97605 Mongolia Monthly Economic Brief June 2015 Mongolia’s economic growth in Q1 2015, from a year ago, possibly indicating substitutions slowed to 4.4% (y/y), down from 8% in the of domestically produced goods for imported previous quarter. Investment sharply consumption goods amidst continued exchange contracted by 61.6% from the same quarter a rate depreciation over the last two years. year ago, amidst continued dampening of FDI Agricultural GDP growth softened to 9.2%. inflows. Final consumption also remained Construction GDP expanded by 31.8% in the first sluggish, increasing by 2.7% (y/y) in the first quarter on account of the completion of a few quarter, after a contraction by 2.4% in the large commercial buildings and apartments that previous quarter. Improving trade accounts, had been under construction over the recent however, underpinned economic growth on years. account of declining imports and t robust export The unemployment rate stood at 7.4% in the growth. first quarter and the composition of jobs Mineral GDP growth softened to 13.8% (y/y) in indicates deteriorating labor market the first quarter from 20.5% in the previous conditions. The official unemployment rate in quarter. Slowing production growth of copper the first quarter was down from 9.4% in the concentrates, oil and gold moderated mining same quarter the previous year, despite the GDP growth. In April, mining industrial slowing economy. The number of jobs increased production growth picked up to 28% (y/y), from by 65 thousand. Employment in self-employed 15% in March, on the back of increased businesses, unpaid family work, and animal production of copper concentrate. Copper husbandry – which are typically small and more concentrate production increased by 37.5% in associated with informal sector – absorbed more April and by 18.6% in the first four months on a labor force than formally paid-employees. Such year-on-year basis. Coal production increased by informal jobs accounted for 49.8% of total jobs 16.8% in the first four months from a year ago. in the first quarter, continuously rising from 49.3% in the same quarter last year and 46.3% in Non-mineral GDP growth dropped to 1.5% (y/y) 2013. in the first quarter, from 4.1% of the previous quarter. The wholesale and retail sector and net Food price inflation has been picking up since taxes on products contracted by 7.6% and 14.8% February whilst national headline inflation respectively on a year-on-year basis, likely remained in single digits. UB headline inflation reflecting substantial declines in imports. The was 7.5% (y/y) in May, down from 8.8% in the manufacturing sector, however, grew 11.1 % previous two months. National headline inflation 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). moderated to 8% in May, from 9.2% the previous however, increased by 8% over the first five month. Core inflation (UB) continued to months, likely reflecting seasonal meat supply moderate to 10% (y/y) in May, down from 11% fluctuations. in April. Overall food price inflation (UB), Figure 1. Growth slowed to 4.4% in Q1 due to slowing Figure 2. CPI inflation in UB moderated to 7.5% in May but productions in both mining and non-mining sectors. food price inflation has picked up since March. Real GDP growth trend (y/y, %) Food and non-food inflation in the first 5 months (Ulaanbaatar, YTD, 40 %) Non-mineral GDP 35 Mining GDP Others Non-Meat food Meat Inflation (YTD) 30 Overall GDP 3.0 2.4 2.4 25 2.5 20 2.0 15 1.5 1.5 2.4 10 2.2 0.7 5 1.0 1.2 0.5 0 0.5 0.5 0.1 -5 0.0 I II III IV I II III IV I II III IV I II III IV I -0.5 2011 2012 2013 2014 2015 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Source: NSO, WB staff estimates The current account deficit slightly widened to declined by 46% (y/y) in May largely due to a 49% $80.4 million in April amidst a narrowing trade drop in export volume. However, copper surplus. After a surplus of $86.9 million in concentrate exports increased by 17% in May January, the current account recorded a deficit after a 14% contraction in April. Oil exports also of $210.8 million in Feb-Apr. The current account dropped by 27% (y/y) amidst lower prices. Total deficit over the first four months amounted to imports (CIF term) declined by 32% (y/y) in May $123.8 million. The trade balance recorded a reflecting sluggish domestic demand. $422.3 million surplus over the first five months Investment-related imports continued to sharply on account of a 3% decrease in exports and a drop by 28% and consumption goods also fell by 32.1% contraction in imports. The monthly trade 33% in May from a year ago. Over the first five surplus, however, continued to decline from months, oil product imports dropped by 39% and $225 million in January to $4.3 million in May. non-oil imports also dropped by 30% on a year- Exports declined in May by 15.8% (y/y) due to on-year basis. weakening mineral exports. Coal exports Figure 3. Current account balance continued to deteriorate in Figure 4. Mineral exports substantially declined and weakening April amidst slowing exports. domestic demand continued to dampen imports in April. 