Ts.Gerelchimeg

National Consultant, Revenue division

Ministry of Finance

Coping with Global market commodity Price

Fluctuations: Impact on Fiscal and Debt

Management in case of Mongolia

World Bank’s Annual Stakeholders Forum of the Debt Management Facility

Manila, Philippines

June 3-4, 2015

Contents

1. Country Profile

2. Role of commodity on economy

3. Effect of commodity prices on the fiscal

4. Fiscal policy and improvement on legal environment

5. Medium term policy for Debt sustainability

2

1. Country Profile

3

Geography

• Area: 1,564,116 sq. km

• Capital City: Ulaanbaatar

• Geographic Areas: Gobi, Steppes, Mountains

Population and Culture

• Population: 3 million

• Language(s): Mongolian (90%), Kazakh, Russian

• Religion(s): Buddhist Lamaism, Muslim, Shaman, Christian

• Nomadic Culture

Economics

• Currency: Tugrug (MNT), US$1=1900

• Major Industry: Mining – Copper, coal and gold, Cashmere, agriculture

• Major Trading partners: China, Russia, USA, Japan.

• GDP per capita: ~3600 USD

1. Country Profile

Phase 2: Mining

boom

4

Billion MNT

Mongolia has transitioned into free market

economy in 1990. The transition period from

1990-2008 had experienced steady growth

averaging about 3% in real terms.

With the discovery of two major copper and

coal deposits (Oyu Tolgoi and Tavan Tolgoi),

Mongolia has experienced a very rapid GDP

growth during the Mining Boom, the average

real GDP growth is 10%. While the highest

growth was 17% in 2011.

2. Role of commodity on economy

0

5

10

15

20

25

30

2011 2012 2013 2014

Real GDP growth (in percent)

Mining Non-mining

GDP

0

5

10

15

20

25

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Tax revenue Nominal GDP

Phase 1: Transition period

Tax revenue and Nominal GDP

Phase 2: Mining

boom

0.

1000.

2000.

3000.

4000.

5000.

6000.

7000.

8000.

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

p)

2012 2013

Million

USD

Foreign investment Domestic investment

Phase 1: Transition period

Mongolia has experienced a drastic increase in FDI

from 2009 to 2012 due to construction phase Oyu Tolgoi

project (One of the biggest Copper project in the world).

The mining sector is the main sector for FDI making

about 71% of the total FDI since 1990.

5

Mining Sector71%

Trade17%

Banking Sector

1%

Transportation1%

Construction1%

Оthers9%

FDI breakdown (1990-2013)

2. Role of commodity on economy

Foreign and domestic investment

6

2. Economy, FDI and Tax system

Mining has become the biggest sector in Mongolia, accounting for 20 percent of GDP, 60

percent of industrial value added, and ~90 percent of export earnings.

Major export-related minerals include copper, molybdenum, gold, coal, and fluorspar

concentrates. The country also produces limited amounts of tungsten, salt, clay, lime and

aggregates.

60%66%

81%

89% 89% 82%

83%

0

1000

2000

3000

4000

5000

6000

7000

2008 2009 2010 2011 2012 2013 2014*

Million USD

Mongolia export structure

Total export Mining product export

2. Role of commodity on economy

-

50

100

150

200

250

300

350

-4,000.0

-2,000.0

-

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

2008 2009 2010 2011 2012 2013 2014*

$/tMillion USD /

$/t

Foreign trade

Import Export Trade balance

Copper price, $/t Coal price, $/t

7

VAT

30.0%

Excise Tax

7.3%

Customs

7.6%

Mining

Royalty

11.8%

CIT

12.7%

PIT

8.1%

Capital tax

0.5%

Other

22.0%

Tax revenue breakdown

by taxes (as of 2014)

31%21%

28%29%

18% 18%14%

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

2008 2009 2010 2011 2012 2013 2014*

thousand USD Mining sector revenue share

Mining sector revenue Fiscal revenue

Revenue from mining sector consists of Mining

royalties, CIT, VAT, PIT, air pollution and customs

fee.

At its peak, revenue from mining sector made about

30% of the total revenue, but since 2011 with the

decline of commodity prices it has been steadily

decreasing.

Mining companies make about 20% of the corporate

income tax revenue.

3. Fiscal policy and commodity price effect

8

Main commodities for export are coal and copper concentrates.

Copper and coal generates ~20% of total fiscal revenue, setting the trend for revenue growth.

16%22%

17% 14%

26%21%

14%

78%58%

61%

47%

49%53%

60%

5%

20% 22%

39%

25% 27% 26%

2008 2009 2010 2011 2012 2013 2014*

Mining revenue share by commodities

Other Copper Coal

3. Fiscal policy and commodity price effect

31.2%

17.5%12.1%

23.7%16.4%

7.3% 7.0%

7.3%

9.8% 30.3%

47.2% 43.4%

26.3%

14.7%

30.7%

41.2%41.7%

33.0%

26.6%

26.5%

20.1%19.1%

22.2% 44.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Share of main commodity export in total export

Copper concentrate Coal Gold, unwrought or in semi-manufactured forms

Total revenue rises in response to increases in commodity export prices.

Total revenue changes are closely correlated with the copper commodity prices (0.78), and

therefore its safe to say that Mongolian economy is copper driven economy.

9

3. Fiscal policy and commodity price effect

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Growth rates of commodity export prices and fiscal revenue

Copper price growth Coal price growth Revenue growth

Central Bank

Firms

Government

Financial SectorHousehold

External Sector

₮

Tax

RevenueC

apital

exp

en

ditu

re

Exp

ort Im

po

rt

Imp

ort

Cu

rre

nt

exp

en

ditu

re

We

lfa

re

₮

$

Commodity price

1990-2009 2010-2011 2012-2014

Commodity price

FD

I

1. Fiscal Stability Law (FSL), which was enacted in 2010.

Structural revenue rule

Expenditure rule

Deficit ceiling rule

Debt ceiling rule

2. Debt Management Law, Government debt management strategy

Debt management law was approved by Parliament in this year.

11

4. Fiscal policy and improvement on legal

environment

In the medium-term government debt will be stabilized and its ratio to GDP

will be reduced.

12

5. Medium term policy for Debt

sustainability

44% 43.5%

48%

58%

55%

50%

40%

30%

35%

40%

45%

50%

55%

60%

2012 2013 2014 2015* 2016* 2017* 2018*

Government debt ratio to GDP

The Government of Mongolia shall pursue the following policy objectives within

the Medium-Term Government Debt Management Strategy for 2016-2018 and

shall align all borrowing decisions with the set policy objectives:

Level off government debt services in long-term, gradually reduce a ratio of

debt services to total budget revenues, and lengthen the average maturity

of the government debt portfolio through new borrowing with longer term

maturity in 2016-2018;

Improve Mongolia’s sovereign rating, actively engage with investors, gain

their confidence, raise the profile of Mongolia, reduce foreign debt services

and develop a yield curve of the domestic government debt securities;

Create optimal government debt portfolio by appropriately planning and

implementing comprehensive debt management actions in medium term.

13

5. Medium term policy for Debt

sustainability

Questions and Answers

14

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