MONGOLIA MONTHLY BRIEF – OCTOBER 2009
                              (The full report can be downloaded at http://www.worldbank.org.mn)


Mineral prices held up well since the last Monthly           Exports to China follow Chinese real industrial value added
Update. And economic growth in China—                        trend
Mongolia’s main export destination—continues to                                      Growth in China real industrial value
                                                                 20%                                                         80%
be strong, fueled by a massive fiscal and                                            added, yoy sa (LHS)
monetary stimulus package. In Mongolia,                          18%                 Growth in Mongolia exports to China,    60%
                                                                                     yoy (RHS)
however, depressed economic conditions made                      16%
                                                                                                                             40%
the trade deficit narrow further, as imports                     14%
continue to fall faster than exports (on a 12-month              12%                                                         20%
rolling basis). Industrial production continues to
                                                                 10%                                                         0%
contract, particularly in the manufacturing sector,
                                                                  8%
with Mongolia facing a sharp GDP growth slow                                                                                 -20%
down for 2009 as a whole.                                         6%
                                                                                                                             -40%
                                                                  4%
Only coal exports are up on a year-on-year basis,                                                                            -60%
on the back of extremely strong demand in China        2%

which imported record quantities in September.         0%                                                                    -80%
With the Chinese economy growing strongly, the            Jan-08    Jul-08                         Jan-09         Jul-09
expectation is that the fall in overall exports to
China has now bottomed out and will pick up Notes and source: see Update Notes
going forward. In addition, the decline in the
imports of machinery and equipment seems to have turned the corner.
Mongolia has now benefited from a stable exchange rate since April of this year, due to strong policy actions
taken under the IMF program and favorable copper prices. This has also allowed the BoM to accumulate
international reserves. Real interest rates are now, however, very high, because the economy is experiencing
deflation with prices falling by 1.9 percent (year-on-year) in September, while nominal interest rates on both
savings and loans have not come down significantly.
High real interest rates on savings are responsible for the continued growth recorded in MNT savings, but
pose problems for borrowers in a depressed economy. In addition, most banks remain cautious, preferring to
purchase less risky central bank bills, and depositing their foreign exchange with the central bank.
Fortunately, signs of new lending to individuals are emerging. Overall, the banking sector’s balance sheet has
weakened further: a worrisome trend which is now almost a year old.
How Dutch Disease in the 1960s and 1970s caused the              The fiscal balance remains under pressure despite a
Netherland’s real exchange rate to appreciate and output         slight improvement in the 12-month rolling fiscal
to contract
                                                                 balance in September. Given the limited financing
 160                        GDP (% yoy, RHS)            12       options available, the next two to three years will
                            Ind Prod (% yoy, RHS)                require a continued fiscal effort to bring the budget
                            Real Exch. Rate (LHS)       10
 140                                                             back to a sustainable path. New fiscal management
                                                        8
                                                                 legislation designed to support this effort will be
 120                                                    6        presented to Parliament.
                                                        4
 100                                                             The second annual public Economic Policy
                                                        2        Conference (EPC) and a high-level workshop
   80                                                   0        between parliamentarians and international experts
                                                        -2       aimed to build a better understanding as to why and
   60                                                            how Mongolia was so badly affected by the recent
                                                        -4
                                                                 boom and bust cycle and what types of reforms
   40                                                   -6
                                                                 could be implemented to create a stronger
     1960       1970       1980       1990          2000
                                                                 framework for both the financial sector, as well as
Notes and source: see Update Notes                               fiscal management.