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PDF En Inglés THE WORLD BANK GROUP IN MONGOLIA Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized This Economic Update assesses recent economic developments and discusses policies in Mongolia. The Update was prepared by Taehyun Lee (Task Team Leader, Senior Country Economist), Altantsetseg Shiilegmaa (Economist) and Davaadalai Batsuuri (Economist), under the overall guidance of Chorching Goh (Lead Economist for Mongolia, China and Korea) and Mathew Verghis (Practice Manager, GMFDR). This Economic Update also greatly benefited from advice and contributions from Mark Charles Dorfman (Senior Economist), Erdene Ochir Badarch (Operations Officer), Tungalag Chuluun (Operations Officer) and the guidance from James Anderson (Country Manager for Mongolia), Bert Hofman (Country Director for China, Mongolia and Korea) and Sudhir Shetty (Chief Economist for East Asia and Pacific Region). Public Disclosure Authorized Copies can be downloaded from www.worldbank.org/mongolia. Mongolia Economic Update Table of Contents ....................................................................................................................................... 4 Strong resolve of the new Government to address economic challenges is encouraging ...................................... 5 Economic Policy Framework ................................................................................................................................... 6 .................................................................................................................. 7 Economic growth is slowing despite strong mining production ............................................................................ 7 The unemployment rate declined to 6.4 percent in the third quarter................................................................. 10 Fiscal policy became tighter but the fiscal deficit will remain high due to continuous off-budget expenditures 12 Box 1. Summary of the 2015 Budget............................................................................................................... 14 Box 2. Key Features of the Glass Account Law ................................................................................................ 15 Public debt is rising and fiscal space is constrained by growing debt service. ..................................................... 16 Monetary conditions are being gradually tightened ............................................................................................ 17 Banking sector vulnerability is growing as the asset quality deteriorates ........................................................... 19 Steps were taken to mitigate growing vulnerabilities of the banking system but further actions are needed ... 22 Box 3. The Housing Mortgage Lending Program ............................................................................................. 23 Current account deficit continues to narrow due to stronger copper exports and import compression ............ 25 Balance of payments pressure still remains substantial due to a sharp decline in capital inflow ....................... 27 The external situation may become more vulnerable over time ......................................................................... 29 Box 4. External Position of Mongolia (as of June 2014) .................................................................................. 30 ........................................................................................................... 31 The Mongolian economy is facing challenges from persistent large economic imbalances while long term economic prospects remain strong ....................................................................................................................... 31 Despite the recent improvement, economic imbalances remain high and further corrections are needed ......... 31 External and financial vulnerabilities are increasing ............................................................................................ 32 The unfavorable external environment poses further downside risks .................................................................. 33 ........................................................................................................................................ 34 Economic policies need to focus more on maintaining economic stability than stimulating growth ................... 34 The priority now is to address growing external vulnerabilities ........................................................................... 34 Strong resolve of the new Government to address economic challenges is encouraging .................................... 35 Economic Policy Framework ................................................................................................................................. 35 .................................................................................................................. 37 .............................................................................................. 38 ........................................................................................... 44 ............................................................................................ 52 1 Mongolia Economic Update List of Figures Figure 1. The economic growth softened to 7% in the first 9 months of 2014 from 12% a year ago. .......................... 7 Figure 2. Non-mining growth dropped for 4 consecutive quarters despite the strong mining production. ................ 7 Figure 3. Weakening construction and wholesale/business industry is dragging non-mining economic growth. ....... 8 Figure 4. Strong copper and petroleum production is leading robust mining out. ...................................................... 8 Figure 5. A sharp drop in investment is dragging economic growth and final consumption growth is gradually slowing. .......................................................................................................................................................................... 9 Figure 6. Investment now accounts for only 35% of total economic output, back to the 2009 level. ......................... 9 Figure 7. Inflation still remains in double digits but is slowing recently… ................................................................... 10 Figure 8. … as monetary conditions are tightened and the rate of currency depreciation slowed............................ 10 Figure 9. Unemployment rate declined to 6.4 % in the third quarter of 2014. ........................................................... 11 Figure 10. Unemployment rates declined for all genders. .......................................................................................... 11 Figure 11. Self-employed workers have been on a rising trend since late 2013. ........................................................ 11 Figure 12. Labor market is shifting away from agriculture. ......................................................................................... 11 Figure 13. Fiscal policy is moderately tightened due tighter on-budget and off-budget expenditures. ..................... 13 Figure 14. Consolidated budget deficit will likely be lower in 2014 but will remain high at 7% of GDP ..................... 13 Figure 15. Public debt will likely reach over 60% in 2014… ......................................................................................... 16 Figure 16. …led by large increase in commercial external debt and the BoM’s foreign liabilities. ............................. 16 Figure 17. Rising interest payment is increasingly constraining the fiscal space. ....................................................... 16 Figure 18. The gap between the primary balance and the overall balance is widening. ............................................ 16 Figure 19. Central bank began to taper quantitative easing programs. ...................................................................... 17 Figure 20. Growth of monetary supply and bank loans has been declining since mid-2014. ..................................... 17 Figure 21. Loan to deposit ratio reached 132%. .......................................................................................................... 18 Figure 22. Banks are now relying excessively on central bank credit. ......................................................................... 18 Figure 23. Total domestic credit is still high, twice its size at the end-2012. .............................................................. 18 Figure 24. Mongolia’s inflation remains at the highest level in the region. ................................................................ 18 Figure 25. Tapering effect remains limited as the housing mortgage program loans continue to expand. ............... 19 Figure 26. BoM credit support to non-banking sector is also increasing in recent months. ....................................... 19 Figure 27. Credit growth has been declining in most sectors, but more sharply in construction sector. ................... 20 Figure 28. Outstanding loans declined in construction, retails and mining sector in Q3 from Q2 in 2014. ................ 20 Figure 29. Size of NPLs and past-due loans has been on the rise since late 2013. ...................................................... 21 Figure 30. While NPL ratio still remains stable, past-due-loan to total loan ratio is rising fast. .................................. 21 Figure 31. Loan quality is worsening fast in
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