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Occasion
Mongolia’s anticipated reasonable actual GDP development (+2.5%) in 2022 – after a modest +1.6% in 2021 – is forecasted to speed up to five% in 2023. Nevertheless, the newest IMF forecasts are unsure as the primary exterior elements behind this yr’s subdued development, particularly China’s Covid containment measures, the weak financial momentum and inflation pressures, may persist subsequent yr.
Influence
China’s zero-Covid coverage and sharply weaker financial exercise have considerably hit landlocked Mongolia’s key exports to China due to land border closures, provide chains disruptions and poor (commodity) demand. In addition to, Mongolia is affected by inflation pressures, that are exacerbated by the impression the struggle in Ukraine is having on meals and power costs, and by the depreciation of the tugrik. Thus far, the latter has misplaced 18% of its worth towards the US greenback this yr (information till 13 October), which has fuelled inflation as effectively. Depreciating pressures come not solely from a robust US greenback, but additionally from a considerable widening of the nation’s present account deficit from 12.8% of GDP in 2021 to an anticipated 20% in 2022. This deterioration is defined by the rise in imports, which is basically exceeding the leap in exports in worth, as export volumes proceed to drop this yr as effectively. In response, the central financial institution has sharply tightened its financial coverage by doubling its coverage price to 12% this yr, i.e. a five-year excessive. Additional price will increase will not be dominated out sooner or later. On this context and given the danger of – at greatest ¬– a slowly rising world economic system placing downward pressures on world commodity demand and thus costs, Mongolia’s financial forecasts for 2023 are very unsure as Mongolia stays very reliant on China and mining costs. Certainly, 75% of its exports go to China, whereas greater than 60% of Mongolia’s imports come from China and Russia. Volatility in mining costs is certainly one of a number of exterior shocks weighing on Mongolia’s financial prospects, as costs might be at decrease ranges in case of flat world development subsequent yr. In these turbulent and unsure instances, Mongolia’s dependence on its neighbours and the extractive sector are once more accentuating the nation’s structural weaknesses. That is highlighted by tourism as effectively. The sector, seen as a supply of financial diversification, stays just about frozen because of China’s zero-Covid restrictions and the struggle in Ukraine (e.g. sanctions), and due to this fact continues to hurt financial exercise. One other development driver, personal consumption, is affected by excessive inflation after households had simply welcomed the lifting of Covid-19 restrictions in early 2022.
On the optimistic facet, the growth of the large Oyu Tolgoi copper mine is anticipated to maneuver ahead in 2023 after the federal government and challenge companions reached an settlement in January. This growth is more likely to assist exports and actual GDP development. Furthermore, Mongolia’s political state of affairs has stabilised because the June 2021 elections with the ruling Mongolian Individuals’s Get together having fun with parliamentary majority and answerable for the presidency. In a context of heightened home stability, social protests fuelled by excessive residing prices and unemployment seem as the primary menace to stability within the short-term.
At a global stage, the struggle in Ukraine has raised the nation’s geopolitical dimensions because it finds itself in an in-between place between Russia and China on the one hand, and the West however. Whereas western assist to its democracy is anticipated to rise sooner or later, Mongolia is eager to proceed reaping financial advantages from its transit place between its two big neighbours, Russia and particularly China, its dominant commerce and funding associate. Mongolia is a part of China’s BRI (Belt and Highway Initiative) and agreed with Gazprom on the finish of February to start out constructing a pipeline (‘Energy of Siberia 2’) between Russia and China as from 2024. Whereas the pipeline would re-orient Russian fuel gross sales away from European prospects, it might permit Mongolia to understand useful transit charges. The financing has but to be discovered although, however an oil pipeline can also be mentioned to be thought-about. These financial tasks may ultimately enhance additional Mongolia’s financial vulnerability and dependence in the long run, particularly given rising world geopolitical tensions.
Credendo’s ST scores have remained secure since 2021, primarily due to a slowly enhancing financial momentum pushed by excessive mineral costs. Nevertheless, the ST political danger (4/7) has a unfavourable outlook. Certainly, liquidity dangers have been on the rise this yr, because of the regular collapse in international change reserves (-42% between January and August 2022), reflecting costly imports and weaker export development.
Analyst: Raphaël Cecchi – r.cecchi@credendo.com
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