MONGOLIA MONTHLY BRIEF – SEPTEMBER 2009 (The full report can be downloaded at http://www.worldbank.org.mn) International economic developments since the last Monthly Update Exchange rate stable, with some minor were supportive for Mongolia. Mineral prices continued to rise and appreciation between August and September 2009 the industrial production of Mongolia’s major trading partners, MNT per USD including China, showed signs of a turnaround. However, developments in Mongolia are mixed. Compared to August 2008, the trade deficit narrowed further (on a 12-month rolling basis), but this merely pointed to a continued slowdown in the economy, as the contraction in imports continued to outpace that of exports. Prices, rather than volume, were the main cause of the drop in exports. And even though some gold exports were recorded in August, the performance of this sector was disappointing, despite the directed credit accorded to it earlier in the year. Welcome exceptions to the declining export trend were the increased exports of coal and greasy cashmere. The positive development in the cashmere market, which is important for Notes and source: see Update Mongolia’s rural population, was caused b y the timely removal of the export tax on unprocessed cashmere and the opening up of more border crossings for cashmere trade. The continued narrowing of the trade deficit, combined with monetary tightening and the introduction of a transparent foreign exchange auctioning mechanism by the Bank of Mongolia (BoM), kept the exchange rate stable. This situation has also allowed the BoM to continue to accumulate international reserves. The overall consumer price index decreased by 0.9 percent in August (year-on-year), i.e., the economy is in deflation, driven by price decreases in food and fuel products, while core inflation fell to single digits. In response to lower inflation, the BoM cut its policy rate by one and a half percent and commercial banks reduced their nominal interest rates on MNT deposits. Even though real interest rates dropped, MNT savings continued to grow. While this points to restored confidence in the local currency, the banking sector continues to pose significant risk. NPLs and loans with principal in arrears continued to rise—a worrisome trend which is now almost ten months old. Hardest hit by the economic downturn during the last year were the poor. The World Bank commissioned two special surveys to get a snapshot of the daily wage of unskilled workers in key informal labor markets in Ulaanbaatar in April and September, 2009. While the April survey showed real income collapses by about 60 percent compared to a year earlier, the results of the September survey suggest a modest improvement between April and September. Disappearing inflation and slightly increased job demand seem to have been the contributing factors. Although stabilizing, industrial production continues to contract, particularly in the manufacturing sector, with Mongolia facing a sharp GDP growth slow down for 2009 as a whole. And the IMF recently lowered its growth forecasts for 2009 and 2010 to 0.5 and 3.0 percent, respectively. Company tax returns confirm these negative trends. Comparing the second quarters of 2008 and 2009, company income before tax fell by 28.1 percent, and taxes paid fell by 51.9 percent, with mining, and gas, fuel and coal wholesale sectors being hit the hardest. The fiscal balance remains under pressure: falling revenues contributed to a continued deterioration in the 12-month rolling fiscal balance through August. The deterioration of the Stabilizing the budget during copper price booms and deficit has been mostly due to falling mining revenues as busts: Chile’s structural balance rule expenditures remain relatively stable. 15 Chile's fiscal balance (% of GDP) 9000 Using the crisis as an opportunity to improve the legal Chile's structural balance (% of GDP) framework for fiscal management, the government now intends Mongolia's fiscal balance (% of GDP) Copper price (right axis) in $ per metric ton to submit two pieces of new fiscal management legislation to 7000 parliament. These are a new organic budget law and a new fiscal 5 stability law. These two bills are designed to bring more stability 5000 and sustainability to the budget. A team from the Ministry of 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Finance and Parliament recently visited Chile to get a firsthand -5 account of that country’s highly successful management of its 3000 mining revenues during the recent boom and bust period. These improvements in fiscal management come at a highly opportune time, as the government concluded the negotiations on the OT -15 1000 mining development on October 6. Notes and source: see Update