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Country Risk Analysis: Mongolia


Country Risk Analysis: Mongolia Last updated on: 14 April, 2004 Outline I. Country Overview II. Political, Social and Legal Analysis III. Macro Economic Analysis IV. – PowerPoint PPT presentation

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Title: Country Risk Analysis: Mongolia

Country Risk Analysis Mongolia
Last updated on 14 April, 2004
  • I. Country Overview
  • II. Political, Social and Legal Analysis
  • III. Macro Economic Analysis
  • IV. Balance of Payment Analysis
  • V. Debt Stock and Flows Analysis
  • VI. Ratings and Rankings
  • VII. SWOT analysis
  • VIII. Conclusion

  • I. Country Overview
  • Introduction
  • Historical Background
  • Natural Resources

  • Capital Ulaanbaatar
  • Territory 1,566,000 sq km
  • Climate Sharp continental, marked by 4
  • Population 2.6 million
  • People Khalkh Mongols (86), Kazaks
    (6), Chinese (2), Russian (2)
  • Lang uage Mongolian
  • Religions Tibetan Buddhism
  • Currency Tugrik (MNT)
  • Exchange rate 11,03 MNT per US (04/2004)
  • 1315 MNT per Euro (04/2004)
  • GDP per capita 440US (2002)

  • On 1 December 1911, independence from Manchu was
    declared, with a theocratic government under the
    leadership of the 8th Jebtzun Damba.
  • On 26 November 1924, the Mongolian People's
    Republic (MPR) was declared.
  • Before 1990, the country was under one socialist
    partys rule and influenced by Russian leaders.
  • After 1990 the country has become democratic and
    has started the transition period from planned
    economy to market economy.
  • 1992 Dec 12 Democratic Constitution

Natural resources
  • The country is rich in mineral resources coal,
    copper, molybdenum, uranium, gold, iron,
    phosphates, tin, nickel, zinc, wolfram and
    fluorspar and crude oil.
  • Mongolia has over 30 million heads of livestock,
    thus ranking first in per capita ownership,
    including 13,8 million sheep, 10,2 million goats,
    3,1 million cattle, 2,6 million horse and 322,3
    thousand Bactrian camels which provide
    high-quality agro-processing raw materials.
  • The pristine and unpolluted nature and the
    environment are yet another wealth of Mongolians.

  • II. Political, Social and Legal Analysis
  • Governance
  • Political Analysis
  • Social Analysis
  • Legal Analysis

  • Political system Parliamentary Republic
  • Legislature Parliament, Ikh Hural, with
    76 seats, elected for four years
  • Head of the State President elected for four
  • Government Prime Minister appointed by
    Ikh Hural for four years

Structure of Governance
  • President
  • President
  • National Security Council of Mongolia
  • State Commission on Management and Organization
    Rehabilitation Political Repression
  • Parliament
  • Parliament National Audit Office
  • National Statistical Office
  • Bank of Mongolia
  • Government Service Council of Mongolia
  • Mongolian Securities and Exchange Commission
  • National Human Rights Commission of Mongolia
  • Constitutional Court of Mongolia
  • Supreme Court
  • Supreme Court
  • State General Prosecutors Office
  • Provinces
  • 3 big cities incl. capital
  • 22 provinces

Political forces
  • President
  • Prime Minister
  • Political Parties
  • Mongolian Peoples Revolutionary Party
  • Mongolian Democratic Party
  • Parliament Great Khural dominated by MPRP

Social analysis
2002 Mongolia East Asia Pacific Low income
Population (mil) 2.4 1.838 2.495
Average annual growth 1996-2002 () Population Labour Force 1.0 1.8 1.0 1.2 1.9 2.3
Urban population ( of population) Life expectancy at birth (years) Infant mortality (per 1000 live birth) HDI (2003) 57 65 59 0.66 38 69 33 30 59 81
Literacy ( of population age 15) Gross primary enrolment ( of school-age population) Male Female 1 99 97 101 13 106 105 106 37 95 103 87
Legal analysis
  • After 1990, most of laws are new in accordance
    with transformation to democracy
  • Blend of Soviet, German, and US systems of law
    that combines aspects of a parliamentary system
    with some aspects of a presidential system
  • constitution ambiguous on judicial review of
    legislative acts
  • has not accepted compulsory ICJ jurisdiction

