Asian Development Bank (ADB) has introduced its projections for the Asia and Pacific region from 2016 to 2017, predicting rising inflation and offering perspective on economic growth. We spoke to economist L.Amar about Mongolia’s economic prospects in the near future.
The public believes that next year’s economic prospects are rather grim, as Mongolia’s state budget is looking at difficulties and the country is facing substantial debt. Is there any way to get the economy back on its feet based on the ADB report?
There is a positive message that the economy will recover, since growth hit rock bottom this year. For instance, economic growth is projected to be 2.3 percent at the end of this year, but next year it is expected to pick up to three percent. By tightening monetary policy this year, inflation has decreased. By August, inflation was at 6.6 percent. The ADB projects inflation will reach 7.6 percent at the end of this year, and next year’s inflation will be around the same level, which will have the positive impact of stabilizing commodity prices and alleviating the living conditions of the nation. Foreign direct investment also reached its lowest level this year, meaning that it will increase next year.
Will economic recovery depend on Oyu Tolgoi investments?
Yes. The Oyu Tolgoi underground mine’s financial package is expected to be approved by February of next year. Furthermore, investment is expected to come during the middle of next year. This will increase taxes on imports and related services, and even improve service industries by increasing their revenue. There is an expectation that the Oyu Tolgoi underground mining investment will have the same impact as its initial investment, which helped Mongolia’s economy grow by 17.5 percent [in 2011] This year, the two main economic sectors of the nation, mining and agriculture, are holding back the economy. Next year will also be similar.
This year’s state budget revenue is expected to be 1.2 to 1.3 trillion MNT short, according to the Ministry of Finance. What are the main risks that are likely to face the state budget?
It was clear from the beginning that this year’s state budget was drafted too optimistically by comparing it to the execution of last year’s budget. The only way out is to cut costs from the budget to suit revenue. The state has to follow the law that states that state budget deficit must not be higher than five percent of gross domestic product. There isn’t any other way.
What are the main risks for Mongolia’ economy next year? Some economists have said that the decrease in people’s income will have a negative effect on the construction and banking sectors, as borrowers will not be able to pay their loans on time.
The biggest risk isn’t domestic. The biggest impact will be determined by how well the Chinese government manages the economy and how it will influence our economy. The Chinese economy is heading more towards consumption rather than investment. They are decreasing infrastructure and construction investments, and this means that the demand for iron ore and coking coal, our main exports, is decreasing. If you look at their whole economy, automobile and machinery production is growing. The fact that they are decreasing investment in construction and infrastructure is negatively impacting our exports and reducing their value. From loan repayment reports, it is evident that bad loans are increasing, which is a concern.
How are Chinese economic prospects in the coming years? If China continues to pinch its construction and infrastructure projects, how will this affect Mongolia?
China’s economy has been growing at an average of 10 percent over the last decade. Now it is at 6.8 percent, or around seven percent, which seems bad, but actually, compared to global economic growth, this is still a leading figure. We believe the Chinese economy will grow by 6.7 percent in the next year. Due to the situation I described earlier, negative impacts will be dominant.
Can the state budget really cut costs by more than a trillion MNT? Does Mongolia need to acquire loans to make up the deficit?
Since the budget can be expanded, it can also be reduced. People spend depending on how much money they have in their pockets. Since income is decreasing, spending has to be cut. The budget stabilization fund law leaves domestic and foreign loans open. The ADB has agreed to provide a 150 million USD soft loan to support the state budget, because economic slowdown has the worst impact on the most vulnerable groups in society. This type of loan can have up to 30 year terms and floating interest rates. Currently, the interest rate is lower than one percent a year.SOURCE: UB Post