63853 MONGOLIA MONTHLY ECONOMIC UPDATE WORLD BANK June 2009 The World Bank’s Mongolia Monthly Economic Update provides an update on recent economic and social developments and policies in Mongolia. It also presents findings of ongoing World Bank work in Mongolia. The Mongolia Monthly is produced by a team from the World Bank’s Poverty Reduction and Economic Management (PREM) Sector Unit in the East Asia and Pacific Region Vice-Presidency, with key inputs from other members of the Mongolia country team. Questions and feedback can be addressed to Altantsetseg Shiilegmaa (ashiilegmaa@worldbank.org). Copies can be downloaded from http://www.worldbank.org.mn. Table of Contents Sections: Page number 1. Introduction………………………………………………………………………………………… 3 2. Fiscal balance………………………………………………………………………………………. 3 3. External sector……………………………………………………………………………………… 7 4. Financial sector……………………………………………………………………………………... 9 5. Growth and unemployment……………………………………………………………………….. 12 6. Conclusion………………………………………………………………………………………… 15 Tables: 1. Revenue improved compared to April………………………………………………………………3 2. Expenditure has risen slightly compared to 2008………………………………………………….. 5 3. Main drivers of changes in goods exports………………………………………………………….. 8 4. Exports by destination……………………………………………………………………………… 8 5. Main drivers of changes in goods imports…………………………………………………………. 8 6. Prices of food stuffs have risen…………………………………………………………………… 15 7. Some cost of informal mining has increased, although the price oil has fallen, which partly mitigates this increase………………………………………………………………. 15 8. Mongolia: Key Indicators…………………………………………………………………………. 16 Figures: 1. Copper and gold prices have rebounded for now, earning WPT revenues………………………… 4 2. Duration of power outages has increased between 2005 and 2008………………………………… 6 3. Reserve margins will come under pressure in the next years……………………………………… 6 4. The fiscal deficit was 8.2 percent of GDP…………………………………………………………. 7 5. The trade balance is improving as imports are dropping faster than exports……………………… 7 6. The exchange rate stabilized, and the BoM continued to accumulate reserves…………………… 9 7. While inflation dropped, the BoM lowered its policy rate………………………………………… 9 8. MNT deposits declined and FX deposits increased………………………………………………. 10 9. NPLs and loans with principal in arrears increased further to reach 18.1 percent of outstanding loans……………………………………………………….. 10 10a. The largest increases in NPLs and loans in arrears in manufacturing, construction, wholesale and retail …. …………………………………………………………… 11 10b. And these sectors now account for the majority of NPLs and loans in arrears…………………… 11 11. Bank have shifted from lending to buying central bank bills…………………………………….. 11 12a. Large decreases in loan issuance to wholesale and retail, mining, construction and manufacturing … ……………………………………………………. 12 12b. … the loan portfolio is exposed to sectors that have suffered from NPLs…………………….…. 12 13. Headline industrial production is stable, but manufacturing continues to contract sharply………. 12 14. Firms’ sales revenue, expenses before tax, income before tax and taxes paid declined………….. 13 15. Construction, mining and gas, fuel and coal wholesale firms suffered the largest drops in revenue……………………………………………………………… 13 16. Registered unemployment increased strongly…………………………………………………….. 14 Boxes: 1. Investment and maintenance in the power sector………………………………………………….. 6 2. Corporate income declined by 64 percent in the first quarter of 2009 compared to a year earlier.. 13 3. The social and poverty impacts of the economic slowdown in Mongolia………………………... 15 -2- 1. Introduction1 The impact of the economic downturn is felt throughout the economy. And while the pace of the downturn has slowed down in several areas, risks exist in the banking sector going forward. The fiscal deficit deteriorated slightly in May, while revenue improved compared to April. The trade balance is improving as imports are dropping faster than exports. The exchange rate has been stable against the USD, while the Bank of Mongolia has been able to accumulate international reserves. In the financial sector, the Bank of Mongolia lowered its policy rate again, in line with falling inflation (mainly caused by the economic slowdown). Total deposits at commercial banks increased, but non- performing loans and loans with principal in arrears continue to increase. Banks are reluctant to lend to the private sector and are buying less risky central bank bills instead. This credit crunch is aggravating the slowdown in the manufacturing sector. Only mining and quarrying bucks the trend thanks to some recovery in mineral prices. On average, the corporate sector shows a large drop in income and taxes paid, as expected during these difficult times. There are increases in unemployment in both the formal and informal sectors. 