MONGOLIA ECONOMIC UPDATE May 2024 World Bank with external contributions. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the World Bank, the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this report. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/ The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, http://copyright.com/. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, email pubrights@worldbank.org. Mongolia Economic Update – May 2024 Contents Executive Summary ................................................................................................................................5 1. Recent Economic Developments ...................................................................................................7 1.1. Growth in 2023 reached 7.1 percent led by mineral production and private consumption, but there are signs of deceleration .................................................................................................. 7 1.2. Headline inflation gradually declined, coming within the central bank’s target range ..... 10 1.3. Mining-related fiscal revenues rose faster than spending, contributing to a reduction in public debt........................................................................................................................................ 12 1.4. A surge in coal exports led to a current account surplus and higher international reserves 14 2. Outlook, Risks, and Challenges .................................................................................................. 17 1 Mongolia Economic Update – May 2024 List of boxes, figures, and tables Boxes Box 1. The ongoing dzud is causing livestock losses on a scale not witnessed since 2010 ........... 7 Figures Figure 1. Mining and transportation services pulled up growth in 2023, compensating for the contraction in agriculture...................................................................................................................... 7 Figure 2. Net exports and private consumption were key drivers of growth from the demand side ................................................................................................................................................................. 9 Figure 3. Private consumption growth accelerated in H2 2023 as higher salaries supported household income................................................................................................................................ 10 Figure 4. Despite rising wages, total employment growth has been uneven ................................ 10 Figure 5. Inflation pressure from imported prices moderated… ..................................................... 11 Figure 6. … while domestic food prices remain elevated ................................................................ 11 Figure 7. Headline inflation fell within the BOM’s target range, prompting a reduction in the policy rate ............................................................................................................................................. 11 Figure 8. Lending to businesses shows early signs of a recovery ................................................... 12 Figure 9. Higher earnings from mineral activities primarily explain the strong budget revenue performance in 2023 ........................................................................................................................... 13 Figure 10. Fiscal spending declined as a share of GDP despite expanding by 23.7 percent y-o-y in nominal terms .................................................................................................................................. 14 Figure 11. A fiscal surplus in 2023 contributed to a reduction in public debt............................... 14 Figure 12. Strong export growth resulted in a current account surplus in 2023 ........................... 15 Figure 13. Export earnings rose in 2023 as higher coal and copper volumes more than offset lower prices .......................................................................................................................................... 16 Figure 14. The import bill increased modestly, driven by higher fuel and capital goods ............. 15 Figure 15. FDI inflows have slowed as investment in a key copper mine declined and global financial market uncertainties persisted … ....................................................................................... 16 Figure 16. … even so, robust exports and the rollover of some external debt supported an accumulation of reserves .................................................................................................................... 16 Tables Table 1. Key macroeconomic indicators .............................................................................................. 