MONGOLIA MONTHLY ECONOMIC UPDATEdocuments.worldbank.org/curated/pt/303761468277496106/pdf/529… ·...
Transcript of MONGOLIA MONTHLY ECONOMIC UPDATEdocuments.worldbank.org/curated/pt/303761468277496106/pdf/529… ·...
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MONGOLIA MONTHLY
ECONOMIC UPDATE
WORLD BANK
May 2009
The World Bank’s Mongolia Monthly Economic Update provides an update on recent economic and social
developments and policies in Mongolia. It also presents findings of ongoing World Bank work in Mongolia. The
Mongolia Monthly is produced by a team from the World Bank’s Poverty Reduction and Economic Management
(PREM) Sector Unit in the East Asia and Pacific Region Vice-Presidency, with key inputs from other members of
the Mongolia country team. Questions and feedback can be addressed to Altantsetseg Shiilegmaa
([email protected]). Copies can be downloaded from http://www.worldbank.org.mn.
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Table of Contents
Sections: Page number
1. Introduction………………………………………………………………………………………… 3
2. Fiscal sector………………………………………………………………………………………… 3
3. Exports……………………………………………………………………………………………… 5
4. Imports……………………………………………………………………………………………… 7
5. Exchange rate………………………………………………………………………………………. 8
6. Financial sector…………………………………………………………………………………….. 9
7. Growth and unemployment…..…………………………………………………………………… 11
8. Conclusion………………………………………………………………………………………… 13
Tables:
1. Revenue has fallen sharply, as predicted…………………………………………………………… 3
2. Expenditure has declined more slowly……………………………………………………………... 4
3. Main drivers of changes in commodity exports……………………………………………………. 5
4. Exports by destination……………………………………………………………………………… 7
5. Informal labor market survey ..…………………………………………………………………… 13
6. Typical fiscal revenue under different scenarios …………………………………………………. 14
7. Mongolia: Key Indicators…………………………………………………………………………. 16
Figures:
1. With expenditure falling as well as revenue, the sharp deterioration of the fiscal deficit
has slowed down…………………………………………………………………………………… 4
2. The trade deficit is narrowing…………………………………………………………………….... 5
3a. The copper price dropped steeply during the second half of 2008………………………………… 6
3b. …but it rebounded recently………………………………………………………………………… 6
4. Mongolia’s main export destinations are projected to slow down…………………………………. 7
5. Global prices of Mongolia’s main commodity imports are forecasted to remain
below their 2008 peaks……………………………………………………………………………... 7
6. The multiple exchange rates started to diverge at the beginning of November 2008
and converged in April 2009.……………………………………………………………………… 8
7. Foreign exchange outflows have reversed, and the exchange rate started to appreciate again……. 8
8. Tugrug deposit outflows have reversed……………………………………………………………. 9
9. NPLs surged in March
while loans with principal in arrears did not decrease by the same amount……………………… 10
10. Growth in loans by banks has fallen……………………………………………………………… 10
11. Inflation continued to fall………………………………………………………………………… 11
12. GDP contracted in the first quarter of 2009 relative to 2008…………………………………….. 12
13. Industrial production stabilized, but unemployment increasing…………………………………. 12
Boxes:
1. Copper price rebound? …………………………………………………………………………….. 6
2. Effective real wages for informal sector workers have decreased about 60 percent……………… 12
3. State equity participation in mining………………………………………………………………. 14
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1. Introduction
The global downturn has hit Mongolia hard, predominantly due to the slump in minerals prices. Its budget
relies heavily on copper revenues and the “bust” has put serious strain on the country’s finances forcing it
to drastically cut spending. During the mining “boom” years, the government did save part of the windfall
in a special development fund, but it also funded large increases in untargeted social expenditures, civil
service wages, and poorly screened investment projects. When the “boom” turned into “bust”, the modest
fiscal surplus quickly turned into a large deficit. At the same time, the current account also switched into
deficit, and the financial sector, which had been overheating during the boom period, ran into serious
problems, with a major bank having to be put under conservatorship. However, in response to the crisis,
the government took a number of strong policy actions. On the basis of these, an agreement with the IMF
was reached, supported by several other development partners. This Economic Update reviews the recent
economic developments in the fiscal sector, exports, imports, the exchange rate, the financial sector,
economic growth and unemployment, and the initial impact of the recent policy reforms.1 The overall
conclusion is that the deterioration seems to have slowed down and stabilized in some areas, but
substantial risks, notably in the financial sector, remain.