2. Fiscal balance2 Table 1. Revenue improved compared to April Revenue improved compared Share of Change Change 2008 between between to April revenue year to year to May (%) April 2008 2008 and Total revenues were 22.8 and 2009 2009 (%) (%) percent lower in 2008 than in Total revenue and grants 100.0 -31.4 -22.8 2009, when we compare the Tax revenue 87.6 -35.0 -29.8 Corporate income tax 11.7 -45.6 -45.5 budget outturn of the first five Taxes on wages & salaries 4.7 16.5 12.2 WPT 18.0 -91.8 -86.9 months for each year (Table 1). Social security contr. 10.4 -6.2 16.6 This is somewhat of an Value added tax 16.5 -18.5 -7.4 Excise taxes 8.3 -11.1 -8.9 improvement compared to April Import duties 6.6 -29.8 -29.5 Royalty 5.1 -53.2 -46.9 2009, when it was 31.4 percent Non-tax revenue 11.5 -4.4 26.8 lower than in 2008. When we Dividends 1.5 59.5 182.3 Note: From the general budget, which includes state/central and local budget, compare revenues from month Mongolian Development Fund and Social Security Fund Source: Ministry of Finance, World Bank to month (between April and 1 The analysis is based on the most recent data (May and Q1 2009) from the Bank of Mongolia, the National Statistical Office, the Ministry of Finance, and data from other sources which will be quoted in the text. 2 A newly amended budget is expected to be submitted to Parliament shortly. -3- May 2009), we see that the increase in revenues came from mainly the Windfall Profit Tax (WPT)3, social security contributions, the value-added tax and the excise tax. The drop in WPT revenues Figure 1. Copper and gold prices have rebounded for now, earning WPT revenues between 2008 and 2009 has been $/tonne $/ounce slightly less in May (-86.9 percent) 1,000 5,000 than in April (-91.8 percent), when 4,600 950 we compare the year-on-year 4,200 changes of revenues between 2008 900 3,800 and 2009. This is because copper 3,400 850 prices continued to rise in May Copper from its five-year low close to the 3,000 Gold (right axis) 800 2,600 $2600/tonne WPT threshold in 2,200 750 December, and briefly breached Dec-08 Feb-09 Apr-09 Jun-09 the $5000/tonne mark in June. Note: the dashed lines indicate the $2600/tonne and $850/ounce thresholds for Gold prices have also remained copper and gold respectively for the WPT. above their $850/ounce WPT Last observation: June 16, 2009. Source: Ministry of Finance, World Bank threshold since mid-January (Figure 1). However, in spite of the recent uptick in prices, the contribution of mining-related revenue to total revenue is likely to be much lower in 2009 than during 2007 and 2008. For instance, the WPT and royalties4 contributed only 7 percent to total revenue in the first five months of 2009; much lower than in 2007 and 2008, when during the same period, the contribution was 18 and 23 percent respectively. As most of Mongolia’s copper exports go to China,5 China is an important country to monitor. The World Bank recently revised its growth projection for China to 7.2 percent in 2009,6 up from 6.5 percent, because of the larger than expected effect of the domestic fiscal stimulus. The stimulus’s focus on infrastructure has led to an increase in government-influenced investment, which has been one of the contributors to the recent copper price rebound.7 But China’s growth is unlikely to rebound to very high single-digit rates unless the world economy recovers. 3 A 68 percent tax applies to revenues from prices exceeding base prices of $2600/tonne for copper and $850/ounce for gold, which will be deposited in the Mongolian Development Fund to finance savings, social programs and infrastructure investments in equal amounts. 4 Besides the WPT and royalties, mining-related revenue also includes revenue from corporate income tax and dividends from mining companies. However, there is no monthly breakdown of these numbers. 5 Exports to China generate 65% of export revenues, half of which is copper. 