6 Table 2. Selected macroeconomic indicators .................................................................................... 19 2 Mongolia Economic Update – May 2024 ABBREVIATIONS BOM Bank of Mongolia CIT Corporate income tax CPI consumer price index DBM Development Bank of Mongolia FDI foreign direct investment FHF Future Heritage Fund FSF Fiscal Stabilization Fund GDP gross domestic product GOM Government of Mongolia LFPR labor force participation rate MOF Ministry of Finance, Mongolia NSO National Statistics Office, Mongolia OT Oyu Tolgoi PBOC People’s Bank of China PIT Personal income tax SEC State Emergency Committee SOE state-owned enterprise SSC Social security contribution VAT value added tax 3 Mongolia Economic Update – May 2024 ACKNOWLEDGEMENTS This edition of the Mongolia Economic Update (MEU) was prepared by Undral Batmunkh (Economist), Andrew Blackman (Senior Economist), Dulmaa Enkhtuya (Extended Term Consultant), and Anna Twum (Young Professional). The MEU was prepared under the guidance of Mara K. Warwick (Country Director), Sebastian Eckardt (Practice Manager), Tae Hyun Lee (Country Manager), Elitza Mileva (Lead Economist), and Jose Luis Diaz Sanchez (Senior Economist). The team is grateful to Javkhlan Bold-Erdene (External Affairs Associate) for her support on communication affairs. The findings, interpretations, and conclusions expressed in this update are those of World Bank staff and do not necessarily reflect the views of the Executive Board of the World Bank or the governments they represent. For information about the World Bank and its activities in Mongolia, please visit https://www.worldbank.org/en/country/mongolia. For questions and comments on the contents of this publication, please contact Undral Batmunkh (ubatmunkh@worldbank.org). The cutoff date for this edition of the MEU is March 31, 2024. 4 Mongolia Economic Update – May 2024 Executive Summary Mongolia’s economy has recovered but the agreement with the People’s Bank of China current economic expansion was largely (PBOC)). driven by strong coal exports. Despite the Higher coal exports also improved the contraction in agricultural production external position. Robust coal exports were attributed to harsh weather conditions, the partially offset by increased imports of economy expanded by 7.1 percent in 2023. services and consumption goods, leading to Growth was mainly driven by coal mining a modest current account surplus. Gross and related transportation services. Indeed, international reserves stood at US$4.9 coal exports rose to 91 percent above their billion by end-2023, rebounding from their pre-pandemic (2018-2019) average. This low of US$2.7 billion in August 2022, despite was primarily driven by higher demand for weaker net capital inflows and some coal from China. payments on external debt obligations by Public and private consumption growth also the government, the Development Bank of supported the economy, spurred by rising Mongolia (DBM, a state-owned enterprise, household income and the 2023 SOE), and the central bank. supplementary budget. Public consumption Looking ahead, economic growth is expected increased by 5.4 percent in 2023, boosted by to slow to 4.8 percent in 2024 as coal an acceleration in the third quarter of the exports decline from their peak in 2023 and year reflecting the 2023 supplementary the agriculture sector continues to be budget that increased public spending on affected by harsh climate conditions. The goods and services. Private consumption mining sector is expected to expand but at a also accelerated in the second half of the slower pace in 2024 compared to 2023, as year, supported by rising wages (including higher production of copper and gold more public wages) and declining inflation. In than offsets a normalization in coal exports. particular, headline inflation declined to 7.9 However, the contraction in the agriculture percent in December 2023 (and to 7.0 sector is projected to worsen as the dzud—a percent in March 2024). The inflation rate of weather phenomenon characterized by imported goods decelerated as supply extreme cold temperature and heavy bottlenecks, transportation costs, snowfall—extends into a second year, with international energy and food prices, and the sector suffering its largest livestock exchange rate depreciation eased. However, losses since 2010. On the demand side, prices of domestically produced food, robust private consumption and fiscal particularly meat, remained elevated. expansion—including higher public wages, Despite increased public spending, the pensions, and investment—will support government’s fiscal position improved in growth. Private investment is also expected 2023, driven by higher mining revenues, to recover due to higher bank lending and a resulting in a reduction in public debt. The stabilization in production costs. budget