2. Fiscal sector
While total revenue fell sharply in 2008 and total
expenditure remained steady, a large fiscal gap
opened by mid-2008, leading to a 5 percent of GDP
fiscal deficit for the 2008 fiscal year.
In the first four months of 2009, compared to the
same period in 2008, total revenue and grants have
fallen by 31.4 percent (see Table 1). The major
contributors to this drop were mining-related
revenues: the Windfall Profits Tax (WPT), royalties
and corporate income tax experienced the largest
declines, and only dividends increased, which reflects
the boom of the previous years.2,3
As a result, certain
1 The analysis is based on the most recent data (April) from the Bank of Mongolia, the National Statistical Office
and the Ministry of Finance. 2 The mining sector provided an estimated 42 percent of corporate income tax and an estimated 89 percent of
dividends in 2008.
Table 1. Revenue has fallen sharply, as
predicted
Change
between year
to April 2008
and 2009 (%)
Total revenue and grants -31.4 Tax revenue, including -35.0 Corporate income tax -45.6 Personal income tax 22.4 Windfall Profits Tax -91.8 Social security contributions -6.2 Value added tax -18.5 Excise taxes -11.1 Taxes on foreign trade -26.2
Royalties -53.2 Non-tax revenue, including -4.4 Dividends 59.5
Source: Ministry of Finance, World Bank
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non-mining revenue components—personal income tax, social security contributions, VAT, excise tax,
and taxes of foreign trade—have become more important as sources of revenue.
However, this large fall in revenues was as predicted. For the year to April, actual revenue was only 1.3
percent lower than the Ministry of Finance’s planned revenue for that period. Tax revenues were slightly
higher than the plan, and non-tax revenues were close to, but slightly below plan. These monthly revenue
plans are based on the amended budget that was approved in March (replacing the previously approved
2009 budget), which shows that the amended budget has more realistic revenue projections than the
previous budget.
Total expenditure and net lending has declined by
3.6 percent during the first four months of 2009
compared to the same period in 2008 (see Table 2).
Current expenditure increased slightly, due to an
increase in expenditure on wages and salaries, while
subsidies and transfers—in particular pensions
(social security fund)—have taken a cut. Social
transfers (social assistance fund) have hardly
changed. Domestic investment was cut sharply by
MNT 8.5 billion.
The sharp deterioration of the fiscal deficit has
slowed down. We take a look at the full year of
revenues and expenditure, and reduce seasonal
effects by taking the 12-month rolling sum of
the fiscal numbers (Figure 1). This 12-month
rolling fiscal balance went into deficit in June
2008. The subsequent sharp deterioration has
been driven mainly by falling revenue. It
started to slow down in March 2009.
3 Box 3 discusses the implications of state equity participation in the mining sector.
Table 2. Expenditure has declined more
slowly
Change
between year
to April 2008
and 2009 (%)
Total expenditure and net lending -3.6
Current expenditure, including 0.4
Wages and salaries 9.5
Subsidies and transfers -4.8
Social security fund -11.7
Social assistance fund -0.8
Capital expenditure, including -6.6
Domestic investment -17.6
Source: Ministry of Finance, World Bank
Figure 1. With expenditure falling as well as
revenue, the sharp deterioration of the fiscal deficit
has slowed down
MNT trillion, 12-months rolling sum(1)
(1) Sum over previous twelve months to adjust for seasonal
effects.
Source: Ministry of Finance, World Bank
-0.6-0.5-0.4-0.3-0.2-0.10.00.10.20.3
1.8
1.9
2.0
2.1
2.2
2.3
2.4
2.5
2.6
Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
Revenue
Expenditure
Fiscal balance (right axis)
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3. Exports
The trade deficit ended the year at 11.4 percent of
GDP. However, because imports fell more sharply
than exports during the first few months of 2009, the
trade deficit is gradually narrowing (see Figure 2).
Mongolia’s exports—copper, gold, coal, cashmere,
zinc, and crude oil accounted for 81 percent of goods
exports in 2008 (see Table 3)—dropped by 42 percent
in the first four months of 2009 compared to the same
period in 2008. The decline in the value of the main
export product, copper, and crude petroleum oils were
primarily driven by price, not volume (see also Box
1). However, the picture is more mixed for other exports.
For instance, while the price of gold
hardly changed, as it is considered a
safe investment during crises, the
volume of gold exports dropped
markedly.5 Coal export revenues
increased strongly, driven by an
increase in volume and price.