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% -60 -300 Sep-11 Sep-12 Sep-13 Sep-14 Jul-11 Nov-11 Jul-12 Nov-12 Jul-13 Nov-13 Jul-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 -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 $332 million a year before, largely due to net outflow of $125.7 million over the first four repayment of inter-company borrowings. FDI, months. FDI recorded a net outflow of $71 however, turned into a slight net inflow of $38 million during the same period, a significant million in April. A net financial inflow of $455 deterioration compared to the net inflow of million was recorded in the currency and deposit 2 account in the first four months reflecting Recent stabilization of exchange rate since May reserve-related transactions. reflects positive developments on the external The balance of payments deficit reached $320 accounts. An agreement on the long-awaited million over the first four months, reflecting a development of OT underground mine was $49 million deficit in April. Gross international announced on May 18, resolving outstanding reserves moderately declined to $1,267 million shareholder issues including tax, royalties and in April from $1,323 million of the previous management services payments. Once the month. The bilateral currency swap facility with project begins, after the approval of the China helped mitigate pressures on gross feasibility study and project financing of around reserves. Gross reserves dropped by $382 $4 billion in the coming months, it is expected to million in the first four months from the end- substantially ramp up FDI inflows in the coming 2014 level ($1,649 million). The exchange rate years. An international bond issuance of $500 depreciation trend has been reversed since May, million by the Trade and Development Bank with local currency value appreciating 2.7% in (TDB) under government guarantee in May also May and another 2% against the USD for the first contributed to the strengthening of the value of ten days in June. local currency. Figure 5. BoP remained in deficit in Jan-Apr amidst weak FDI Figure 6. Gross FX reserves declined to $1.2 billion in April despite liquidity buffers from the PBoC swap line. but the FX rate depreciation trend was reversed in May-June. Net capital flows and BoP balance (in millions of US$, 3 month Nominal exchange rate and gross FX reserves moving average) 4.5 Gross FX reserves (billions of $): LHS 2100 1,000 Exchange Rate (MNT/USD): RHS FDI 4.0 2000 800 Errors and omissions 3.5 1900 Currency and Deposits 1800 600 Portfolio investment & loans 3.0 Overall BoP balance 1700 400 2.5 1600 2.0 200 1500 1.5 1400 0 1.0 1300 -200 0.5 1200 -400 0.0 1100 Feb/11 Feb/12 Feb/13 Feb/14 Feb/15 May/11 Nov/11 May/12 Nov/12 May/13 Nov/13 May/14 Nov/14 May/15 Aug/11 Aug/12 Aug/13 Aug/14 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 on unhedged borrowers. MNT loans including increase in April with the NPL ratio climbing to securitized mortgage loans displayed a 20.6% y/y over 4% of total loans. Outstanding NPLs growth in April, down from 24% the previous (excluding the failed banks in 2008-9) reached month, reflecting the gradual withdrawal of PSP 4.2% of total loans in April, up from 3.9% in loans and the slowing economy. Bank deposit March and 3.1% at the end of 2014. Past-due growth remained weak. Bank deposits declined loans reached 4.9% of outstanding loans in April, 2.1% from March and 3.2% from a year ago. up from 4.65% in March and 2.2% at the end of Broad money growth further slowed to a 2014. negative 4.9% growth (y/y) amidst slowing domestic credit growth and continued Bank liquidity remained tight in April amidst substantial declines in net foreign assets. subdued foreign currency loans, phasing-out of the Price Stabilization Program, and declining BoM’s net domestic credit climbed to MNT 3.8 bank deposits. Bank credit growth (including trillion in April, from MNT 3.4 trillion at the end securitized mortgaged loans) decelerated to 12% of 2014. Net claims on government continued to (y/y) in April from 16% in March and 20% at the increase due to declines in government deposits end of 2014. Foreign currency loans continued to amidst the tight fiscal situation. Claims on banks decline in April on a year-on-year basis amidst declined to MNT 1.8 trillion in April from MNT import declines and higher risk weights imposed 2.6 trillion at the end of 2014 reflecting the 3 phasing-out of the Price Stabilization Program the housing mortgages were securitized into and BoM’s purchases of securitized housing RMBSs through MIK as of April and the BoM mortgage loans (RMBSs) from banks via purchased about 90% of RMBSs. Claims on non- Mongolia Mortgage Corporation (MIK). bank sectors (including MIK) increased to MNT 2 Outstanding discounted housing mortgage loans trillion in April from MNT 1.7 trillion at the end reached MNT 2.26 trillion in April, growing 11% of 2014 reflecting the purchases of RMBSs. over the last four months. MNT 1.24 trillion of Figure 7. NPLs increased by 9.7% and past-due loans Figure 8. Bank loan growth continued to decelerate and increased by 5% in April. deposit growth turned negative in April. 