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Mongolia Business Forecast Report Q2 2011
Business Monitor International, March 2011, Pages: 36
Ramping Up For The Boom Years
The publisher retains their bullish outlook on Mongolia’s long-term prospects, with rising investment and surging exports set to underpin double digit growth over the next five years. The signing of the landmark Oyu Tolgoi Investment Agreement in 2009 will underpin investor confidence in the government’s pro-business credentials, which will support development of the mining sector. Mongolia’s favourable location next to China should ensure plentiful demand for its raw materials. The key risk remains inflation, with grain shortages in Russia pushing food prices higher. In addition, we remain wary of poor asset quality in the banking sector, but highlight underlying signs of stability and a reasonably strong pick-up in loan growth.
The report highlights a highly favourable macroeconomic environment in Mongolia and hold to our forecast for 8.1% 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 indicate that mining and 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 a broader trend, with mining activity set to be the main driver of economic expansion in the coming years.
Robust deposit growth and improving asset quality will continue to underpin Mongolian banks’ ability and willingness to lend through 2011. Nevertheless, we note that a large amount of banks’ capital continues to be invested in central bank bills (which yield roughly the same as inflation), implying that banks remain concerned about over-exposure to the real economy. A new bank law being debated by the Mongolian parliament – providing, among other things, a stand-by recapitalisation facility – should help improve lenders’ confidence to extend credit over the medium term.
The report holds the view that the development of Mongolia’s mining sector will result in an export boom over the coming years, driven in particular by copper and coal, and that this will see the current account flip into surplus in 2013. Moreover, we remain positive on the outlook for the financial account, with strong foreign direct investment and portfolio inflows expected as investors seek to take advantage of the country’s huge mineral deposits, attractive business environment, stable political system and enormous growth potential. The key risk to our outlook remains over-reliance on Chinese demand, which leaves Mongolia highly vulnerable to a slowdown in its larger neighbour.
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