Cashmere products experienced a
general decline in prices, but exports
volumes have picked up. This
substantial increase in the export
volume seems to have been driven by
Chinese traders taking advantage of the low prices. The positive cashmere trend may continue, however,
because in May quality restrictions on cashmere exports were lifted, ports authorized for cashmere
exports were increased from three to twenty, and the export tax was abolished. The decline in zinc was
caused by both price and export volume declines.
4 Monthly trade data is strongly affected by the seasons in Mongolia, and has strong month-to-month fluctuations.
For this reason, the data has filtered using seasonal adjustment and a three-month moving average. 5 News sources suggest that the actual volume of exports may be higher, as the WPT may have led to gold being
smuggled out of the country. Another reason may be that producers are holding on their gold stock rather than
exporting it, in the expectation that this tax would be abolished shortly.
Figure 2. The trade deficit is narrowing4
$ million, monthly, seasonally adjusted, 3m mov. avg
Source: Bank of Mongolia, World Bank
Table 3. Main drivers of changes in commodity exports
2008
export
revenues
($ mn)
Change between first 4
months of 2008 and 2009 (%)
Value Volume Unit
price(1)
Copper concentrate 835 -59.4 -2.5 -58.3
Gold(2)
599 -35.8 -32.8 -4.4
Coal 184 129.7 99.3 15.3
Combed goat down(3)
97 -25.6 7.1 -30.5
Raw/Greasy cashmere(4)
77 -4.6 75.3 -45.6
Zinc concentrate 154 -80.1 -57.1 -53.5
Crude petroleum oils 101 -55.0 -3.7 -53.2
(1) Derived from export value and volume. These unit prices may vary
substantially from global benchmark prices, which have been adjusted for
content. (2) Unwrought or in semi-manufactured forms. (3) and (4) are
intermediate cashmere products.
Source: National Statistical Office, World Bank
-150
-100
-50
0
50
100
150
200
250
300
350
Apr-06 Apr-07 Apr-08 Apr-09
Exports
Imports
Trade balance
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The main cause of the decline in Mongolia’s total exports in the first four months of 2009 compared to
the same period in 2008 was the drop in exports to China due to the collapse in copper prices. Exports to
the European Union increased by a little, whereas exports to the US, Canada and Russia fell sharply
(Table 4). Going forward, global prospects are not good. The World Bank6 forecasts a 1.7 percent year-
on-year contraction of real world GDP in 2009, and a 2.3 percent growth in 2010. Except for China,
growth is expected to contract significantly in Mongolia’s main export destinations: the European Union,
Canada, the US and Russia (accounting for 32 percent of total goods exports in 2008), and will slowly
recover in 2010. China, which absorbed about of 65 percent of Mongolia’s goods exports in 2008 (and
about half is copper), is forecasted to slow down substantially to 6.5 percent yoy in 2009, and then to
grow by 7.5 percent in 2010 (see Figure 4).
6 See World Bank (2009), Global Economic Prospects 2009 Forecast Update, March 30, 2009, and World Bank
(2009), China Q1 Quarterly Update, March 2009.
Box 1. Copper price rebound?
Having fallen from $8900/tonne in mid-April 2008 to $2700 in late December 2008, the copper price has gradually
recovered. It reached about $4700 in mid-April and early-May 2009, before falling back slightly (see Figures 3a and
3b). According to market analysts, the following factors explain this surge in copper prices: (i) China’s State
Reserve Bureau has been buying refined metals to support domestic producers in the downturn, but also for strategic
stocks in the case of copper; (ii) China's fiscal stimulus may have also supported copper prices via construction
activity; and (iii) inventories have started to fall, and scrap markets have been very tight, especially for copper. On
the other hand, underlying demand has remained weak, especially outside China. Moreover, China has historically
bought most of its raw materials during the first two quarters of the year, so demand may start to level off. In
conclusion, the market does not expect a sustained rally of copper prices to their 2008 levels.
Figure 3a. The copper price dropped steeply
during the second half of 2008…
Figure 3b. … but it rebounded recently
$/tonne $/tone
Source: World Bank Last observation: May 21. 2009.
Source: London Metals Exchange, World Bank
Source: news sources, World Bank staff
0
2000
4000
6000
8000
10000
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09
2668
4766 4760
2500
3000
3500
4000
4500
5000
Dec-08 Jan-09 Feb-09Mar-09 Apr-09 May-09
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4. Imports
Three effects have caused the decrease in imports.
