MONGOLIA

ECONOMIC OUTLOOK

RISK SUMMARY
POLITICAL RISK

Uranium Exploration To Begin

Prime Minister Batbold Sukhbaatar says Mongolia will aim to begin uranium exploration before 2012, according to a report in the Ulan Bator Post. Sukhbaatar said the country needs to speed up operations so that it can exploit the almost 1mn tonnes of reasonably assured uranium reserves in Mongolia soon. Feasibility studies have commenced at the enriched Mardai and Kharaat deposits. We are encouraged by the prime ministers statement and continue to stress that Mongolias investment climate remains strong, despite concerns over recent mining licence problems.
Our short-term political risk rating is 74.0.

Bumper Year Ahead, But Risks Persist

BMI View: We remain bullish on Mongolias medium-term growth prospects, and highlight a generally supportive political culture and business environment which make Mongolia a solid bet for investors. That said, we continue to flag up a number of risks.
We reiterate our long-held view that Mongolia will be one of the worlds fastest-growing economies in the next 10 years, powered by an investment-led mining boom. Strong foreign direct investment will enable the development of the countrys vast mineral resources, leading to a surge in exports and real GDP growth in the high single digits or above through to 2020. Heading into 2011, we highlight a highly favourable macroeconomic environment and hold to our forecast for 7.9% real GDP growth this year, which we expect to be driven by fixed investment in the mining and transport sectors. Indeed, the recent release of preliminary data for full-year 2010 growth by the Mongolian National Statistics Office (MNSO) indicates that mining & quarrying surpassed agriculture last year to become the biggest sector of the economy. While this was no doubt helped by the dire performance of agriculture following a terrible 2009/10 winter, we nevertheless contend that it is indicative of
DATA & FORECASTS
BMI View: The Mongolian togrog continues to perform well, strengthening to MNT1,245/ US$ at one point on January 31 from MNT1,259/US$ at end-2010. We have long been bullish on the unit and continue to expect a robust performance. Indeed, with exports expected to perform well on the back of strong Chinese demand, growth forecast to hit 7.9% in 2011 and foreign investment likely to rise further, we see the togrog hitting MNT1,140/US$ by end-2011.
Population, mn [1] Nominal GDP, US$bn [2] Real GDP growth, % change y-o-y [2] Industrial production index, % y-o-y, ave [3] Budget balance, % of GDP [4] Consumer prices, % y-o-y, eop [5] Exchange rate MNT/US$, eop [6] Goods imports, US$bn [5] Goods exports, US$bn [5] Balance of trade in goods, US$bn [5] Current account, % of GDP [4] Foreign reserves ex gold, US$bn [7] Total external debt stock, % of GDP [9] 2009 2.7 4.2 -1.6 17.8 -5.7 1.8 1,430.00 3.1 2.5 -0.6 -6.3 1.3 44.9 2010e 2.7 4.6 9.3 13.6 0.0 10.0 1,259.00 2.1 1.8 -0.2 -3.9 1.8 43.5 LatestPeriod 10.9 1,245.25 3.3 2.9 -0.4 Sep 31-Jan Jan-Dec Jan-Dec Jan-Dec 2011f 2.7 6.1 7.9 10.1 2.5 9.0 1,140.00 2.7 2.5 -0.1 -2.6 2.1 37.7 2012f 2.8 7.7 9.0 11.4 -0.8 8.0 1,080.00 3.5 3.4 -0.0 -0.1 2.4 33.6

ECONOMIC RISK

Recovery On Course
Mongolian industrial production rose by 13.6% y-o-y over the course of 2010, down from 17.8% y-o-y in the previous year. While the rate of growth dropped, we nevertheless contend that the 2010 number marks a healthy outturn and supports our view that the economic recovery is firmly on course. In particular, we highlight the healthy performance of mining last year, with this component of industrial production rising by 10.1%. In 2011, we forecast the recovery to remain on course, with the economy expected to grow by 7.9%.
Our short-term economic risk rating is 51.9.

a broader trend, with mining activity set to be the main driver of economic expansion in the coming years. The fiscal picture is also improving, in line with our view, with the government having actually posted a fiscal surplus in 2010 according to preliminary data from the MNSO. Moreover, the outlook for the banking sector is also relatively favourable, in line with our long-held view that the worst of the crisis is over. While we are upbeat on Mongolias growth prospects and believe these will provide a multitude of attractive opportunities for investors over the medium term, we note an increasing dependence on international commodity prices and Chinese demand. In addition, inflation will remain a problem through 2011, with the initial spike in H110 driven by a domestic food shortage being maintained through H210 by loose fiscal policy, stronger demand-side pressures and higher international food and commodity prices.

BUSINESS ENVIRONMENT

Minco Gold Forms CNNC JV

Canadas Minco Gold has entered a joint venture agreement with a subsidiary of the China National Nuclear Corporation and has acquired a 51% equity interest on a gold mine in Inner Mongolia. According to Trading Markets, the mine has been producing gold since 1996 and is currently operating at 600 tonnes per day at roughly 85% gold recovery. We expect mining sector output to grow to US$9.9bn by 2014, marking a fourfold increase from 2010, with the majority of this increase occurring in 2013 and 2014 as the Oyu Tolgoi mine comes online.
BMIs business environment rating is 47.0.

Notes: e/f = BMI estimates/forecasts. Sources: 1 World Bank/BMI calculation/BMI; 2 IMF/BOM/BMI; 3 MNSO; 4 BoM/BMI; 5 BoM; 6 BMI; 7 IMF; 8 EBRD; 9 EBRD/BMI.

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