6 Based on the recently issued China Quarterly Update, June 2009, http://www.worldbank.org/cn 7 Box 1 in the previous Mongolia Monthly Economic Update, May 2009, http://www.worldbank.org.mn, contains an analysis of the drivers of the copper price. -4- Total expenditure was relatively stable in nominal terms Comparing the first five months of 2009 to the same period in 2008, total expenditure and net lending are slightly higher in nominal terms, and hence negative in real terms by 13 percent (Table 2). Disbursements from the social security fund (including pensions) and the social assistance fund were similar to 2008. The main component of the social assistance fund, the Child Money Program, has been disbursed according to the amended budget of March 2009. Domestic investment continues to be much lower than last year (but this is partly offset by higher foreign-financed investment). Capital repairs, which capture part of total maintenance of infrastructure, have been 79 percent lower than in 2008. Fortunately, capital repairs have improved somewhat from April to May, 2009. The category of “capital repairs” in the budget underestimates total maintenance expenditures , because significant shares of the “Road Fund” and “domestic investment” categories are used for maintenance and repairs. The World Bank attaches a great deal of importance to maintaining basic infrastructure, and has therefore included the allocation of a minimum level of expenditure on maintenance as a key policy reform to be pursued going forward. The protection of the maintenance of basic infrastructure during the downturn is an urgent priority. For instance, trends in investment and maintenance in the power sector are reasons for concern (Box 1). Table 2. Expenditure has risen slightly compared to 2008 Share of Change Change 2008 between year to between year to expenditure April 2008 and May 2008 and (%) 2009 (%) 2009 (%) Total expenditure and net lending 100.0 -3.6 1.5 Current expenditure 71.1 0.4 2.7 Wages and salaries 22.1 9.5 8.2 Purchases of goods and services 19.8 -3.4 -8.6 Subsidies to energy 0.6 20.7 27.5 Subsidies to public transportation 0.5 21.7 10.4 Social security fund 14.9 -11.7 2.0 Social assistance fund 8.8 -0.8 2.0 Capital expenditure 25.4 -6.6 -5.7 Domestic investment 19.4 -17.6 -18.0 Capital repairs 1.1 -93.7 -79.0 Note: General budget includes state/central and local budget, Mongolian Development Fund and social security fund. Source: Ministry of Finance, World Bank -5- Box 1. Investment and maintenance in the power sector During the current downturn, it is important that Mongolia maintains its existing power network, and that it invests in the new capacity it needs to accommodate new mining projects in the South Gobi region. Frequent power outages will have costs, in terms of reduced industrial output, and even more importantly, in terms of human welfare, given Mongolia’s harsh winter climate. Without new investment in power capacity, total demand for power in Mongolia is expected to exceed supply within a few years, leaving the country vulnerable to power shortages in the near future. In the last few years Mongolia has already experienced an Figure 2. Duration of power outages has increase in power outages (Figure 2). The duration of total increased between 2005 and 2008 power outage per customer has increased 49 percent from Number of minutes of power outages per customer 8000 7226 4857 minutes in 2006 to 7226 minutes in 2008 (equivalent to 5862 6000 4857 5360 five 24-hour days), driven by both an increase in the number of outages per customer and an increase in the average 4000 duration of an outage. 2000 0 Recent simulations done by the World Bank in the context of 2005 2006 2007 2008 assisting the government with an infrastructure strategy for the Southern Gobi indicate that there is a likelihood of Source: Energy Regulatory Authority shortages in the near future due to undercapacity, because power demand is projected to accelerate, as mining projects are developed and come on stream in a few years (Figure 3). At the same time, one existing power station is projected to be retired. Without enough investment in new power stations, Mongolia will have to rely more on imports from Russia and China. And even with additional imports, reserve margins could come under pressure in the next few years in the case of unanticipated breakdowns and peak demand. Figure 3. Reserve margins will come under pressure in the next years Megawatt China imports Russia imports TPP#2 TPP#3 1200 TPP#4 Erdenet TPP Darkhan TPP Newcom 1000 Peak demand 20% reserve margin