First, the slowdown in domestic growth has limited
demand for imports (see Section 7). Second, global
commodity prices, such as energy, food in general
and wheat in particular (a major food import in
Mongolia) have come down from record levels (see
Figure 5). This can be also be seen in Mongolia’s
import data, which shows that unit import prices of
flour, petrol, diesel (accounting for around 40
percent of imports), have fallen by 25, 45 and 36
percent respectively in the first four months of 2009
compared to the same period in 2008. Third, the
depreciation of the exchange rate, 39 percent between end-October and mid-March (see also Section 3),
has made imports less attractive.
Figure 4. Mongolia’s main export destinations
are projected to slow down
Table 4. Exports by destination
% year-on-year change in real GDP
2008 export
revenues
($ mn)
Change between
first 4 months of
2008 and 2009
(%)
China 1,644 -44.4
European Union 435 2.3
Canada 175 -10.8
US 113 -92.0
Russia 85 -29.1
Total good exports 2,539 -42.4
Source: IMF (2009), World Economic Outlook, April 2009;
World Bank (2009), Global Economic Prospects 2009 Forecast
Update, March 30, 2009; World Bank (2009), China Q1
Quarterly Update, March 2009.
Source: National Statistical Office, World Bank
Figure 5. Global prices of Mongolia’s main
commodity imports are forecasted to remain
below their 2008 peaks Index=100 in January 2004
Source: World Bank
China
European Union Canada
United States
Russia
-6
-1
4
9
14
2005 2006 2007 2008E 2009F 2010F
0
100
200
300
400
2005 2006 2007 2008 2009 2010 2011 2012
Energy index
Food index
Wheat index
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5. Exchange rate
Two important developments
occurred in the foreign exchange
market. The multiple exchange
rates—official Bank of Mongolia
(BoM) rate, commercial bank rate
and parallel market rate—that had
prevailed since November 2008
have converged, and the exchange
rate has appreciated (Figure 6).
Pressures on the balance of
payments had led to a depreciation
of the tugrug, starting at the end of
October, from MNT 1145 per
dollar to MNT 1591 by mid-March. During this period, the BoM rationed the sale of foreign exchange,
and a parallel market quickly developed. The exchange rate in this parallel market peaked around 1700 by
mid-March, which implied a depreciation of 50 percent since the end of October.
However, as part of a package of
corrective policy measures, the BoM
raised its policy rate from 9.75 to 14
percent on March 11, and instituted an
auctioning mechanism for foreign
exchange on April 1.7 As a result, the
official and parallel market exchange
rates quickly converged, the depreciation
was halted and the BoM was able to add
to its international reserves (Figure 7).
This is an important development,
because the banking system as a whole
had seen almost continuous outflows of international reserves since August 2008, when bank customers
started to move out of tugrug deposits, while the BoM tried to defend the exchange rate.
7 See World Bank (2009) Mongolia April 2009 Monthly Economic Update (available at
http://www.worldbank.org.mn) for more information on the auctioning mechanism.
Figure 6. The multiple exchange rates started to diverge at the
beginning of November 2008 and converged in April 2009
Tugrug per US dollar
Last observation: May 21, 2009.
Source: Bank of Mongolia, Mongolian Financial Association, World Bank
Figure 7. Foreign exchange outflows have reversed, and
the exchange rate started to appreciate again $ million, month-on-month change Tugrug per US dollar
* BoM and banking system’s net international reserves.
Source: Bank of Mongolia, World Bank
1,100
1,200
1,300
1,400
1,500
1,600
1,700
1,800
Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09
BoM official rate
Parallel market bid
Parallel market ask
auction FX sell to banks
auction FX buy from banks
1,100
1,200
1,300
1,400
1,500
1,600
-400
-300
-200
-100
0
100
200
Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
Change in total net international reserves*
Exchange rate versus USD (right axis)
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6. Financial sector
Monetary policy
The BoM reduced its policy rate, the one-week CB bill rate, to 12.75 percent from 14 percent. As
inflation has fallen further to 12.6 percent year on year, the policy rate is now just positive in real terms.
After several months of outflows, tugrug-denominated time deposits increased by a record MNT 60
billion from February to March, the largest increase since February 2007, and continued to increase in
April, while FX-denominated time deposits fell for a second consecutive month.