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) Size of past-due loans (billions MNT) 70 MNT loan (y/y, %p) 1,600 NPL ratio (incl. failed banks, %): RHS 20 Total bank loans (yoy, %) 60 Past-due loan ratio (incl. failed banks, %): RHS 18 Bank deposit growth (y/y, %) 1,400 50 16 1,200 40 14 1,000 12 30 800 10 20 600 8 6 10 400 4 0 200 2 -10 0 0 Feb-12 Oct-12 Feb-13 Oct-13 Feb-14 Oct-14 Feb-15 Jun-12 Jun-13 Jun-14 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Apr-08 Jul-08 Apr-09 Jul-09 Apr-10 Jul-10 Apr-11 Jul-11 Apr-12 Jul-12 Apr-13 Jul-13 Apr-14 Jul-14 Apr-15 Source: BoM, WB staff estimates Budget expenditures became tighter in May expenditures (30% of the budget plan). The amidst widening revenue shortages. Budget MTFF for 2016-19 approved by the parliament revenue shortfalls reached 18% of planned on May 18 projected annual revenue shortfalls receipts in the first five months. Tax revenue to reach MNT 498 billion (7% of budget shortfalls amounted to 11% of the budget projection) in 2015. High domestic sovereign projection mainly due to weak foreign trade- borrowing costs persisted amidst tight banking related taxes. Non-tax revenue outturn only sector liquidity, with 12-week government bond reached 54% of the original plan. Under tight yields remaining close to 15% in April and May. payment controls by the budget authorities, The budget authorities have urged budget budget execution in the five months remained governors to prioritize spending and only at 70% of the spending plan. While the commitments to avoid payment arrears. The budget execution rates of wages and social Government is currently considering an welfare transfers were above 90% of the plan, amendment of the 2015 budget in light of the execution of discretionary spending remained weak revenue performance. substantially weak particularly in capital 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 consolidating spending proposals. The following parliament on May 21. The MTFF revised measures are proposed to contain the deficit downward the revenue projections for 2015-18 within 4% of GDP in 2016 required by the FSL: and set a path of aggregate expenditure ceilings  Reduce discretionary recurrent spending and to meet the requirements of the Fiscal Stability contain interest payment by reducing T-bill Law. 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 to MNT 200 billion. 2015 to reach MNT 498 billion due to declining Reduce foreign loan disbursements by imports, weaker copper and oil prices and prioritizing new foreign loan projects. sluggish growth, and calls for budget spending The new MTFF is another positive step taken by cuts by the same amount to comply with the FSL. the Government, reaffirming its commitment The fiscal plan underscores the importance of to the fiscal adjustment path envisioned by the realistic revenue projections. The plan notes FSL. An amendment of the 2015 budget is that overstated revenue projections have needed to reflect the realistic revenue projection undermined the credibility of the budget in the of the MTFF. Proper reflection of the plan into past years. The MTFF projects the economy to the 2016 budget would strengthen the grow at 5% on average in 2016-18 due to weak credibility of the fiscal adjustment plan. An ad- external environment, and revises downward hoc increase of the revenue forecast during the revenue projections from the previous MTFF by parliament review needs to be avoided. 7.4% for 2015, 3.4% for 2016, and 4.3% for 2017. Specifying medium-term spending priorities The MTFF calls for spending adjustment to and reform measures would further improve contain the budget deficit within 4% of GDP in the credibility of the MTFF. While proposing 2016 and further reduce it within 3% in 2017 more realistic revenue projections than in the and 2% in 2018 according to the FSL. The plan previous years, the current MTFF is still focused notes that the budget deficit could reach over on the next year’s budget and is yet to include 19% of GDP in 2016, should all spending medium-term fiscal strategies including proposals be included in the budget. The MTFF revenue mobilization and expenditure proposes to contain budget spending growth at prioritization policies in the next three years. 5% in 2016 and less than 2% in 2017-18 by Figure 11. The new MTFF lowers revenue projections based Figure 12. … needed to achieve the lower budget expenditure on more realistic assumptions… ceilings needed 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 (2016-19) 5