MONGOLIA MONTHLY BRIEF – MAY 2009

(The full report in English and Mongolian can be downloaded at http://www.worldbank.org.mn)

The economic downturn seems to have slowed down, but the negative impact on unemployment and wages has now
become clear. The worsening outlook in the financial sector is a reason to remain concerned.
Real GDP contracted by 4.2 percent year on year in the first quarter With expenditure falling as well as revenue, the
of 2009 compared to the same period in 2008, due to a contraction in sharp deterioration of the fiscal deficit has slowed
industry and construction, while services and agriculture provided down
some positive offsets. The latest data shows that industrial MNT trillion, 12-months rolling sum
production has stabilized, but the manufacturing component is still 2.6 0.3
contracting sharply. Meanwhile, official unemployment has 2.5 0.2
continued to rise to 3.0 percent of the labor force in April. An 2.4 0.1
unofficial survey shows that in the informal sector real effective 0.0
2.3
wages have fallen by about 60 percent. -0.1
2.2
-0.2
The deterioration of the fiscal deficit, mainly driven by falling 2.1 -0.3
revenue, started to stabilize in March 2009. Revenue declined by 2.0 Revenue
-0.4
31.4 percent in the first four months of 2009 compared to the same 1.9 Expenditure
-0.5
period in 2008. For the year to April, actual revenue was only 1.3 1.8 Fiscal balance (right axis) -0.6
percent lower than planned, which shows that the amended budget
revenue projections were realistic. Apr-08 Jul-08 Oct-08 Jan-09 Apr-09

Expenditure declined by 3.6 percent in the first four months of 2009 Notes and source: see Update
compared to the same period in 2008. Current expenditure increased slightly, due to an increase in expenditure on wages
and salaries, while subsidies and transfers have taken a cut. Social transfers have hardly changed. Domestic investment
was cut sharply.
As imports fell more sharply than exports during the first months of 2009, the trade deficit is gradually narrowing.
Exports dropped by 42 percent in the first four months of 2009 compared to the same period in 2008, driven mainly by
the decline in copper prices rather than volumes. The recent copper price rebound should be viewed with caution as it is
not supported by sustained underlying demand. China, Mongolia’s main export destination, is projected to slow down to
6.5 percent, and other destinations will contract significantly in 2009 and only slowly recover in 2010. Imports have
decreased because of the domestic slowdown, lower global energy and food prices, and the exchange rate depreciation.
The multiple exchange rates—official Bank of Mongolia rate, commercial bank rate and parallel market rate—that had
prevailed since November 2008 have converged. This is the result of the BoM’s corrective actions, including hiking its
policy rate, and instituting an auctioning mechanism for foreign exchange in April.
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 the second
consecutive month. This shows seemingly renewed confidence in the tugrug, thanks to the recent tugrug appreciation,
the policy rate hike, lower CPI inflation, and the clarification of the deposit guarantee.
NPLs surged in March while loans with principal However, the increase in non-performing loans (NPLs) suggests
in arrears did not decrease by the same amount that the quality of the banks’ loan portfolio may decline further. The
MNT billion (numbers are NPLs as % of total loans) aggregate number of NPLs surged by 31 percent from February to
Loans with principal in arrears 10.6 March, reaching 10.6 percent of outstanding loans in April. This
300
points to a general deterioration of loan quality. Moreover, the loans
Non-performing loans
250 9.9 with principal in arrears did not decrease by the same amount in
200 7.2 March, which means that on the whole there continue to be
7.4
significant risks going forward.
150
3.3 CPI inflation has fallen to 12.6 percent year on year in April 2009.
100 This reduction of inflation started as both food and fuel prices
50 started to fall in the second half of 2008, while core inflation also
started to fall, as the domestic economy has slowed down
0
drastically.
Oct-08 Dec-08 Feb-09 Apr-09
Finally, the Update briefly discusses the implications of state equity
Notes and source: see Update participation in the mining sector. Using a hypothetical example, we
show that under a high copper price, taking an equity stake may make financial sense, but under a low copper price, the
alternative, which relies on collecting a tax on dividends only, seems to make more sense. We also discuss international
experience with alternative forms of sovereign control over strategic investments.