China imports 800 Russia imports 600 TPP #3 400 TPP #4 200 Erdenet TPP Darkhan TPP 0 Newcom 2007 2008 2009 2010 2011 2012 Source: Economic Consulting Associated, World Bank Source: Economic Consulting Associated; World Bank (2009), Southern Mongolia Infrastructure Strategy, discussion draft, March 2009; World Bank -6- The resulting 12-month rolling fiscal Figure 4. The fiscal deficit was 8.2 percent of GDP deficit was 8.2 percent of GDP % of 2008 GDP, 12-month rolling sum Total revenue and grants 50 Total expenditure and net lending 2 By summing the monthly fiscal balance Fiscal balance (right axis) 0 numbers over the previous 12 months (to 45 -2 take into account the typically strong 40 -4 seasonal effects on the budget), the 12-month -6 rolling fiscal deficit was MNT 505 billion in 35 -8 May, which is equivalent to 8.2 percent of 30 -10 2008 GDP (Figure 4). May-08 Aug-08 Nov-08 Feb-09 May-09 Note: GDP was MNT 6,130 billion in current prices in 2008. Source: Ministry of Finance, World Bank 3. External sector The trade balance is improving as imports are dropping faster than exports Figure 5. The trade balance is improving as The domestic slowdown has led to a rapid drop imports are dropping faster than exports in imports. Comparing the first five months of $ million, 12-month rolling sum 4,000 200 2009 to 2008, imports were 48 percent lower 3,500 0 than in 2008. At the same time, exports were 3,000 -200 only 41 percent lower than in 2008. 2,500 -400 On a 12-month rolling basis (to account for 2,000 -600 seasonal effects), total exports amounted to 1,500 1,000 Exports -800 $2135 million and total imports were $2971 Imports -1000 million. This narrowed the 12-month rolling 500 Trade balance (right axis) 0 -1200 trade deficit to $836 million in May, from $989 May-06 May-07 May-08 May-09 million in April (Figure 5). Note: sum over previous twelve months to adjust for seasonal effects. Comparing 2009 to 2008, the main reason for Source: National Statistical Office, World Bank the drop in exports is copper (mainly an effect of lower prices, as the exported volume has only declined little) and gold (both price and volume effects), while coal has provided some positive offset (Table 3). Compared to April 2009, exports have improved slightly, thanks to positive developments in copper, gold and crude oil exports, although this has been counterbalanced by drops in exported volume and price of coal. Global prices of copper, zinc and crude petroleum have seen some recovery. From the export destination point of view, exports to China and the Europe Union have improved somewhat compared to April (Table 4). -7- Table 3. Main drivers of changes in goods exports Change in value between Change in value 2008 export revenues year to April 2008 and between year to May ($ mn) 2009 (%) 2008 and 2009 (%) Copper concentrate 835 -59.4 -58.7 Gold(1) 599 -35.8 -29.9 Coal 184 129.7 61.6 Combed goat down(2) 97 -25.6 -25.4 Raw/Greasy cashmere(3) 77 -4.6 -43.2 Zinc concentrate 154 -80.1 -68.7 Crude petroleum oils 101 -55.0 -43.5 Total good exports 2,539 -42.4 -40.6 (1) Unwrought or in semi-manufactured forms. (2) and (3) are intermediate cashmere products. Source: National Statistical Office, World Bank Table 4. Exports by destination Change between first 5 Change between first 4 2008 export revenues months of 2008 and 2009 months of 2008 and 2009 ($ mn) (%) (%) China 1,644 -44.4 -43.0 European Union 435 2.3 15.9 Canada 175 -10.8 -23.9 US 113 -92.0 -89.4 Russia 85 -29.1 -34.3 Total good exports 2,539 -42.4 -40.6 Source: National Statistical Office, World Bank Imports have fallen by 39.6 percent in the first five months of 2009, compared to the same period in 2008 (Table 5). Metal and mineral products have seen the largest drops in imports, followed by food, and finally equipment. Table 5. Main drivers of changes in goods imports Change in value Change in value 2008 imports between year to April between year to May ($ mn) 2008 and 2009 (%) 2008 and 2009 (%) Mineral products 964 - 55.4 - 51.5 Machinery and equipment 606 - 19.6 - 28.5 Transport equipment 459 - 22.1 - 26.0 Base metals 267 - 67.1 - 66.4 Food products 231 - 29.4 - 33.0 Total goods imports 3,245 -37.8 -39.6 (1) Unwrought or in semi-manufactured forms. (2) and (3) are intermediate cashmere products. Source: National Statistical Office, World Bank -8- The exchange rate has been very steady against the USD, and the Bank of Mongolia continued to accumulate international