98239 Mongolia Monthly Economic Brief June 2015 Mongolia’s economic growth in Q1 2015, 9.2%. Construction GDP expanded by 31.8% in slowed to 4.4% (y/y), down from 8% in the the first quarter on account of the completion of previous quarter. Investment sharply some large commercial buildings and contracted by 61.6% from the same quarter a apartments. In April and May, manufacturing year ago, amidst continued dampening of FDI industrial production declined by 5.3% and inflows. Final consumption also remained electricity production grew by only 0.2% on a sluggish, increasing by 2.7% (y/y) in the first year-on-year basis, indicating that non-mining quarter, after a contraction by 2.4% in the sector production remained weak in the second previous quarter. Substantial improvement in quarter. net exports due to robust exports and subdued The composition of jobs indicates deteriorating imports underpinned economic growth. quality of labor market conditions. The official Mineral GDP growth softened to 13.8% (y/y) in unemployment rate in the first quarter was the first quarter from 20.5% in the previous down from 9.4% in the same quarter the quarter. Slowing production growth of copper previous year, despite the slowing economy. concentrates, oil and gold moderated mining Employment in jobs more associated with GDP growth. Mining industrial production in informal sector, however, absorbed more labor April and May increased by 13.6% (y/y), force than formal sector jobs, indicating moderately picking up from 13% in the first deteriorating quality of employment. Self- quarter. Coal production declined by 4.5% in the employed businesses, unpaid family work, and first five months on a year-on-year basis. Copper animal husbandry accounted for 49.8% of total concentrate production increased by 19.4% in jobs in the first quarter, which rose from 46.3% the first five months from a year ago. in 2013. Non-mineral GDP growth dropped to 1.5% (y/y) Inflation continued to moderate. UB headline in the first quarter, from 4.1% of the previous inflation was 7.5% (y/y) in May, down from 8.8% quarter. The wholesale and retail sector in the previous two months. National headline contracted by 7.6% on a year-on-year basis, inflation moderated to 8% in May, from 9.2% the likely reflecting substantial declines in imports. previous month. Core inflation (UB) continued to Manufacturing grew 11.1% from a year ago, moderate to 10% (y/y) in May, down from 11% largely due to a strong increase in textile in April. products. Agricultural GDP growth softened to The Monthly Economic Brief was prepared by the MFM GP Mongolia Team, composed of Taehyun Lee (Senior Country Economist), Altantsetseg Shiilegmaa (Economist), Davaadalai Batsuuri (Economist), under the guidance of Chorching Goh (Lead Economist) and Mathew A. Verghis (Practice Manager). Figure 1. Growth slowed to 4.4% in Q1 due to slowing Figure 2. National CPI inflation moderated to 8% in May. productions in both mining and non-mining sectors. Real GDP growth trend (y/y, %) Food and non-food inflation (Ulaanbaatar, y/y, %) 40 Headline inflation Food inflation Non-Food inflation Non-mineral GDP 35 20% Mining GDP 18% 30 Overall GDP 16% 25 14% 20 12% 10.0% 15 10% 10 8% 7.5% 5 6% 4% 0 3.3% 2% -5 0% I II III IV I II III IV I II III IV I II III IV I Feb-14 Sep-14 Feb-15 Nov-13 Jul-14 Aug-14 Nov-14 Jan-14 Mar-14 Jun-14 Jan-15 Mar-15 Dec-13 Dec-14 Oct-13 Oct-14 Apr-14 May-14 Apr-15 May-15 2011 2012 2013 2014 2015 Source: NSO, WB staff estimates The current account deficit slightly widened to copper concentrate exports increased by 17% $80.4 million in April amidst a narrowing trade (y/y) in May, rebounding from a 14% contraction surplus. After a surplus of $86.9 million in in April. Oil exports also dropped by 27% (y/y) January, the current account recorded a deficit amidst lower prices. Total imports (CIF term) of $210.8 million in Feb-Apr. The trade balance declined by 32% (y/y) in May reflecting sluggish recorded a $422.3 million surplus in the first five domestic demand. Investment-related imports months but the monthly trade surplus