registered a surplus of 2.6 percent of Fiscal expansion and rising household GDP in 2023, as higher revenues—mainly incomes are expected to elevate inflationary from coal exports—more than offset an pressures in 2024. Supply constraints from increase in spending. This supported a the expected agricultural contraction are reduction in public debt, which stood at 44.1 poised to elevate domestic food prices, percent of GDP by the end of 2023 pushing average headline inflation to 8.5 (excluding the Bank of Mongolia’s swap percent in 2024, slightly exceeding the 5 Mongolia Economic Update – May 2024 central bank’s target range of 4.0-8.0 agriculture production, while a greater-than- percent. Deficits in the fiscal and current expected fiscal expansion would lead to account balances are expected to reemerge wider fiscal and current account deficits and in 2024 as coal exports normalize, export elevate inflationary pressures. commodity prices decline, elevated While the recent mining-led boom resulted government spending persists, and demand in an improved macro-fiscal situation in for imports builds. 2023, structural reforms remain The medium-term growth outlook remains fundamental for achieving macroeconomic favorable, mainly supported by the mining resilience and fostering inclusive and industry. Economic growth is expected to resilient growth. Fiscal and structural reach an average of 6.4 percent over 2025- reforms can help mitigate the above risks 2026, driven by a substantial increase in and enhance Mongolia’s economic mineral production of the Oyu Tolgoi (OT) resilience, stability, and productivity. mine, the largest copper mine in Mongolia, Prudent fiscal and monetary policies to which is planning to more than double its increase macroeconomic resilience and 2023 production by 2025 (Table 1). structural reforms to develop the non- resource economy led by the private sector The outlook is subject to significant risks. are crucial to decoupling the economy from The economy could face negative spillovers the commodity boom/bust cycle and from weaker-than-anticipated growth in the achieving the Vision 2050 ambitions. Chinese economy (including due to a Increasing frequency and intensity of natural protracted real estate market slowdown disasters, as evidenced by the harsh winters which could dampen steel demand for which of two consecutive years and last year’s Mongolian coal is a major input), and an floods, call for attention to institutions, escalation of geopolitical tensions resulting policies and investments to make the in a higher price of imported oil. country more resilient to the adverse Domestically, a more severe and prolonged impacts of climate change. dzud would lead to a greater contraction in Table 1. Key macroeconomic indicators 2021 2022 2023 2024f 2025f 2026f Real GDP Growth, at constant market prices 1.6 5.0 7.1 4.8 6.6 6.3 Private Consumption -5.9 8.1 7.4 8.6 5.3 6.5 Government Consumption 9.2 6.9 6.6 17.7 4.8 6.8 Gross Fixed Capital Formation 17.7 13.2 7.0 17.1 9.8 6.1 Exports, Goods and Services -14.6 32.3 42.9 3.5 16.0 6.3 Imports, Goods and Services 13.6 29.1 21.0 9.2 14.7 6.6 Real GDP Growth, at constant factor prices 0.4 4.2 7.0 4.8 6.6 6.3 Agriculture -5.5 12.0 -8.9 -9.5 8.0 6.5 Industry (including mining) -2.2 -4.5 12.6 6.4 11.2 7.8 Services 3.9 6.9 9.0 7.7 3.8 5.3 Inflation (CPI, period average) 7.3 15.2 10.6 8.5 8.3 7.5 Current Account Balance (% of GDP) -13.4 -13.2 0.7 -11.5 -10.2 -10.1 Fiscal Balance (% of GDP) -3.0 0.7 2.6 -1.0 -0.7 -0.5 Debt (% of GDP) 64.5 62.1 44.1 43.8 42.0 40.1 Source: World Bank staff estimates. Note: Public debt does not include contingent liabilities or the BoM’s liability under the PBOC swap line (8 percent of GDP in 2023). 6 Mongolia Economic Update – May 2024 1. Recent Economic Developments 1.1. Growth in 2023 reached 7.1 percent led by mineral production and private consumption, but there are signs of deceleration A rebound in mineral production and increase in China’s demand for coking coal in transportation services for mineral exports 2023 and the start of production at the OT were key drivers of growth in 2023. With underground copper mine in March 2023 coal production more than doubling and propelled the growth in mining. Together copper production increasing by 17.3 with transportation services for coal exports, percent, mining output expanded by 23.4 mining contributed over 60 percent of GDP percent y-o-y in 2023. An exceptional growth in 2023 (Figure 1). Figure 1. Mining and transportation services pulled up growth in 2023, compensating for the contraction in agriculture Y-o-y growth of GDP, and growth contributions by key sectors (percentage points) 20% Mining & transportation Agriculture 15% Other sectors GDP growth 10% 5% 0% -5% 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2021 2022 2023 Source: NSO. The agriculture