reserves The exchange rate has hardly moved against Figure 6. The exchange rate stabilized, and the BoM the USD since the end of April, with daily continued to accumulate reserves $ million, month-on-month change MNT per USD changes of +/- 0.1 percent around MNT 1427 Change in banking system's net intl reserves 200 Change in BoM's net intl reserves 1600 per USD, without intervention by the BoM. 150 Exchange rate versus USD (right axis) 1550 The Bank of Mongolia’s (BoM) net 100 1500 50 1450 international reserves increased further to 0 1400 $553 million at the end May, from $534 -50 1350 -100 million at the end of April, due to dividends 1300 -150 and taxes paid in foreign currency, gold -200 1250 -250 1200 purchases and valuation changes. The -300 1150 banking system’s net international reserves -350 1100 increased to $648 million from $571 million May-08 Aug-08 Nov-08 Feb-09 May-09 at the end of April (Figure 6). Source: Bank of Mongolia, World Bank 4. Financial sector As inflation continued to fall, the BoM lowered its policy rate again Inflation is sharply down to 7.4 percent year on year in May, from 12.6 percent yoy in April, led by a decrease in core inflation,8 giving further evidence of an economic slowdown. Prices of meat, milk and cheese have fallen as well (Figure 7). Figure 7. While inflation dropped, the BoM lowered its policy rate % year-on-year change percentage point contribution to CPI inflation Core inflation (right axis) 45 Meat, milk and cheese (right axis) 30 Energy and fuels (right axis) 25 35 CPI inflation BoM policy rate 20 25 15 15 10 5 5 0 -5 May-08 Aug-08 Nov-08 Feb-09 May-09 -5 Source: Bank of Mongolia, National Statistical Office, World Bank 8 Core inflation excludes volatile food and fuel prices, and is a proxy for domestically generated inflation. -9- The BoM lowered its policy rate, the 1-week central bank bill rate, to 11.5 percent from 12.75 percent by mid-June. This cut was not as large as the drop in inflation though, so in real terms, the policy rate is now strongly positive. Total deposits increased from April to May9 Figure 8. MNT deposits declined and FX deposits increased Total deposits at commercial banks increased by MNT billion, month-on-month change 60 MNT 13 billion from April to May. MNT MNT deposits 40 deposits fell by MNT 43 billion from April to 20 FX deposits May, while FX deposits increased by MNT 55 0 -20 billion equivalent (Figure 8). Part of this -40 decrease in MNT deposits is in line with -60 seasonal variations in MNT deposits. -80 May-08 Aug-08 Nov-08 Feb-09 May-09 Source: Bank of Mongolia, World Bank Non-performing loans and loans with principal in arrears have increased further Non-performing loans (NPLs) continued to Figure 9. NPLs and loans with principal in arrears increased further to reach 18.1 percent of increase, reaching MNT 294 billion or 11.6 outstanding loans MNT million percent of outstanding loans. Loans with Loans with principal in arrears principal in arrears10 also increased again, 500 18.1 450 Non-performing loans 14.9 amounting to MNT 165 billion or 6.5 percent of 400 12.7 outstanding loans. NPLs and loans with 350 10.7 300 principal in arrears together amount to MNT 250 459 billion or 18.1 percent of outstanding loans 200 5.3 (Figure 9). The private sector accounts for 78 150 100 percent of all NPLs, and individuals for 22 50 percent. The fact that more standard loans 0 turned into loans with principal in arrears Sep-08 Nov-08 Jan-09 Mar-09 May-09 suggests that risks may be ahead. Note: number in boxes is sum of NPLs and loans with principal in arrears as a percent of total loans outstanding Source: Bank of Mongolia, World Bank 9 The numbers in the remainder of this section have been provided by the Bank of Mongolia. They include Anod Bank, the bank that was taken under conservatorship by the Bank of Mongolia in December 2008. 