  • III. Macro economy
  • Overview
  • Infrastructure, employment
  • GDP
  • Inflation
  • Exchange Rate
  • Savings Investment
  • Economic Structure Sector Analysis
  • Trade Strengths and Weaknesses

Overview of economy
  • A small landlocked economy
  • In transition period from planned economy to
    market economy since 1990
  • Reasonable macroeconomic stability in 2002
  • Highly vulnerable to natural adversities and
    price volatility in world commodity markets
  • Mongolias per capita income is 451 and 36 of
    its population live below the poverty line
  • Deteriorating performance of the agriculture
    sector has been one of the factors hindering
    economic growth
  • GDP growth excluding agriculture grew 9.4 in
  • Inequity growth of spatial and income
    distributions in rural and urban areas

  • Fuel and Energy
  • Generated from mostly coal
  • Telecommunications
  • Satellite systems
  • Mobile phone users 256/1000 in 2002
  • Phone lines 126/1000 in 2002
  • Cheaper postal services
  • Transportation
  • the auto-transportation, rails,
    air-transportation and a small fleet of cargo
    boats operates on some small lakes
  • Media
  • Nation-wide public and private TVs and Radio
  • Increasing number of internet users 8/1000 in

Employment (1000 persons)
  • Most population is employed in agriculture,
    precisely breeding livestock
  • Labour productivity is very low

Source UNDP, Mongolia
  • Unemployment is decreasing
  • However, unemployed people never register as
  • People who employed by informal sector is counted
    as unemployed gt biased statistics

Source UNDP, Mongolia
GDP US million (at current market price)
Some experts have suggested that a 1.0 percent
increase of world market prices causes a 0.15
percent slump in the country's GDP
Source CBM, IMF
GDP growth
  • Economy is stabilizing after the slowdown
  • Sharp growth between 2001 and 2004
  • Real rising GDP growth with stable prices

Source CBM, IMF
1992 325.5 1993 183
  • In recent years, as a result of successful
    implementation of the monetary and financial
    policies, the inflation declined to one-digit
    level (1.6 - 2002)
  • Under control

Source CBM
  • The inflation rate was stable at around 8.0
    percent in 2000 and 2001.
  • In 2002, it fell to 1.6 percent - the lowest
    since 1991.
  • In July 2003, prices have risen by 6.5 percent
    compared with the same period of the previous
    year, and had risen by 5.2 percent compared to
    the end of 2002.
  • However, interest rates remain strikingly high
    and the supply of credit remains limited.
  • The substantial growth in money supply has not
    been accompanied by inflationary outcomes.
  • This suggests that monetary policy is too

Exchange rate MNT vs. US
  • Appreciating Mongolian Togrog is not remedy for
    the trade deficit
  • Although local currency is appreciating, export
    can not become more competitive

Source CBM, ADB
Savings Investment as of GDP
  • Savings come from government
  • In contrast, investment is made by private sector
  • Gradually, both savings/GDP investment/GDP will
    rise as projected
  • Savings/GDP growth has been more dramatic than
    investment/GDP growth

Source IMF
Macro Economy summary
  • Although Mongolia is at the same level with other
    transition countries according to the main
    macroeconomic indicators, it tends to have a drag
    on real growth due to unfavourable weather
  • In 2002, owing to the recovery signs of the
    industrial sector, real GDP growth reached to 3.9
    percent with an increase of 2.9 points from 2001.
  • In order to promote less nature and weather
    dependent employment and to expand the variety of
    export items, it is vital to develop the tourism,
    IT, and mining sectors