This seemingly renewed confidence is the tugrug
has a number of causes. First, the recent
appreciation has made saving in tugrug more
attractive. Second, the increase in the BoM
policy rate may have shifted market expectations
against the one-way bet against the tugrug. Third,
CPI inflation has come down, increasing the real
interest rate on deposits. And fourth, the
clarification of the deposit guarantee to exclude
certain accounts may have increased its
credibility in the eyes of bank customers.
Banking sector
The aggregate number of NPLs surged first by 117 percent from November to December 2008, and then
again from February to March by 31 percent, reaching 10.6 percent of outstanding loans in April. Loans
with principal in arrears had increased by 70 percent from November to December, having been relatively
steady in the months before November (see Figure 9).
Figure 8. Tugrug deposit outflows have reversed MNT billion, month-on-month change
Source: Bank of Mongolia, World Bank
-80
-60
-40
-20
0
20
40
60
Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
MNT deposits
FX deposits
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The increase in NPLs in March points to a general deterioration of loan quality, as opposed to the earlier
increase (in December), which seems to have been caused by the exposure to the failed bank, because it
was not preceded by a similar-sized increase in loans with principal in arrears.8 While NPLs increased in
March, the loans with principal in arrears did not decrease by the same amount in the same month, which
means that, on the whole, there continue to be significant risks going forward.
Risk management departments of banks are focusing on the quality of existing loans rather than issuing
more loans (see Figure 10). This has led to bank credit to the private sector slowing down significantly,
and bank credit to individuals shrinking. Moreover, recent headline news and anecdotal stories convey
that foreclosures on collateral are picking up while some banks are restructuring a significant portion of
their outstanding loans by extending the time borrowers have to repay.
In response to the worsening NPLs, the BoM required banks to increase their capital adequacy ratio from
10 to 12% in March to strengthen their risk bearing-capacity. At the same time, the BoM reversed its
policy introduced in 2004 that required banks to build up buffers against NPLs. The provision ratio for
NPLs has now been reduced, so that banks are now allowed to use these during the economic downturn.
8 According to the bank loan classification regulation, loans with principal in arrears mechanically become NPLs
after 90 days.
Figure 9. NPLs surged in March while loans
with principal in arrears did not decrease by
the same amount
Figure 10. Growth in loans by banks has fallen
MNT billion % year-on-year change
The numbers in boxes are NPLs as a percentage of total
loans outstanding.
Source: Bank of Mongolia, World Bank
Source: Bank of Mongolia, World Bank
3.3
7.27.4
9.9
10.6
0
50
100
150
200
250
300
Oct-08 Dec-08 Feb-09 Apr-09
Loans with principal in arrears
Non-performing loans
-20
0
20
40
60
80
100
Apr-07 Oct-07 Apr-08 Oct-08 Apr-09
Total
Private
Individuals
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Inflation
CPI inflation (or headline inflation) peaked at 34.1
percent year on year in August 2008, and has been
falling continuously, reaching 12.6 percent year
on year in April 2009 (see Figure 11).
This process of disinflation (reduction of inflation)
started as both food and fuel prices started to fall
in the second half of 2008 (see Figure 6). Core
inflation9 also started to fall, as the domestic
economy has slowed down strongly. However, as
a large part of the food consumption basket is
imported, the previously large exchange rate
depreciation may eventually be transmitted into
the economy.
7. Growth and unemployment
Real GDP contracted by 4.2 percent year on year in the first quarter of 2009 compared to the same period
in 2008 (see Figure 12). The drivers of this contraction were industry and construction, and net taxes on
products. Services and agriculture displayed positive growth, which partly offsets this contraction.
The contraction of total industrial production seems to have bottomed out at 12 percent year on year
(three-month moving average) in February 2009, and recovered slightly in April (see Figure 13). The
main reason is that mining output, which has a large weight in industrial production, has stabilized, while
output of utilities has continued to grow. Manufacturing output, however, is still contracting sharply.
9 Core inflation excludes volatile food and fuel prices, and is a proxy for domestically generated inflation.
Figure 11. Inflation continued to fall Percentage point contribution to CPI inflation % yoy chg
Source: National Statistical Office, World Bank
0
5
10
15
20
25
30
35
40
-5
0
5
10
15
20
25
Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
Core inflationMeat, milk and cheeseEnergy and fuelsCPI inflation (right axis)
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Until November 2008 registered unemployment had been decreasing almost continuously to 2.90 percent
of the labor force. However, in January it began to steadily increase for the first time (see Figure 13). This
data captures mainly jobs in the public sector and in large private companies, so the data may not reveal
what is happening in the “informal” sector (see Box 2) and in the rural areas of the country.
