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Economy / Mongolia News / September 17, 2015

Mongolia hit hard by China’s economic slowdown

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Mongolia has been greatly affected by China’s economic slowdown. How have falling commodity prices and a devaluation of Mongolia’s currency affected the country?

Surpassing the US as the world’s largest trading nation in 2013, the impact of China’s economic slowdown has been felt all over the world, proving particularly challenging for a number of low-income and lower-middle-income economies, including Mongolia, that have depended on exports to China.

Dependence on natural resources

Mongolia, classified as an upper-middle-income economy by the World Bank, has enjoyed high growth rates over the past several years due to its wealth of natural resources. Rents from minerals, coal, oil and forestry accounted for over a quarter of GDP in 2013.

In 2014, Mongolia was one of the fastest growing economies in the world, with an estimated real GDP growth rate of 9.1% and China as its biggest trading partner. 90% of Mongolian exports went to China in 2013.

However, consisting almost entirely of coal, copper, iron ore, and crude oil, Mongolian exports have been hit incredibly hard by the drop in Chinese industrial demand. Coinciding with this slowdown, worldwide prices of commodities used in construction have dropped dramatically. As a result, Mongolia’s GDP growth rate is estimated to fall to 4.2% in 2016, compared with 18% in 2011.

Tugrik under pressure

The fall in commodity prices has put pressure on Mongolia’s currency, the Tugrik. Compared to the US dollar, it reached a record lows in March of this year, only to recover slightly before falling again by 4.9% between June and July 2015.

Comparing the Tugrik to the Chinese Yuan shows an even more alarming trend – The Tugrik has depreciated by 40% since 2011 relative to the currency of China, its biggest trading partner. Since Mongolia imports many consumer goods, including textiles, the exchange rate has directly impacted Mongolians’ purchasing power.

In addition, the expected price increases of imported goods, together with the Mongolian government’s loose fiscal and monetary policies, are likely to drive up inflation. As a response to persistently high inflation rates, which averaged 12.3% over the past eight years, the IMF has warned that Mongolia requires strong fiscal and monetary reforms to bring inflation back under control.

Has China’s slowdown also caused a decrease in Chinese FDI in Mongolia?

While Mongolian exports continue to suffer, Chinese FDI into Mongolia has continued to rise. In 2012, FDI from China accounted for 8.8% of Mongolia’s GDP, further illustrating Mongolia’s reliance on its southern neighbor. Between 2012 and 2013 total FDI in Mongolia fell by half, raising questions about the impact of a Chinese slowdown.

However, World Bank data illustrates that between 2012 and 2013 China’s net FDI outflows as a percent of GDP actually increased from 1.4% to 1.7%. Instead, the decrease in FDI in Mongolia was primarily driven by the adoption of the Strategic Entities Foreign Investment Law, which limits foreign ownership in a number of sectors, including mining.

SOURCE: Global Risk Insights

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