sector was hit hard by harsh million livestock (6.9 percent of the total weather conditions (dzud) in the spring of livestock) and 27.9 percent fewer offspring 2023 and again in the 2023-24 compared to 2022. The heavier-than-usual winter/spring season. Agricultural snowfall in late 2023 and early 2024 is production contracted 8.9 percent in 2023, currently straining the livestock industry for its largest contraction since the 2010 dzud. the second year in a row. Agricultural The livestock industry was buffeted by the production contracted by 33.1 percent y-o-y colder-than-usual weather conditions in in the first two months of 2024 (see Box 1). April-May 2023, which led to the loss of 4.9 Box 1. The ongoing dzud is causing livestock losses on a scale not witnessed since 2010 Affected by the ongoing dzud, Mongolia has suffered its largest livestock losses since 2010, which poses significant challenges for herders and the agricultural sector as a whole. As of end-March 2024, the ongoing dzud had resulted in a total loss of 6.3 million livestock (9.7 percent of the total livestock). Despite recent temperature rises, further losses are expected in the spring season due to the weakness in the surviving livestock. These losses compare to an average livestock loss during non-dzud years in 1995-2023 of about 3.0 percent of the total (Figure B1). The sector is also expected to be negatively 7 Mongolia Economic Update – May 2024 affected by fewer births and weaker survival of offspring in the following months, as many of the breeding stock are reported to have miscarried. Figure B1. Livestock loss as of end-March 2024 has already exceeded the annual loss in 2023 Livestock loss (% of total livestock) Average livestock loss in non-dzud years Agriculture GDP growth (RHS) 25% 30% 20% 20% 10% 15% 0% 10% -10% 5% -20% 0% -30% 2007 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Source: National Statistics Office (NSO) and State Emergency Committee (SEC). Note: The value for 2024 represents livestock loss between January–March, while the values for previous years represent the whole year. Despite an increase in livestock insurance since the dzud in 2010, most Mongolian herders remain uninsured. Only 14.4 percent of the nearly 250,000 herder households and 9.9 percent of the total livestock were insured in 2023, making herders highly vulnerable to the impact of the dzud. A state of emergency was declared on February 14 and cash and in-kind support, including animal feed and medical supplies, are being provided to the herders from both public sources and private fundraising, as well as from development partner donations. Growth outside of mining, agriculture and Net exports were the key driver of growth in transportation started to accelerate in the 2023 due to a large increase in external last quarter of 2023, reflecting a rebound in demand for coal. Net exports contributed 5.2 domestic demand. Economic growth in the percentage points of growth in 2023 as sectors excluding mining, agriculture, and record-high coal volumes more than offset transportation services reached 5.8 percent robust demand for imports of transportation in 2023, slightly lower than the 7.4 percent services, durable consumption goods, expansion recorded in 2022. Activities in investment inputs, and fuel (Figure 2). In trade and other services, in particular, particular, the rebuilding of Chinese coal recovered rapidly in Q4 as higher wages and stocks and increased steel production in fiscal expansion drove an increase in northern China (in part driven by strong steel domestic demand. Growth contributions exports) led to unprecedented demand for from other industries were weaker, despite Mongolia’s coking coal. Following the some rebound in meat processing activities resolution of pandemic-related trade with the removal of the export quota in disruptions in H2 2022, Mongolia’s coal 2023. exports in 2023 almost doubled relative to the amount exported in 2019, a previous record year for Mongolia.1 However, the 1 More than half (52.9 percent) of China’s coking coal imports in 2023 originated from Mongolia, an increase from 44 percent during 2018-2019, Mongolia’s previous record years for coal exports. 