Box 2. Effective real wages for informal sector workers have decreased about 60 percent
We conducted a small survey in April to get a snapshot of the daily workers’ income at major unskilled labor
markets in Ulaanbaatar. The results (see Table 5) suggest that the workers’ effective real wages about 60 percent
have fallen for two reasons: (i) the number of hours worked has decreased; and (ii) the real wage has been eroded
due to high inflation. Prior to the onset of the economic crisis, the number of informal sector workers had been
increasing in line with economic growth, especially in the transportation and construction sectors. However, recent
interviews with several of these workers suggest that their daily incomes have been decreased by 50 to 70 percent
due to a decrease in the availability of jobs. This suggests that the reduction in import activity, marked by fewer
cargo and railway shipments coming into the country and an increase in the number of construction sites with no
activity, has led to a decrease in the number of hours worked. With respect to the second reason, the survey
indicated that the rate of hourly wages has remained the same in nominal terms between April 2008 and 2009;
however, the value of their hourly wages in real terms has been eroded as inflation was 12.6 percent over the same
Figure 12. GDP contracted in the first quarter
of 2009 relative to 2008
Figure 13. Industrial production stabilized,
but unemployment(1)
increasing Percentage points contribution to real year-on-year GDP
growth
% year-on-year real change(2)
% of labor
force(3)
Source: National Statistical Office, World Bank (1) Defined as working-age population currently not
working in a paid job and not self-employed, actively
looking for job and registered at the Employment Office. (2)
Real change, 3-month moving average. (3) Seasonally
adjusted, by dividing 12-month moving average number of
unemployed by linearly interpolated labor force.
Source: National Statistical Office, World Bank
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
Q1-07 Q3-07 Q1-08 Q3-08 Q1-09
Net taxes of productsServicesIndustry and constructionAgricultureGDP
2.90
2.92
2.94
2.96
2.98
3.00
3.02
3.04-30
-20
-10
0
10
20
30
Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
Total
Mining and quarrying
Manufacturing
Utilities
Unemployment rate (inverted scale, right)
- 13 -
period (see Figure 12). This survey suggests that, due to reduced job availability and inflation, the effective real
wage in the informal sector has been reduced by about 60 percent.1
The survey also includes basic demographic statistics which indicate that these workers are predominantly males
with secondary level education and that they support their families with their income. However, the effects of
reduced job availability and eroded value of their hourly wages left the workers barely able to cover their daily food
expenses. Moreover, the number of these workers is likely to increase due to rising unemployment rates in the
formal sectors. In addition, there has been an increase in the number of people moving into the city from rural
regions who are looking to find new ways to earn a living after having given up on their livestock due to
foreclosures of their herder loans.
Table 5. Informal labor market survey
Name/location of the market
Total
number of
workers
(estimated)
Average daily
income
(MNT)
Maximum
wage
(MNT/per
hour)
Reduction
in job
availability
since last
year (%)
Reduction
in effective
real wage*
(%)
"44" /Unloading at the railways/
at Triangle bridge district 500 3,000-7,000 585 70 73
Loading/Unloading at private
cargo areas 260 8000 1000 60 64
Botanic market at Amgalan
district /Cement mill factory/ 200 8,000-30,000 2310 50 56
Bars market 75 5,000-10,000 1250 50 56
*The reduction in the effective real wage reflects the estimate of the reduction in availability of jobs and the increase in the
consumer price index between April 2008 and 2009 of 12.6 percent
1 This is confirmed in a different study amongst women whose families have migrated to Ulaanbaatar 2 to 8 years ago, although
there was more concern in this group about the erosion of real wages (stable or even falling nominal wages for longer hours in
the face of continued price rises) than on availability of employment per se.
Source: World Bank staff
8. Conclusion
In the last few months, the economic downturn seems to have reached its lowest level, while the negative
impact on unemployment and wages has now become clear. The sharp deterioration of the fiscal deficit
slowed down, the trade deficit narrowed, the exchange rate stabilized and inflation fell further, bringing
real interest rates back into positive territory. Real GDP fell in the first quarter, but the latest data suggests
that the drop in industrial production has stabilized. Unemployment is rising, and real wages of informal,
unskilled labor have fallen sharply from a year ago. In the financial sector, while deposits have started to
flow back into tugrug accounts, non-performing loans continue to increase and are reason for continued
concern. In short, the deterioration seems to have slowed down and stabilized in some areas, but
substantial risks, notably in the banking sector, remain.