Economic structure and sector analysis
  • The composition of GDP has undergone a
  • change between 1995 and 2003
  • Agricultures output is only 20 of GDP, but it
    employs around 60 of economically active
  • Services sector is playing more important role
    in the economy

Source ADB
Sector growth trend ()
  • Unsatisfactory growth high volatile in growth
    of each sector
  • Services sectors have seen dramatic growth in
  • Drop in growth was affected by natural disaster
  • Industry growth is dependent on agriculture

Source ADB
GDP by industrial origin
  • Trade mostly contributes to GDP, however its
    growth is unsatisfactory during past years
  • Agriculture accounts for 20 of GDP

Source ADB
  • Main products
  • wheat, barley, forage crops, oats vegetables
  • Livestock
  • sheep, goats, cattle, camels, horses
  • Exports
  • Milk, cashmere, wool, meat
  • There are important links between the
    agricultural and industrial sectors, with
    agriculture providing the inputs to many
    manufacturing activities, including leather and
    shoe manufacturing, wool processing and cashmere

  • Mining
  • Copper (80)
  • Lignite brown coal
  • Coal
  • salt
  • Manufacturing
  • Cement
  • Meat
  • Sawn wood (coniferous)
  • Wheat flour

  • This sector has seen a continuing decline
    throughout 1990s, except for modest gains in
    1998. This decline is mainly in reaction to the
    decline in international prices for basic metals
    thereby affecting the mining industry.
  • However, 2001 saw an increase in production
    especially the agro-industry sector, e.g.
    cashmere, scoured wool, leather boots, etc.
    Overall manufacturing industry production
    increased by 22.7.
  • Mongolia now needs to concentrate on the
    development of the manufacturing sub-sectors that
    utilize minerals and primary agriculture products

  • The service sector has been more volatile in the
    past several years than before, due to a shift in
    the importance of its various components.
  • Since 1997, the banking sector has experienced a
    decline in its contribution to domestic
    production while other sectors such as transport,
    communications, and construction increased or
    maintained their respective share of GDP
  • Tourism sector is developing

Sector analysis summary
  • Growth in recent years has been spurred by the
    mining sector.
  • Unfortunately mining sector has little potential
    for generating employment, though it does boost
    opportunities for mobilizing additional taxes and
    stimulating activities in the service sector

Trade balance (mil US)
  • 1998 Asian crisis 1999 Russian crisis
    contributed to trade deficit
  • 1999 fall in the value of the togrog against the
    US dollar helped to improve the balance of trade
  • 2002 trade balance worsened due to lower copper
    prices and textile exports

Source ADB, IMF
Export Partners
  • There are 43 countries exports to Mongolia
  • However, export market is concentrated in 3
    countries only
  • Russia was a main partner before 1990

Source ADB, IMF
Export Commodities
  • As of today, nearly 90 per cent of exported
    goods are in hard currency
  • Most of exports are composed in raw materials
    such as copper, cashmere wool
  • Vulnerable to falls in world market prices
  • A narrow range of specialized goods
  • Mongolia accounts for 30 of world cashmere
    production-textiles, and meat and meat products

Source ADB, IMF
Import Origin
  • 67 countries import to Mongolia
  • Import origin is not diversified
  • Mongolia is lacking in freight due landlocked
    position low infrastructure

Source ADB, IMF
Import Commodities
  • Oil is a main product (90 of ) in minerals
  • Russia is a main supplier of oil

Source ADB, IMF
Trade Openness
Source ADB, IMF
Trade openness comparison among Asian countries
Trade strengths weaknesses
  • Export is not diversified
  • Economy is very dependent on trade
  • Partners are concentrated on few countries
  • Vulnerable to falls in world market prices
  • A narrow range of specialized goods
  • Most of exports are composed in raw materials
    such as copper, cashmere wool
  • One of few cashmere exporter in the world

