Mongolia’s GDP Growth Expected to Drop by One-Third

on Oct 30, 2012

Bloomberg news agency reported today that Naidansuren Zoljargal, governor of Mongolia’s central bank released a statement that the nation’s growth rate is expected to slow by up to one-third from the record 17 percent achieved in 2011 due to the recent cool down in foreign direct investment (FDI) and China’s lowered demand.

**Mongolia’s Impressive 2011 Growth and Subsequent Slowdown**
The resource-rich country defied the global economic slowdown last year and registered a stunning 17.3 percent increase in output boosted by soaring coal shipments to China and a surge in foreign investment in its mineral sector.
Coal export rates in the country climbed in recent years fuelled by Chinese demand and grew by 27.5 percent in 2011 to 21.3 million tonnes. Almost 92 percent of Mongolia’s total exports go to its energy-hungry southern neighbour.

With China’s GDP growth slowing down to 7.6 percent, the weakest figure in three years, the Mongolian government realises the country is too dependent on its neighbour. “It’s a reality check for us,” Mr Zoljargal told Bloomberg but added that he still expects a “very healthy” growth rate this year of about 11 to 12 percent. According to government statistics, mineral product exports, which account for 90 percent of all goods sold by the country, plummeted by 41 percent in September from $324 million (£201.6 million) last year.

!m[Oyu Tolgoi Mine in the Gobi Desert](/uploads/story/673/thumbs/pic_1_inline.png)The IMF predicts growth to be in “double digits” and to accelerate in 2013 but at the same time warns that “inflation remains high and pressures on the balance of payments are increasing,” The inflation currently sits at 15 percent “primarily due to rapidly raising government spending” and far exceeds the central bank’s target of below 10 percent. On Monday credit rating agency Standard & Poor decreased its outlook of Mongolia’s debt rating from BB- positive to BB- stable, justifying its decision with the increased risk of volatility in the underdeveloped economy.

**Mongolia’s Future – Diversifying Its Economy**
“We are talking a lot about what kind of industry can be a better option to mining if we want to diversify our economy. Whether it is tourism or manufacturing, we want ‘mining boom’ to be changed to ‘mind boom’,” said Mongolia’s tourism minister Oyungerel Tsedevdambaa.
The government is considering building a $3 billion rail network to Russia, which could create opportunities for surges in exports away from China and towards Russia’s ports and overseas markets.

Copper production is yet another possible solution as Mongolia has significant resources of the metal with exports reaching 575,900 tonnes in 2011. Once again, almost 100 percent of those copper shipments went to China. According to Eric Zurrin, director of Ulan Bator-based investment firm ResCap, coal is very much susceptible to seasonal and other cyclical swings, while copper demand typically remains steady.
This month Turquoise Hill and Rio Tinto rejected a request from the Mongolian government to renegotiate the terms on the ownership of Oyu Tolgoi – the giant copper-gold mine in the Gobi Desert. The mine is one of the largest in the world and is essentially ready to begin operations. Production is halted only until an agreement is reached with China over the power-supply to the mine.
Turquoise Hill’s CEO Kay Priestly said that the Oyu Tolgoi investment made by her company is beneficial for Mongolia and there is no reason for renegotiations. “We have invested nearly $6 billion (£3.73 billion), created thousands of jobs for Mongolians and are on the verge of production based on the investment agreement, which provides a stable legal framework and is a legally binding document,” said Ms Priestly.


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