continued continued to sharply drop by 28% and to decline from $225 million in January to $4.3 consumption goods also fell by 33% in May from million in May. Exports declined in May by 15.8% a year ago. Over the first five months, oil product (y/y) due to weakening mineral exports. Coal imports dropped by 39% and non-oil imports exports declined by 46% (y/y) in May largely due dropped by 30% on a year-on-year basis. to a 49% drop in export volume. However, Figure 3. Current account balance continued to deteriorate in Figure 4. Mineral export growth slowed and weakening domestic April amidst slowing exports. demand continued to dampen imports in May. Growth of exports and imports (3 month moving average) and Y/Y growth of key export/import goods (3 month rolling sum, %) current account balance (3 month rolling sum) 300% Exports (y/y, %): LHS 250% 60 Imports (y/y, %): LHS 300 CA balance (million $, 3 month rolling sum): RHS 200% 40 200 150% 20 100 100% 0 0 50% -20 -100 0% -50% -40 -200 -100% Jul-11 Sep-11 Nov-11 Jul-12 Sep-12 Nov-12 Jul-13 Sep-13 Nov-13 Jul-14 Sep-14 Nov-14 Mar-11 Jan-12 Mar-12 Jan-13 Mar-13 Jan-14 Mar-14 Jan-15 Mar-15 May-11 May-12 May-13 May-14 May-15 -60 -300 -80 -400 Copper concentrate exports Coal exports Jul-12 Sep-12 Nov-12 Jul-13 Sep-13 Nov-13 Jul-14 Sep-14 Nov-14 Jan-12 Mar-12 Jan-13 Mar-13 Jan-14 Mar-14 Jan-15 Mar-15 May-12 May-13 May-14 May-15 Oil exports Investment-related imports Consumption-related imports Source: BoM, WB staff estimates The capital and financial account displayed a months reflecting the drawdown of the bilateral net outflow of $125.7 million over the first four currency swap line with China. months. FDI recorded a net outflow of $71 million, a significant deterioration compared to The balance of payments deficit reached $320 the net inflow of $332 million a year before, million over the first four months, reflecting a largely due to repayment of inter-company $49 million deficit in April. Trade surplus and borrowings. FDI, however, turned into a slight reserve buffers from the bilateral currency swap net inflow of $38 million in April. A net financial line with China helped eased the BoP pressures inflow of $455 million was recorded in the from continued declines in FDI inflow. currency and deposit account in the first four 2 Gross international reserves declined in April against the USD in two months, from MNT 1989 reflecting the BoP deficit, but rebounded in at end-March to MNT 1862 on June 13. The May due to a new external borrowing. Gross currency appreciation reflected growing reserves dropped to $1,267 million in April, expectations on the agreement on the long- down by 382 million over the first four months delayed OT’s underground investment. The from $1,649 million at the end of 2014. Gross exchange rate has been back on a depreciating reserves, however, rose to $1,590 million in trend since June 16. May, reflecting a new external borrowing by the Trade and Development Bank (TDB). The TDB An agreement on the development of OT issued 5-year international bonds of $500 million underground mine was announced on May 18. under government guarantee with a 9.375% rate The agreement included outstanding in May. The bond proceeds were absorbed by shareholder issues including tax, royalties and the central bank international reserves through management services payments. Once the a long-term swap arrangement. project begins, after the approval of the feasibility study and project financing of around Exchange rate depreciation slowed since mid- $4 billion in the coming months, the second April. After a 3.8% depreciation in the first four phase development of OT mine is expected to months amidst continued BoP deficit, the ramp up FDI inflows in the coming years. exchange rate appreciated over 6 percent Figure 5. BoP remained in deficit in Jan-Apr amidst weak FDI Figure 6. The exchange rate has been depreciating since mid- despite liquidity buffers from the PBoC swap line. June after two months’ appreciation. Net capital flows and BoP balance (in millions of US$, 3 month Daily nominal exchange rate (MNT/USD) moving average) 1,000 2,100 FDI 800 Errors and omissions 2,000 Currency and Deposits 1,900 600 Portfolio investment & loans Overall BoP balance 1,800 400 1,700 200 1,600 0 1,500 -200 1,400 -400 Feb-12 Feb-13 Feb-14 Feb-15 Oct-12 Oct-13 Oct-14 Jun-12 Jun-13 Jun-14 Apr-12 Apr-13 Apr-14 Apr-15 Aug-12 Dec-12 Aug-13 Dec-13 Aug-14 Dec-14 Source: BoM, WB staff estimates Non-performing loans (NPLs) continued to grow continued to decline in May on a year-on-year in April-May with the NPL ratio climbing to over basis amidst import declines and higher risk 4% of total loans. Outstanding NPLs (excluding weights imposed on unhedged borrowers. MNT the failed banks in 2008-9) reached 4.2% of total loans including securitized mortgage loans loans in May, up from 3.9% in March and 3.1% at displayed a 16% y/y growth in May, down from the end of 2014. Past-due loans reached 5% of 20.6% the previous month, reflecting the gradual outstanding loans in May, up from 4.9% in April withdrawal of PSP loans and the slowing and 2.2% at the end of 2014. economy. Bank deposit growth remained weak. Bank deposits declined 3.3% in May from a year Bank liquidity remained tight in May amidst ago. Broad money growth further slowed to a subdued foreign currency loans, phasing-out of negative 3.8% growth (y/y) in May amidst the Price Stabilization Program, and declining slowing domestic credit growth and continued bank deposits. Bank credit growth (including declines in net foreign assets. securitized mortgaged loans) decelerated to 8.4% (y/y) in May from 12.4% in April and 20% at the end of 2014. Foreign currency loans 3 BoM continued to phase out the PSP loans but BoM purchased about 90% of RMBSs. BoM the mortgage program continued to grow. claims on banks declined to MNT 1.9 trillion in BoM’s outstanding PSP credit continued to May from MNT 2.6 trillion at the end of 2014 decline to MNT 0.7 billion in May. Outstanding reflecting the unwinding of PSP loans and BoM’s discounted mortgage loans reached MNT 2.3 RMBS purchases from MIK. Claims on non-bank trillion in May, growing 13.7% over the last five sectors (including MIK) increased to MNT 2.1 months. MNT 1.23 trillion of the mortgages were trillion in May from MNT 1.7 trillion at the end of securitized into RMBSs through Mongolia 2014 reflecting the purchases of RMBSs. Mortgage Corporation (MIK) as of May and the Figure 7. NPLs reached 4.2% of total loans in May. Figure 8. Bank loan growth continued to decelerate and deposit growth remained weak. Size and ratio of NPLs and past-due loans (billions of MNT, %) Bank loans and deposit y/y growth and reserves to deposit ratio (%) Size of NPLs (billions MNT) Foreign currency loan (y/y, %p) 1,600 Size of past-due loans (billions MNT) 20 MNT loan (y/y, %p) NPL ratio (incl. failed banks, %): RHS 70 Total bank loans (yoy, %) 1,400 Past-due loan ratio (incl. failed banks, %): RHS 18 Bank deposit growth (y/y, %) 60 16 Reserves (in % to deposits): incl. BoM bills 1,200 50 14 1,000 12 40 800 10 30 600 8 20 6 400 10 4 200 0 2 0 0 -10 Jul-12 Sep-12 Nov-12 Jul-13 Sep-13 Nov-13 Jul-14 Sep-14 Nov-14 Jan-12 Mar-12 Jan-13 Mar-13 Jan-14 Mar-14 Jan-15 Mar-15 May-12 May-13 May-14 May-15 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 Source: BoM, WB staff estimates Widening revenue shortages continue to discretionary spending stayed weak particularly undermine the credibility of the fiscal plan, in capital expenditures (30% of the budget plan). requiring a supplementary budget. Budget The MTFF approved on May 18 projected revenue shortfalls reached 18% of the budget in revenue shortfalls to reach MNT 498 billion (7% the first five months. Tax revenue shortfalls of budget) in 2015. High domestic sovereign amounted to 11% of the budget mainly due to borrowing costs persisted amidst tight banking weak trade-related taxes. Under tight payment sector liquidity, with government bond yields controls by the budget authorities, budget remaining around 15%. A supplementary budget execution in the five months remained only at would enable the authorities to properly 70% of the spending plan. While the budget