- 14 -
Box 3. State equity participation in mining
The 2007 Minerals Law allows Mongolia to take equity stakes in strategic mining deposits.1 The objective is to
allow the government to exercise some control to protect the national interest, and generate revenues in the form of
dividends. But what are the implications for revenues if the state needs to borrow the capital for its equity share and
foregoes its share of the dividends? How does that compare to a situation in which the government does not take an
equity share, and obtains its revenues from taxing the dividends? And are there other ways in which a government
can retain control over its mining industry without taking an equity stake?
A government can typically expect the following main types of revenue from a mining project: corporate income
tax, royalties, and dividend withholding tax. If the government takes up equity, it may also receive dividends at
some later time in the mine life. But there are also downsides. First, there is an opportunity cost for providing
capital. For instance, instead of investing in health and education, the state now invests in mining projects.
Alternatively, it borrows the money at the prevailing commercial interest rate. Second, taking up equity exposes the
government to commercial and technical risks. Not all mines are successful and some never make a profit sufficient
to cover the initial investment plus a reasonable rate of return sufficient to pay off the loans with interest.
Table 6 shows the net fiscal revenues under different scenarios for a hypothetical copper mining investment
agreement between the government and a private-sector partner. The first scenario assumes that the government
takes a 34 percent equity stake in a mining project and receives its fair share of the dividends. It finances its share by
borrowing at a commercial interest rate from the investment partner, and makes dividend payments exempt from
taxes (scenario 1). Alternatively, it can decide to take no equity stake at all, but charge a 15 percent tax on the
dividends (scenario 2). Effectively, this scenario yields revenues equivalent to having a 15 percent stake, but without
having to finance it up front and pay any interest. We evaluate both scenarios under two copper price assumptions:
high ($6000/tonne) and low ($3000/tonne).
Under scenario 1, a drop in the copper price from $6000/tonne to $3000/tonne will reduce annual net fiscal revenue
by 54 percent. The reason is that the return on assets, and hence payable dividends, will drop significantly.2 Under
scenario 2 the government does not receive any direct dividend payments, but neither does it have to make any
interest payments on borrowed capital. At a high copper price, the annual net fiscal revenue under scenario 2 will be
Table 6. Typical fiscal revenue under different scenarios
Annual net fiscal revenue, index =100 for scenario 1 under copper price of $6000/tonne
Scenario 1 Scenario 2
Government equity stake 34% No equity stake
Dividend tax 0% 15%
High copper price: $6000/tonne 100 96
Low copper price: $3000/tonne 46 51
Baseline assumptions: initial capital amount of $1.5 billion, if the government takes an equity stake, it will have to borrow
from the investment partner at 10 percent, paid for by dividends; the exchange rate is MNT 1500 per US dollar; initial
output is 600,000 tonnes; operating costs dependent on output value and copper price.
Source: World Bank staff
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4 percent lower than under scenario 1. However, under a “low” copper price, the annual net fiscal revenue under
scenario 2 will be 11 percent higher than under scenario 1.
Recall that the argument for the state to acquire an ownership stake is based on the state wanting to exercise some
form of direct control over the investment. An alternative way for a government to retain control over its mining
industry, but without taking an equity stake, is to adopt a foreign investment and takeover law. For example, the
Australian Foreign Acquisitions and Takeovers Act of 1975 requires foreign investors to obtain approval from the
Foreign Investment Review Board for various categories of investment or takeovers in Australia. Under this law, the
government of Australia is currently reviewing the proposed investment of Chinalco in Rio Tinto, to determine
whether this has any implications for the economic or national security of Australia.
Another example is the United States, which has similar legislation, known as the Defense Production Act of 1950,
which mandates the Committee on Foreign Investment in the US (CFIUS) to review any foreign investment that
potentially poses a threat to US national security. CFIUS is a Treasury-led committee and comprises representatives
of eleven US government agencies. The committee has the power to recommend to the president to block any
takeover by a foreign investor. In 2005, the US rejected a bid by China’s CNOOC to take over Unocal, an American
oil company.
An added advantage of such laws is that they would apply to all strategic economic activities within Mongolia and
not only to those operations where the state happens to hold an equity interest.