8 Mongolia Economic Update – May 2024 growth contribution from net exports turned base effect from Q4 2022 when coal exports negative in Q4 2023 mainly due to a high had started to surge. Figure 2. Net exports and private consumption were key drivers of growth from the demand side Demand-side contribution to GDP growth (percentage points) 25% Net exports 15% Change in inventories 5% Gross fixed investment -5% Government consumption Private consumption -15% GDP growth -25% 2019 2020 2021 2022 2023 Source: NSO. Fiscal policy also supported growth due to and wages, predominantly due to the higher spending on goods & services and significant raise in public sector wages public investment, while private investment enacted through the supplementary budget. remained muted. Public consumption of In addition, household spending was goods and services accelerated in H2 2023— boosted by increased benefits of the social and contributed 1.3 percentage points to security pension and social welfare programs annual growth. This was driven by public via the supplementary budget, alongside the sector wage hikes adopted in July as part of substantial growth in personal loans. Finally, the 2023 supplementary budget. In addition, the gradual decline in headline inflation also public investment (excluding SOEs) also bolstered households’ purchasing power. increased to 10.7 percent of GDP in 2023, up Combined, these factors contributed to a from 9.7 percent in 2022. Meanwhile, private significant rise in private consumption investment remained subdued due to a 30.7 during 2023. percent reduction in net foreign direct investment and persistently high lending Household consumption was also supported rates that continued to weigh on business by an improvement in the labor market, borrowing throughout 2023. Finally, fewer though the recovery has been uneven. Total offspring in the livestock industry reduced employment expanded by 3.3 percent in Q4 inventories, resulting in a negative GDP 2023, mainly driven by the creation of growth contribution. permanent jobs in non-agriculture sectors (Figure 4). In contrast, agriculture sector Household real income accelerated in H2 employment declined due to the dzud. 2023 and supported a 7.4 percent expansion Reflecting the uneven recovery, the labor in private consumption. Household real force participation rate averaged 57.7 income growth accelerated in H2 2023 and percent in 2023, still below the pre- reached 14.1 percent y-o-y in Q4 (Figure 3). pandemic average of 61.0 percent (2015-19 This was primarily driven by higher salaries average).2 2 The decline in 2023 is mainly the result of young female workers leaving the labor force for education purposes and women in their early 50s going into early retirement. The female labor force participation rate declined to 50.4 percent in 2023, compared to 51.5 percent in 2022 and 54.3 percent during the pre-pandemic period (2015-19). 9 Mongolia Economic Update – May 2024 Figure 3. Private consumption growth accelerated in H2 Figure 4. Despite rising wages, total employment growth 2023 as higher salaries supported household income has been uneven Y-o-y growth of household real consumption and real income, Y-o-y growth of total employment and percentage contributions percentage contributions to real income growth Others Other income Temporary salary employment Pension & social welfare Salary & wage 20% Permanent salary employment 20% HH real income growth Total employment growth 15% 15% Real private consumption growth 10% 10% 5% 5% 0% 0% -5% -5% -10% -10% -15% -15% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2022 2023 2022 2023 Source: NSO. Source: NSO. 1.2. Headline inflation gradually declined, coming within the central bank’s target range Moderating price increases of imported Meanwhile, inflation of domestically goods supported a gradual decline in produced food was persistently high consumer price inflation, despite the throughout 2023 (averaging 18.9 percent) continued rise of domestic food prices. reflecting higher production costs of flour Nationwide headline inflation gradually and flour-based goods3 and a lower supply of declined from 12.3 percent in January 2023 meat.4 While the prices of meat and other to 7.0 percent by March 2024, falling within livestock-related food items remain elevated the Bank of Mongolia (BOM)’s target range of due to the contraction in agricultural 4.0-8.0 percent for 2024 (Figure 5). The production, inflation of domestically inflation reduction is mainly attributed to a produced food declined to 12.1 percent in moderation in import prices (from 12.4 March 2024, mainly reflecting a lower percent in January 2023 to 5.1 percent in contribution from flour and flour-based March 2024), as international prices of food goods, due to a high base year effect in early and fuel stabilized and transportation costs 2023 (Figure 6). declined following the resolution of pandemic-related bottlenecks in late 2022. A broad-based appreciation in the nominal exchange rate also dampened import prices. 3 Prices of imported inputs including fertilizers and diesel fuel went up in late 2022 and created supply-side pressure on flour producers, who had kept their prices relatively stable in 2022. 