  • Economic Policies
  • Fiscal Policy
  • Monetary Policy
  • Reform Policies

Fiscal Policy
  • In 2003 ( of GDP)
  • Financing deficit -6.1
  • Domestic 5.1
  • Foreign 1.0
  • Public Debt Stock87.9
  • Domestic 0.2
  • Foreign 87.7
  • Revenues35.8
  • Domestic 35.1
  • Tax 27.1
  • Non-tax 8.0
  • Foreign 0.7
  • Expenditures41.9
  • Current 32.4
  • Capital 9.5
  • Deficit financed domestically

Source ADB, IMF, CBM
Monetary Policy
  • Tools of Bank of Mongolia (CBM)
  • Tight monetary policy
  • To restrict sharp growth of reserve money
  • Central Bank Bills (CBB)
  • Reserve Requirement
  • Credit control

Source ADB, IMF
Reform Policy
  • Market-led system
  • A rapid transition 1990
  • "shock therapy - privatisation, currency reform,
    and price and wage liberalisation
  • In 1991 Mongolia joined
  • the World Bank,
  • the IMF and
  • the Asian Development Bank (ADB), which agreed to
    help the country to overcome the difficulties of
    loss of Soviet aid, and guaranteed deliveries and
    external markets
  • Privatization 2001 Jan
  • Large state companies through competitive

Reform Policy
  • Major tax reforms
  • 1997 New income tax rates and a simplified and
    progressive business tax were introduced. Most
    customs tariffs were abolished
  • 1998 On July 1st a value-added tax was
    introduced at 10, but it was quickly raised to
    13 in an attempt to close the government's
    widening budget deficit. A 10 gold tax was
    imposed on November 6th
  • 1999 Customs duty on all imported goods, except
    medical equipment, was reinstated at 10
  • 1997 WTO member

  • IV. BOP
  • Current Account Balance
  • Capital Account Balance
  • FDI
  • ODA
  • Conclusion

Balance of Payment
  • Current account balance is worsening
  • However, capital account surplus
  • leading to overall positive balance

Source IMF
Current Account
  • Current account deficit is larger than trade
  • Both balance will be improved according to IMF

Source IMF
Capital Account 2002
81.2 US million
  • Medium long term loans gt surplus

Source IMF
FDI inflows
FDI - low compared to the other transition
economies, which is related to the size of the
economy and ability to absorb
  • 2001 FDI increased by 38, number of companies
    raised 20 respectively.
  • Among them 84 or 97.1 million USD invested by
    the leading 27 big investors

Source FIFTA, Mongolia
Structure of investors
  • The most foreign invested companies established
    mainly small or medium enterprises
  • Foreign investors interest is growing in
  • The big investments by international companies
    remained in very low level excepting merchants
    and dealers

Source FIFTA, Mongolia
FDI by country origin 2001
  • China is the main investor
  • Its investment accounts for 41 of total FDI
  • FDI origin is not diversified

Source FIFTA, Mongolia
FDI by sectors 2001
A Geological prospecting and exploration
45 B Banking and financial services 16 C
Trade and catering service 6 D Engineering
construction and production of building materials
- 6 E Light industry 5 F Processing of
animal originated raw materials 5 G Energy
1 H Others 16
  • Half of FDI for mining

Source FIFTA, Mongolia
ODA (1991 2000 mil USD)
  • Mongolia has become very much dependent on
    foreign aids grants
  • In the initial years, external assistance was
  • intended to soften the difficulties of transition
  • Over the
  • years, it has become more project-based

Source UNDP, Mongolia
  • Ratio is ten times the average for low-income

Source UNDP, Mongolia
ODA by major donors (1991-2002)
Grants (mil USD)
Bilateral loans (mil USD)
Multilateral loans (mil USD)
Source UNDP, Mongolia
Errors Omissions lt 5 of GDP
Source IMF
Capital flight
  • After banking crisis bankruptcy of 2 state
    banks, individuals trust have worsened gt savings