prioritize spending that are consistent with execution rates of wages and welfare transfers realistic revenue estimates and the FSL. were above 90% of the plan, execution of Figure 9. Budget revenue shortfall widened in May and budget Figure 10. Domestic sovereign borrowing costs remained spending remains tight. substantially elevated since late 2014. Y/Y growth of revenue and spending (year-to-date rolling sum, %) Key market interest rates and government securities yields (%) Budet revenues (ytd rolling sum, y/y, %): LHS 19 12 week T-bills 1 year T-bills Expenditures (ytd rolling sum, y/y, %) excl. DBM: LHS Overnight loans BoM policy rate 60% 17 40% 15 13 20% 11 0% 9 -20% 7 -40% 5 Source: MoF, BoM, WB staff estimates 4 The MTFF for 2016-18 was approved by the measures are proposed to contain the deficit parliament on May 21. The MTFF revised within 4% of GDP in 2016 required by the FSL: downward the revenue projections for 2015-18  Reduce discretionary recurrent spending and and set a path of aggregate expenditure ceilings contain interest payment by reducing T-bill to meet the requirements of the FSL. issuance to finance the budget deficit. Further spending cuts are called for in 2015 in  Allow only on-going public investment projects light of large revenue shortfalls. The MTFF and contain DBM-financed budgetary projects annual budget revenue shortages in investment projects. Reduce foreign loan 2015 to reach MNT 498 billion due to declining disbursements by prioritizing new foreign loan imports, weaker copper and oil prices and projects. sluggish growth, and calls for budget spending Proper implementation of the MTFF would cuts by the same amount to comply with the FSL. strengthen the credibility the fiscal adjustment The fiscal plan underscores the importance of plan. A further adjustment of the 2015 budget is realistic revenue projections. The plan notes needed to reflect the realistic revenue projection that overstated revenue projections have of the MTFF. Proper reflection of the plan into undermined the credibility of the budget in the the 2016 budget is also critical for credible past years. The MTFF projects the economy to implementation of the fiscal adjustment plan grow at 5% on average in 2016-18 due to weak envisioned by the FSL. In this regard, an ad-hoc external environment, and revises downward increase of the revenue forecast during the revenue projections from the previous MTFF by parliament review – which was one of the factors 7.4% for 2015, 3.4% for 2016, and 4.3% for 2017. behind the overstated revenues of the 2015 budget – needs to be avoided. The MTFF calls for spending adjustment to contain the budget deficit within 4% of GDP in Specifying medium-term spending priorities 2016 and further reduce it within 3% in 2017 and reform measures would further improve and 2% in 2018 according to the FSL. The plan the credibility of the MTFF. While proposing notes that the budget deficit could reach over more realistic revenue projections than in the 19% of GDP in 2016, should all spending previous years, the current MTFF is still focused proposals be included in the budget. The MTFF on the next year’s budget and is yet to include proposes to contain budget spending growth at medium-term fiscal strategies including 5% in 2016 and less than 2% in 2017-18 by revenue mobilization and expenditure consolidating spending proposals. The following prioritization policies in the next three years. Figure 11. The new MTFF lowers revenue projections based Figure 12. … and set lower budget expenditure ceilings needed on more realistic assumptions… to meet the FSL deficit ceilings. Revenue Projection (trillion MNT): 2015 MTFF (2016-18) vs. Budget expenditure ceilings (trillion MNT): 2015 MTFF (2016-18) 2014 MTFF (2015-17) vs. 2014 MTFF (2015-17) 9 8 8 7 7 6 6 5 5 4 4 Actual Actual Budget 2015 2014 2015 2014 2015 2015 Actual Actual Budget 2015 2014 2015 2014 2015 2015 MTFF MTFF MTFF MTFF MTFF MTFF MTFF MTFF MTFF MTFF MTFF MTFF 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 Source: MoF, 2015 Budget, 2014 MTFF (2015-17), 2015 MTFF (2016-18) 5