shelter only.
A comparison of the macroeconomy of Mongolia now with trends that prevailed in the country in 2008, prior to the crisis, suggest similarities. These similarities are in no small measure due to the expansionary 2011 budget plans. First, the plans include large cash handouts, exerting upward pressure on prices for the second half of 2011, with the risk of substantial second-round effects in the form of a wage-price spiral. Second, while real interest rates are currently positive due to the fall in inflation, upward pressure on prices warrants a close watch on these rates, which could return to negative territory as was the case before the crisis. Finally, as mentioned above, with the trade deficit continuing to widen with the mining boom, the current account is also in deficit-as was the case prior to the crisis. Consequently, there is a risk of returning to the boom-bust scenario that prevailed before 2008 (illustrated in Box 4). Additionally, high domestic inflation will cause the currency to appreciate in real terms, ultimately hurting the export sectors, and possibly creating a macroeconimic scenario called the Dutch Disease (discussed in Box 2).
Mongolia has promising growth prospects. It has the opportunity now to exercise prudent fiscal and macroeconomic policies so it can steer clear of the mistakes made by other resource rich economies and achieve its potential. The Integrated Budget Law, which reforms the budget process and supports the implementation of the FSL, will be debated in Parliament's spring session and would be an important step in permanently locking in prudent fiscal policies and mechanisms.
This ensures a path of counter-cyclical budgets, thereby avoiding some of the macroeconomic "Dutch Disease" issues typically seen in resource rich countries. Unfortunately, the crux of the FSL-abiding by a structural fiscal deficit of 2 percent of GDP calculated using long-term mineral price projections does not come into force until 2013, after the 2012 election year. Until that time significant risks exist, emanating from both domestic as well as external sources.
The economy grew 6.1 percent year-on-year (yoy) in 2010, following a contraction of 1.3 percent in 2009. The last quarter of 2010 ended with a broad-based recovery, supported by transportation, construction and wholesale and retail trade. Unfortunately for the employment of the poorest segments of society, the agriculture sector (down 17 percent yoy in 2010) experienced double digit contractions in all four quarters in 2010. However, the upward trend in consumer prices was broken by declining meat prices--the result of sales under a government-subsidized meat reserve scheme. March data show a moderation in the headline UB inflation to 7.4 percent yoy, following a 11 percent yoy increase in the previous month. However, food prices are rising in Russia and China, from where Mongolia imports the bulk of its main food commodities.
The latest fiscal data show continued improvement in the budget outturns. On a 12-month rolling basis, the fiscal surplus increased to 2.4 percent of GDP in March 2011, up from a 5 percent deficit in March last year. This reflects the recovery in broad based economic activity, imports and favorable commodity prices. Revenues have improved markedly, increasingly annually by 56 percent in real terms in March. However, the 2011 Budget of Mongolia envisages a steep increase in government spending to an unprecedented MNT 779 billion (over 52 percent of GDP). The financing of the resulting deficit (around US$400 m) will be difficult as it depends mostly on yet uncertain revenues to be received from the Tavan Tolgoi (TT) agreement (discussed in Box 1). If the agreement fails to fund the deficit, and given that the government is cognizant of the difficult environment for sovereign bonds, the funding would have to come from the domestic market in its entirety. This could crowd out the private sector which is especially in need of credit during this period of economic expansion.
Imports increased to record levels of 86 percent yoy in March as the trade deficit continued to widen reaching US$ 646 million. Exports were up 71 percent yoy supported by the upward momentum in metal prices and large coal and copper imports by China, which absorbs 90 percent of Mongolia's exports. As a result of the increased goods trade deficit, the current account deficit is expected to widen further in the first quarter of 2011. The average monthly exchange rate against the US$ appreciated by a percent in April, before depreciating by 6 percent in early May. The accumulation of reserves by the Central Bank leveled off as there was no need to intervene in the market.
In the banking sector, the steady rise in NPL ratios in 2009 has been reversed. However, there continue to exist solvency concerns for small and medium banks. Loans in arrears declined to MNT 81 billion in March from MNT 90 billion in December. However, the ratio of NPLs and loans in arrears to total outstanding loans still stand at high at 13 percent, and the actual stock of NPLs increased in March by 3.2 percent from February. Excluding the two failed banks, whose NPLs largely remain unresolved, NPLs increased to MNT 204 billion, up 8 percent in March from MNT 189 billion in February. In the meantime, the stock of loans outstanding is on the rise since December 2009, up 35 percent yoy in March 2011 or 29 percent in real terms. With credit growing this fast, as was the case prior to the 2008 crisis, regulatory and oversight issues among Mongolian banks (along with capital adequacy) remain crucial. MNT deposits continued to rise, and hit a new peak of above 2.3 trillion in March, fuelled by currency appreciation expectations and supported by the blanket deposit guarantee. Out of the total banking sector liabilities of MNT 6.3 trillion around MNT 4.5 trillion comprises deposits and current accounts for which the government has issued a blanket guarantee. Further reforms are needed to create an efficient, adequately capitalized and well-regulated banking sector.
The latest survey conducted in informal labor markets in March 2011 revealed no changes in the total number of casual workers compared to December. However, due to the increased activity in the construction sector, the number of informal workers in construction material markets rose while the number of informal workers declined in the other markets. Workers' real informal market wages on average increased by about 18 percent from December to March 2011. The previous decline in real wages is attributable to reduced job opportunities during the winter months and rising inflation. This situation has improved with better weather and moderated inflation. However, of the most vulnerable in society, about 40 percent of those surveyed continue to indicate that their earnings do not meet their basic needs, while the rest rely on these markets for food and shelter only.
A comparison of the macroeconomy of Mongolia now with trends that prevailed in the country in 2008, prior to the crisis, suggest similarities. These similarities are in no small measure due to the expansionary 2011 budget plans. First, the plans include large cash handouts, exerting upward pressure on prices for the second half of 2011, with the risk of substantial second-round effects in the form of a wage-price spiral. Second, while real interest rates are currently positive due to the fall in inflation, upward pressure on prices warrants a close watch on these rates, which could return to negative territory as was the case before the crisis. Finally, as mentioned above, with the trade deficit continuing to widen with the mining boom, the current account is also in deficit-as was the case prior to the crisis. Consequently, there is a risk of returning to the boom-bust scenario that prevailed before 2008 (illustrated in Box 4). Additionally, high domestic inflation will cause the currency to appreciate in real terms, ultimately hurting the export sectors, and possibly creating a macroeconimic scenario called the Dutch Disease (discussed in Box 2).
Mongolia has promising growth prospects. It has the opportunity now to exercise prudent fiscal and macroeconomic policies so it can steer clear of the mistakes made by other resource rich economies and achieve its potential. The Integrated Budget Law, which reforms the budget process and supports the implementation of the FSL, will be debated in Parliament's spring session and would be an important step in permanently locking in prudent fiscal policies and mechanisms.