10 These are loans of which the principal is 1 to 90 days in arrears. After 90 days, they become non-perfoming loans. - 10 - NPLs have increased in most sectors, but some have been hit harder Comparing the sectoral composition of the changes in NPLs and loans with principal in arrears between the fourth quarter of 2008 and the first quarter of 2009, we find that the largest increases were recorded in the manufacturing, construction, and wholesale and retail sectors (Figure 10a). These three sectors also account for the majority of all NPLs and loans with principal in arrears at the end of the first quarter of 2009 (Figure 10b). Figure 10a. The largest increases in NPLs and Figure 10b. … And these sectors now account for loans in arrears occurred in manufacturing, the majority of NPLs and loans in arrears construction, wholesale and retail …. % change in NPLs and loans in arrears between Q4 2008 and % of total NPLs and loans in arrears as of Q1 2009, by sector Q1 2009 40 Agricultu Mining 35 30 Other re, 4.4% and 25 sectors, quarryin 20 15 28.5% g, 11.5% 10 5 Manufac 0 Wholesa turing, and retail… le and Wholesale Agriculture Mining and Manufacturin Construction Other sectors 17.9% quarrying retail trade, g Construc 18.9% tion, 23.2% Source: Bank of Mongolia, World Bank Source: Bank of Mongolia Banks have reduced lending and are buying less Figure 11. Bank have shifted from lending to risky central bank bills instead, making it very buying central bank bills % year-on-year change % year-on-year change difficult for companies and individuals to obtain Total 100 Private 250 loans Individuals 80 CB bills (right axis) 200 Loans have declined further, and outstanding loans 150 are now below their June 2008 level. Loan growth to 60 private individuals has become negative (Figure 11). 100 40 50 Instead, banks have started to buy central bank bills 20 0 from the BoM instead, which currently provide a 0 -50 high risk-free return with inflation on a downward trend. This means that businesses have great -20 -100 difficulty to obtain bank credit. The BoM has May-07 May-08 May-09 Source: Bank of Mongolia, World Bank lowered its policy rate to reduce this bias. - 11 - Newly issued loans declined in many segments of the private sector Newly issued loans dropped 57 percent to MNT 453 billion in the first quarter of 2009 from MNT 1,045 billion in the first quarter of 2008, when the economy was still booming. Large decreases in newly issued loans occurred in wholesale and retail, mining and quarrying, construction and manufacturing (Figure 12a). But the aggregate banks’ loan portfolio is still exposed to the sectors that suffer from large amounts of NPLs and loans in arrears at the end of the first quarter of 2009 (Figure 12b). Figure 12a. Large decreases in loan issuance to Figure 12b. … the loan portfolio is exposed to wholesale and retail, mining, construction and sectors that have suffered from NPLs and manufacturing … loans with principal in arrears MNT billion, newly issued loans by sector % share of loans outstanding as of Q1 2009 400 Agricultu 300 Q1 2008 re, 6.3% Mining 200 Q1 2009 Other and sectors, quarrying 100 32.4% , 7.2% 0 Manufact Agriculture Construction Whole and retail Manufacturing Mining and Other sectors quarrying uring, 16.2% Wholesal e and Construct retail, ion, 22.3% 15.7% Source: Bank of Mongolia Source: Bank of Mongolia 5. Growth and unemployment The reduced lending has contributed to a continued slowdown in the manufacturing sector, although mining and quarrying seem to have recovered slightly Figure 13. Headline industrial production The three-month moving average industrial production is stable, but manufacturing continues to contracted 5.8 percent year on year, which is a small contract sharply % yoy real change, 3-month moving average improvement compared to April. Manufacturing output 30 contracted further, while mining and quarrying output 20 became positive. This was mainly due to expansion of 10 output of crude petroleum and coal, while output of 0 -10 metal ores, including copper, remained flat. Utilities Total -20 Mining and quarrying output continued to grow steadily (Figure 13). Manufacturing -30 Utilities May-08 Aug-08 Nov-08 Feb-09 May-09 Source: National Statistical Office, World Bank - 12 - The corporate sector shows a large drop in income and taxes paid Firm-level data from the fourth quarter of 2007 to the fourth quarter of 2008 by economic sector show the impact of the downturn on firms. In particular, firms in the mining sector have seen large drops in income before tax, when mineral prices dropped to their 2004 level in the fourth quarter of 2008 (there has been some recovery since then; Box 2). Box 2. Corporate income declined by 64 percent in the first quarter of 2009 compared to a year earlier A drastic slowdown in the corporate sector took place starting Figure 14. Firms’ sales revenue, expenses in the last quarter of 2008, when the unfavorable shocks in before tax, income before tax and taxes paid declined commodity prices, inflation, exchange rate