4 The dzud effect on the livestock industry was the strongest in Q2 of 2023 and its inflationary effect persisted throughout the year. 10 Mongolia Economic Update – May 2024 Figure 5. Inflation pressure from imported prices Figure 6. … while domestic food prices remain elevated moderated … Contributions to headline inflation Contributions to domestic food inflation Domestic food Others Vegetable Domestic services Milk Meat Imported goods Flour & bread Domestic food inflation 13.2% 14% 12.2% Others 25% 12% Headline inflation 20% 10% 15% 7.0% 8% 10% 6% 5% 4% 2% 0% 0% -5% Nov-23 Jun-23 Jul-23 Aug-23 Sep-23 Feb-23 Mar-23 Apr-23 May-23 Feb-24 Mar-24 Dec-22 Jan-23 Dec-23 Jan-24 Oct-23 Nov-23 Jul-23 Aug-23 Sep-23 Jun-23 Apr-23 Mar-23 May-23 Mar-24 Dec-22 Feb-23 Dec-23 Feb-24 Jan-23 Jan-24 Oct-23 Source: NSO. Source: NSO. Note: Areas reflect percentage contributions to y-o-y Note: Bars reflect percentage contributions to y-o-y headline inflation. domestic food inflation. Cautious of growing demand-side up from 5.2 percent y-o-y in March 2023 inflationary pressures, the central bank kept (Figure 8). Nearly half of the March credit its policy rate high throughout 2023. The growth was associated with faster growth of rapid acceleration in household personal loans which reached 35.7 percent consumption supported by increased y-o-y, as banks continued to aviod lending to incomes and consumption loans (see Section businesses due to higher risk. To limit the I.1) and the fiscal expansion, particularly on excessive growth in personal loans the BOM goods and services (see Section I.3), is tightened its macroprudential measures on fueling demand-driven price pressures and pension-backed loans starting in January presents risks to further reduction in 2023. Meanwhile, the share of troubled consumer inflation. Cautious of these loans in total loans declined from 15.6 reemerging demand pressures, the central percent in March 2023 to 11.4 percent in bank kept its policy rate fixed at 13 percent March 2024. This improvement in the quality in 2023. However, with headline inflation of business loans—especially to those in coming within the BOM’s target range of 4.0- trade, mining, and manufacturing sectors 8.0 in recent months, the policy rate was cut following the economic recovery—is by 100 basis points in March 2024 (Figure 7). expected to have prompted some recovery in lending to businesses. While persistently Banks have remained risk-averse but there high lending rates5 curbed business lending are early signs of a recovery in lending to in 2023, the recent BOM decision to cut the businesses. Credit growth has picked up and policy rate is likely to ease this pressure to reached 25.7 percent y-o-y by March 2024, some degree. 5 With the end of the COVID law, banks reverted to paying interest to demand deposit holders, which resulted in a higher average deposit interest rates. 11 Mongolia Economic Update – May 2024 Figure 7. Headline inflation fell within the BOM’s Figure 8. Lending to businesses shows early signs of a target range, prompting a reduction in the policy rate recovery Monetary policy rate, inflation target, and headline inflation Y-o-y growth of total outstanding credit Headline inflation Policy rate 30% 14% Personal loan 25% 12% Corporate loan 20% Mortgage loan 10% Credit growth (y-o-y) 8% 15% Target inflation 10% 6% range 4% 5% 2% 0% 0% -5% Nov-23 Jun-23 Sep-23 Feb-23 Apr-23 Jul-23 Aug-23 Mar-23 May-23 Feb-24 Mar-24 Dec-22 Jan-23 Dec-23 Jan-24 Oct-23 Sep-23 Jun-23 Nov-23 Jul-23 Aug-23 Apr-23 May-23 Dec-22 Feb-23 Mar-23 Dec-23 Feb-24 Mar-24 Jan-23 Jan-24 Oct-23 Source: BOM and NSO. Source: BOM. Note: Areas reflect percentage growth contributions. 1.3. Mining-related fiscal revenues rose faster than spending, contributing to a reduction in public debt Fiscal revenue increased significantly, to higher revenue collection through buoyed by robust mining revenues. Budget personal income taxes (PIT), social security revenue increased by 31.3 percent y-o-y in contribution (SSC) fees, and trade taxes 2023 and reached 34.5 percent of GDP (up including VAT (Figure 9b). In the 2024 from 33.8 percent in 2022). Despite lower approved budget, revenue is planned to prices, the surge in mineral export volume increase by 14.1 percent y-o-y and reach supported the budget through higher 37.5 percent of GDP, driven by strong growth royalties, corporate income taxes (CIT), and of both mining and non-mining activities. dividends of mining SOEs—which together Revenue collection started 2024 strongly, formed about one-third of total revenue in recording a 78.4 percent y-o-y increase in 2023 (Figure 9a).6 Higher revenues also led the first two months of 2024, mainly driven to an increase in the Fiscal Stability Fund by mining royalties, CIT, and SSC. The (FSF) by 1.0 percent of GDP by end-2023, growth in revenue is expected to moderate although this was only half the amount over 2024 in line with the normalization in accumulated in 2022 reflecting a y-o-y coal exports and the contraction in decline in commodity prices. Meanwhile, agriculture (which occurred after the 2024 rising wages (including in the public sector) budget was approved). Meanwhile, declining and the acceleration in trade and services commodity prices have already started to activities in the second half of the year led dampen the accumulation in the FSF.7 6 More than half is attributed to the coal sector. 