Source BIS Quarterly Review, March 2004
BOP summary
  • Current account in deficit
  • Capital account in surplus gt overall positive
  • FDI flow is from mainly China
  • No more errors omissions from 2003
  • Capital flight to abroad gt local investors have
    less trust in economy

  • V. Debt flows and stock
  • External Debt Stock
  • Debt Servicing
  • Solvency and Liquidity Rations
  • Conclusion

External Debt Stock
Mongolia - Low income moderate indebted country,
WB 2003
Source IMF
Composition of debt
Debt 2002 1037 USD million
Source WB
External debt/GDP
  • External Debt burden is high - about 90 GDP
    (limitation 30)
  • Mongolia is the ninth most aid-dependent country
    in the world
  • Debt per head 2003 US426 high!

Source IMF
External Debt/Gross Official Reserves
  • Reserves are not adequate!

Source IMF
External Debt/XGS NPV External Debt/XGS
  • Debt/XGS ratio is much beyond limit
  • NPV Debt/XGS is at favorable level cause debt is
    contracted at rate below market level

Source IMF
Debt service structure
Source IMF
Debt servicing ratio (PI/XGS PI/GDP)
  • Debt servicing ratio is at low level
    projected to decrease slightly
  • limitation 30

Source IMF
Export growth rate/Average interest rate
  • Export growth will worsen to 5.89 times of
    average interest rate

Official Reserves Import coverage
  • Reserves just more than 3 months of imports ?
    Insufficient! (Security 12 months)

Source IMF
Debt sustainability summary
  • External debt burden is higher
  • Solvency ratio is not attractive gt Mongolia
    could default on its external debt by 2009
  • Mongolia might become one of HIPC
  • Reserves are not enough
  • Liquidity ratios are favourable

  • VI. Ratings Rankings

Ratings Rankings (2003)
Agency Rating Explanation
COFACE (country risk) D The high risk profile of a country's economic and political environment will further worsen further a generally very bad payment record
SP (long term debt rating) B Sub-investment grade
Freedom house (political right civil liberties) 2 Free
Euromoney (country credit worthiness rating) 37.32 Medium high risk
Ratings Rankings (2003)
BradyNet Ratings Ladder
Calculated average rating of the three
agencies Moody's, SP, and FitchIBCA.
Ratings Rankings (2003)
Economic Freedom Index by Heritage Foundation
Trade Policy 2 Government Intervention 2.5 Foreign Investment 3 Wages Prices 2 Regulation 4
Fiscal Burden 4.5 Monetary Policy 2 Banking Finance 3 Property Rights 3 Black Market 3
Year 2003 Rank 63Score 2.9 Category
Mostly Free
VII. SWOT analysis
Strengths Abundant natural resources new emerging market educated labour force promising mining sector Weaknesses Less population Hard climate Few export commodities domestic markets narrowness landlocked
Opportunities expanding industrial mining production developing tourism sector Threats higher external indebtedness
VIII. Conclusion
  • Investment recommendations due to newly growing
    opportunities in the following sectors
  • Cashmere New technology needed, since cashmere
    is a main export product (raw cashmere exported)
  • Mining need for investment for further
  • Energy insufficient domestic supply
  • Internet still underdeveloped
  • Telecom very low infrastructure in the
  • Banking is important for the economy
  • Tourism many attractions, untouched nature

Country Risk overview
Social Political stability
Economic growth prospects
Domestic financial stability
External competitiveness
Country Risk overview (II)
Balance of payments sustainability
Debt servicing capacity
Overall MT perspectives
  • Ministry of Finance Economy
  • Ministry of Trade infrastructure
  • Mongol Bank (Central Bank of Mongolia)
  • National Statistical Office of Mongolia
  • FIFTA, Mongolia
  • Country Risk Assessment, (Bouchet M.,
    Groslambert B, Clark E. Wiley 2003)
  • IMF
  • EIU
  • World Bank
  • ADB
  • UNDP
  • CIA
  • Global Finance
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