and demand hit % change Q1 2008 to Q1 2009 the real sectors. Comparing the first quarters of 2008 and 0 2009 for the entire sample of firms, sales revenue declined by Income Expense Taxes revenue before paid before Total -20 sales tax tax 15.7 percent, and expenses fell by 8.3 percent. This caused -40 income before tax to drop by 64.4 percent, and taxes paid by 60.7 percent (Figure 14).a -60 Construction, mining, and gas, fuel and coal wholesale firms -80 suffered large drops in revenue as construction and real estate Source: Top 180 companies financial statements, lending decreased, mineral prices fell to their 2004 levels and National Tax Administration, World Bank the economy continued to slow down (Figure 15). The most unprofitable sectors were the power, the gas, fuel and coal wholesale, and the transportation sector compared to the first quarter of 2008, due decreased revenues and increased expenses, which account for 30 percent of the total expenses. The consequences of a further slowdown of the corporate sector may continue to impact unemployment, fiscal revenue and the overall economy. Figure 15. Construction, mining and gas, fuel and coal wholesale firms suffered the largest drops in revenue % change Q1 2008 to Q1 2009 60 40 20 0 Alchoholic Contracted Constructio wholesale Transportati manufacturi manufacturi Non ferrous Communica Hotel, resort tion service -20 Gas, fuel, wholesale beverage ore mining industry Power coal Light ng,… -40 ng on n -60 Top 180 companies financial statements Source: National Tax Administration Source: National Tax Administration, World Bank a According to the consolidated income statements of the top 180 enterprises, whose taxes paid contribute 80 percent of corporate revenues to the state budget. - 13 - There have been large increases in unemployment in both the formal and informal sectors This has led to a 20.4 percent increase in the number of registered unemployed in May 2009 compared to May 2008. The registered unemployment rate increased to 3.6 percent of the labor force (Figure 16). This does not capture the entire picture, as it excludes those who are not registered at the Employment Office and actively looking for work or available to work immediately. The actual rate of unemployment may be as high as 9 to 12 percent of labor force.11 A recently commissioned survey on the informal sector shows that the effects of the economic slowdown have a widespread social and poverty impact in Mongolia (Box 3).12 Figure 16. Registered unemployment* increased strongly % of labor force 3.7 Unemployment rate (unadjusted) Unemployment rate (adjusted)** 3.5 3.3 3.1 2.9 2.7 2.5 May-07 Nov-07 May-08 Nov-08 May-09 * Defined as working-age population currently not working in a paid job and not self-employed, actively looking for job and registered at the Employment Office. ** Seasonally adjusted, by dividing 12-month moving average number of unemployed by linearly interpolated labor force. Source: National Statistical Office, World Bank 11 The NSO has indicated that it will soon publish unemployment figures that include the unregistered unemployed as well. 12 This survey was commissioned by the World Bank, and executed by Global Reach, an NGO based in Ulaanbaatar. - 14 - Box 3. The social and poverty impacts of the economic slowdown in Mongolia Employment conditions are becoming less favorable for informal workers in the rural regions, according to b preliminary conclusions of a recent study on the crisis implications for household livelihoods. With worsening economic conditions, herders and informal mining workers are barely able to cope with the decreasing job availability, falling wages and increasing living expenses. For herders, the study reveals that there has been a significant reduction of income due to fluctuating prices of livestock products. Their main income is generated through selling livestock products such as cashmere, sheep wool, camel wool, skin, meat and dairy products. However, decreasing prices and increasing costs (Table 6) have forced them to sell their livestock to repay loans and leave barely enough to cover living expenses. In some of the surveyed areas, half of the families still owe money to banks. As a result, these herders look for alternative sources of income, such as working for other wealthier herders, informal mining, or moving to cities to look for any type of work. For informal mining workers, which account to more than 64,000 workers, the