Falling mineral prices and a tapering of foreign investment resulted in slower economic growth in Mongolia in 2014. However, a commitment by the recently installed coalition government to clear bottlenecks in the investment pipeline and cut spending could see lower deficit levels and greater foreign interest in development projects in the year ahead.

unnamedCommodity pros and cons

The country finished the year with a broad-based coalition and a new Prime Minister, as Ch. Saikhanbileg replaced N. Altankhuyag in November. The incoming leader inherited a far more sluggish economy than his predecessor, with growth, confidence and foreign investment all lower year-on-year (y-o-y), as falling demand for minerals dragged on exports and earnings.

Weak demand for Mongolian commodities from its main export market, China, also took its toll during the year. However, one bright spot was an increase in exports of copper concentrate due to a ramp up in operations at the Oyu Tolgoi mine over the course of the year. The total figure rose to $2.3bn in the first 11 months of 2014 from $851m in the same period y-o-y according to official data. Coal exports rose to 16.9m tonnes compared to 16.1m tonnes y-o-y; however this was offset by a steep decline in prices, with the value of coal exports falling to $760.1m from $1b a year earlier.

With the value of exports still well below their peak of a few years ago, the World Bank cut its 2014 GDP growth forecast from 9.5% to just over 6%. Growth slowed to an annualised 7% in the first nine months of 2014, well below the 12.8% witnessed the previous year. Growth projections for 2015 have also been revised downwards, from 8.8% to 6.2%.

Weaker foreign investment inflows were largely a result of an economic slowdown and a drop in global commodity prices. In the first nine months of the year, foreign direct investment (FDI) amounted to $647.5m, less than one-fifth the level seen in 2012. Investment fell 64% y-o-y in the January to May period alone.

Reopening the investment pipeline

However, efforts are underway to increase FDI through the easing of investment regulations and opening of new and previously cancelled or deferred exploration tenders.

A further boost to foreign investment could come in the wake of deals struck with China and Russia in late 2014 that have the potential to increase trade and promote greater investment in transport, infrastructure and industry. Trade with both Russia and China is pencilled to reach $10bn under the initial outlines, facilitated in part by extensive investments in the Mongolian rail network, giving the country access to wider markets.

On the horizon for 2015, the new government must conclude an international tender it has relaunched to develop Erdenes Tavan Tolgoi, the country’s largest coal deposit, after the previous tender collapsed in 2011. At the same time, the authorities have on their agenda to resolve a dispute with mining giant Rio Tinto over a $5bn expansion of the Oyu Tolgoi copper mine.

According to some estimates, a fully operational Oyu Tolgoi mine could contribute up to one-third of GDP. As such, clearing the way for the second stage of its development, as well as facilitating the roll out of new projects, will likely top the agenda in 2015.

Belt tightening ahead

The new government is taking steps to cut spending ahead of what could be a more austere year. In late December, it announced plans to trim the already approved 2015 budget to curb spending and reduce the deficit. The proposed measures include reducing bonuses to state employees and downsizing government ministries by 15%, as well as redefining public spending programmes to make child welfare needs-based and to award student grants on merit.

Revenues will also be buoyed by a broader tax base, now set to include many in the rural community ? herders in particular ? who were previously exempt from levies. The amendments to the budget will cut at least MNT100bn ($60m) from the projected deficit of MNT439.2bn ($263.5m).

The Mongolian economy may also benefit from lower oil prices during the year, as it relies on imports to meet 90% of its oil needs. Although this will help to curb expenditures, the savings are unlikely to offset lost revenue from lower commodity prices. Furthermore, some gains will be cannibalised by the devaluation of the tugrik, which has lost about a quarter of its value against the US dollar since the start of 2013.

Lower oil prices could also come with a downside. Cheaper imported hydrocarbons may dampen investor enthusiasm for the development of domestic oil reserves in the short to medium term, as well as the country?s oil shale deposits ? estimated at more than 700bn tonnes.

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