Sources: IMF (2008), Mongolia: Selected Issues and Statistical Appendix, July 2008, IMF (2007), World Bank staff
1 The government may take a 50 percent stake for strategic deposits explored with state resources, and a 34 percent stake for
other strategic deposits. 2 In such arrangements, it is common that interest payment due will not exceed the dividend. However, under some arrangements
the outstanding balance borrowed from the partner is allowed to rise with some inflation benchmark, which provides an incentive
to repay quickly.
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Table 7. Mongolia: Key Indicators
2003 2004 2005 2006 2007 2008e 2009f
Output, Employment and Prices
Real GDP (% yoy change) 7.0 10.6 7.3 8.6 10.2 8.9 2.7
Industrial production index .. .. .. 100.0 110.4 113.4 ..
(% yoy change) .. .. .. .. 10.4 2.8 ..
Unemployment (%) 3.4 3.6 3.3 3.2 2.8 2.8 ..
Consumer price index (% yoy change) 4.6 10.9 9.6 5.9 14.1 23.2 9.0
Public Sector
Government balance (% of GDP) -3.7 -1.8 2.6 8.1 2.8 -5.0 -6.0
Non-mining balance (% of GDP)(1)
-5.9 -5.8 -1.3 -7.3 -13.4 -15.3 -10.4
Domestic public sector debt (% of GDP) 3.1 1.4 0.1 1.0 0.5 0.0 0.0
Foreign Trade, BOP and External Debt
Trade balance ($ mn) -199.6 -99.2 -99.5 136.2 -52.4 -596.5 -331.0
Exports of goods ($ mn) 627.3 872.1 1066.1 1543.9 1950.7 2532.5 1863.0
(% yoy change) 19.7 39.0 22.2 44.8 26.4 29.8 -26.4
Copper exports (% yoy change) .. .. 14.7 94.8 27.7 3.0 ..
Imports of goods ($ mn) 826.9 971.3 1165.6 1407.7 2003.1 3128.9 2194.0
(% yoy change) 21.6 17.5 20.0 20.8 42.3 56.2 -29.9
Current account balance ($ mn)(2)
-102.4 24.1 29.7 221.6 264.8 -502.7 -261.8
(% of GDP) -7.1 1.3 1.3 7.0 6.7 -9.6 -6.5
Foreign direct investment ($ mn) 131.5 128.9 257.6 289.6 360.0 682.5 316.5
External debt ($ mn) 1240.3 1311.8 1360.0 1413.9 1528.7 1600.5 1795.8
(% of GDP) 87.3 73.7 59.7 44.3 38.9 33.1 46.8
Short-term debt ($ mn)(3)
0.0 0.0 0.0 0.0 0.0 0.0 ..
Debt service ratio (% of exports of g&s)(3)
13.4 9.4 7.6 5.4 4.3 3.5 4.3
Foreign exchange reserves, gross ($ mn) 203.5 207.8 333.1 718.0 1,000.6 656.7 822.1
(month of imports of g&s) 2.3 1.8 2.5 4.6 5.0 2.1 3.7
Financial Markets
Domestic credit (% yoy change) 157.3 25.8 18.8 -3.1 78.4 60.6 ..
Short-term interest rate (% per annum)(4)
.. 15.8 3.7 5.1 8.4 9.8 ..
Exchange rate (MNT/USD, eop) 1168.0 1209.0 1221.0 1165.0 1170.0 1267.5 1640.0
Real effective exchange rate (2000=100)(5)
96.9 95.4 101.8 107.1 109.0 130.2 ..
(% yoy change) -4.8 -1.5 6.7 5.2 1.8 19.5 ..
Stock market index (2000=100)(6)
151.5 120.8 203.6 382.0 2048.0 1181.6 ..
Memo:
Nominal GDP (MNT bn) 1,660 2,152 2,780 3,715 4,600 6,130 6,294
Nominal GDP ($ mn) 1,448 1,,814 2,307 3,156 3,930 5,258 4,035
(1) Non-mining balance excludes revenues from corporate income tax and dividends from mining companies, the Windfall
Profits Tax and royalties. (2) The 2009 projections for the external sector are based on the previous 2008 current account
estimate, rather than the recently published final 2008 figure (which was mentioned in the text). (3) On public and publicly
guaranteed debt. (4) Yield of 14-day bills until 2006 and of 7-day bills for 2007. (5) Increase is appreciation. (6) Top-20 index,
eop, index=100 in Dec-2000.
Source: Bank of Mongolia, National Statistical Office, Ministry of Finance, IMF and World Bank staff estimates