study finds that the cost of chemical reactives and materials to extract gold went up from MNT 65,000-70,000 in September 2008 to MNT 115,000- 120,000 in June 2009 (Table 7). Although the price of gold has increased, the cost of mining, food and transportation costs are becoming higher. Except for gold digging, most informal miners do not have any other income generating jobs. For both miners and herders, the Child Money Program and pension income are becoming vital sources of income to help fill the gap between decreasing income and increasing expenditure. They also hope to get loans as a way to overcome the impact of the downturn and start new business. Table 6. Prices of food stuffs have risen Table 7. Some cost of informal mining has increased, although the price oil has fallen, which partly mitigates this increase Change in price between Change in cost between September 2008 to June 2009 (%) September 2008 to June 2009 (%) Rice 100 Chemical reactives 71 Flour 150 Oil -42 Sugar 50 Source: Study on the crisis implications for household livelihood (May 20 –June 15, 2009), Global Reach, World Bank b This survey was commissioned by the World Bank, and executed by Global Reach, an NGO based in Ulaanbaatar. 6. Conclusion The impact of the economic downturn is felt throughout the economy, and significant risks exist in the banking sector. There are signs of stabilization, i.e., the deterioration of the fiscal deficit has slowed down, the trade deficit has narrowed, and the exchange rate has stabilized. Going forward, the government will need to carefully monitor developments in the corporate and banking sector, and the widespread impact of the downturn on poor and vulnerable people. - 15 - Table 8. Mongolia: Key Indicators 2003 2004 2005 2006 2007 2008e 2009f Output, Employment and Prices Real GDP (% yoy change) 7.0 10.6 7.3 8.6 10.2 8.9 2.7 Industrial production index .. .. .. 100.0 110.4 113.4 .. (% yoy change) .. .. .. .. 10.4 2.8 .. Unemployment (%) 3.4 3.6 3.3 3.2 2.8 2.8 .. Consumer price index (% yoy change) 4.6 10.9 9.6 5.9 14.1 23.2 9.0 Public Sector Government balance (% of GDP) -3.7 -1.8 2.6 8.1 2.8 -5.0 -6.0 Non-mining balance (% of GDP)(1) -5.9 -5.8 -1.3 -7.3 -13.4 -15.3 -10.4 Domestic public sector debt (% of GDP) 3.1 1.4 0.1 1.0 0.5 0.0 0.0 Foreign Trade, BOP and External Debt Trade balance ($ mn) -199.6 -99.2 -99.5 136.2 -52.4 -596.5 -331.0 Exports of goods ($ mn) 627.3 872.1 1066.1 1543.9 1950.7 2532.5 1863.0 (% yoy change) 19.7 39.0 22.2 44.8 26.4 29.8 -26.4 Copper exports (% yoy change) .. .. 14.7 94.8 27.7 3.0 .. Imports of goods ($ mn) 826.9 971.3 1165.6 1407.7 2003.1 3128.9 2194.0 (% yoy change) 21.6 17.5 20.0 20.8 42.3 56.2 -29.9 Current account balance ($ mn)(2) -102.4 24.1 29.7 221.6 264.8 -502.7 -261.8 (% of GDP) -7.1 1.3 1.3 7.0 6.7 -9.6 -6.5 Foreign direct investment ($ mn) 131.5 128.9 257.6 289.6 360.0 682.5 316.5 External debt ($ mn) 1240.3 1311.8 1360.0 1413.9 1528.7 1600.5 1795.8 (% of GDP) 87.3 73.7 59.7 44.3 38.9 33.1 46.8 Short-term debt ($ mn)(3) 0.0 0.0 0.0 0.0 0.0 0.0 .. Debt service ratio (% of exports of g&s)(3) 13.4 9.4 7.6 5.4 4.3 3.5 4.3 Foreign exchange reserves, gross ($ mn) 203.5 207.8 333.1 718.0 1,000.6 656.7 822.1 (month of imports of g&s) 2.3 1.8 2.5 4.6 5.0 2.1 3.7 Financial Markets Domestic credit (% yoy change) 157.3 25.8 18.8 -3.1 78.4 60.6 .. Short-term interest rate (% per annum)(4) .. 15.8 3.7 5.1 8.4 9.8 .. Exchange rate (MNT/USD, eop) 1168.0 1209.0 1221.0 1165.0 1170.0 1267.5 1640.0 Real effective exchange rate (2000=100)(5) 96.9 95.4 101.8 107.1 109.0 130.2 .. (% yoy change) -4.8 -1.5 6.7 5.2 1.8 19.5 .. Stock market index (2000=100)(6) 151.5 120.8 203.6 382.0 2048.0 1181.6 .. Memo: Nominal GDP (MNT bn) 1,660 2,152 2,780 3,715 4,600 6,130 6,294 Nominal GDP ($ mn) 1,448 1,,814 2,307 3,156 3,930 5,258 4,035 (1) Non-mining balance excludes revenues from corporate income tax and dividends from mining companies, the Windfall Profits Tax and royalties. (2) The 2009 projections for the external sector are based on the previous 2008 current account estimate, rather than the recently published final 2008 figure (which was mentioned in the text). (3) On public and publicly guaranteed debt. (4) Yield of 14-day bills until 2006 and of 7-day bills for 2007. (5) Increase is appreciation. (6) Top-20 index, eop, index=100 in Dec-2000. Source: Bank of Mongolia, National Statistical Office, Ministry of Finance, IMF and World Bank staff estimates - 16 -