7 In 2022, the fiscal saving rule was temporarily suspended and the Child Money Program was financed with funds (including mining royalties and dividends from SOEs) that otherwise would have been transferred to the Future Heritage Fund, an inter-generational saving fund. Starting in 2024, Mongolia is gradually returning to the original savings rule and 20 percent of royalties (after deducting transfers to the FSF) will be transferred to the FHF. The government plans to return to the original 65 percent rule starting in 2025. 12 Mongolia Economic Update – May 2024 Figure 9. Higher earnings from mineral activities primarily explain the strong budget revenue performance in 2023 a. Y-o-y growth of budget revenue and key components in b. Y-o-y growth of budget revenue and its growth contributions percent of GDP Non-mining revenue Mining revenue Other 40% 60% Total revenue (y-o-y, RHS) 30% 4.5% VAT 30% 45% 25.4% 23.6% PIT and SSC 24.1% 20% 20% 22.8% 30% 7.7% 9.9% 20.5% CIT 10% 15% 4.0% 9.2% 10.9% 10% 7.2% Royalties 7.7% 7.1% 8.4% 2.6% 0% 0% 8.0% Total revenue (y-o-y 6.7% change) -10% -15% 0% 2019 2020 2021 2022 2023 2022 2023 Sources: MoF; World Bank staff estimates. Total expenditure accelerated in the second The public debt-to-GDP ratio declined owing half of 2023 due to additional spending on to the strong growth in nominal GDP and net wages, pensions, and social assistance. debt repayments. Mongolia recorded an Despite increasing by 23.7 percent y-o-y, overall budget surplus of 2.6 percent of GDP total spending declined to 31.9 percent of in 2023, as higher mineral revenues more GDP, as nominal GDP grew faster than than offset the increase in spending (Figure spending in 2023 (Figure 10). Public 11). The budget surplus contributed to a investment spending increased to 7.3 reduction in public debt, which reached 44.1 percent of GDP in 2023, up from 6.9 percent percent of GDP by end-2023, down from in 2022, as the government completed 62.1 percent in 2022.8 Most of this reduction investment projects delayed from previous was due to the 28.4 percent y-o-y expansion years. In addition, total expenditure in nominal GDP.9 The public sector accelerated in the second half of the year alsorepayed public and publicly guaranteed after the supplementary budget introduced debt worth US$1.4 billion (6.8 percent of additional current expenses worth 2.7 GDP) in 2023. This included refinancing percent of GDP starting July 1, 2023. through a new bond issued in January 2023 Notably, the supplementary budget included (3.2 percent of GDP or US$650 million), a net a 17.8 percent y-o-y increase in the public payment of US$94.1 million (0.5 percent of sector wage bill, a 17.9 percent y-o-y GDP) on two sovereign Eurobonds, and a full increase in social insurance pension payment of US$654.4 million (3.2 percent) payments, and an 8.4 percent y-o-y increase on external debt obligations of the DBM in in social welfare benefits including the Child late 2023. In addition, the BOM closed a Money Program. swap line worth US$210 million with the PBOC. The government also repaid a 8 The public debt includes publicly guaranteed debt of the DBM but does not include contingent liabilities or the BoM’s liability under its swap line with the PBOC (equivalent to 8 percent of GDP in 2023). 9 The public debt-to-GDP ratio declined by 17.9 percent of GDP in 2023, of which 3.4 percentage points are related to a nominal reduction in public debt supported by the fiscal surplus and net payments on maturing debt. 13 Mongolia Economic Update – May 2024 sovereign bond worth US$392 million in million for a sovereign bond due in March 2024, of which US$350 million was September 2026 and US$1.5 billion for the refinanced with a bond issued in late 2023. PBOC swap line due in mid-2026. The next debt amortizations are US$600 Figure 10. Fiscal spending declined as a share of GDP Figure 11. A fiscal surplus in 2023 contributed to a despite expanding by 23.7 percent y-o-y in nominal reduction in public debt terms Budget expenditure and key components in percent of GDP Budget balance in percent of GDP 40% 36.7% 35.0% Pensions 33.1% 6% 31.9% 4.2% 30.8% 3.3% 2.6% 30% 3% 2.1% Social welfare 1.0% 0.7% transfers 0% 20% Goods and services -1.1% -3% -3.0% Overall balance -6% 10% Capital spending -6.7% Structural balance -9% -9.1% Primary balance Total spending 0% -12% 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Sources: MoF; World Bank staff estimates. Sources: MoF; World Bank staff estimates. 1.4. A surge in coal exports led to a current account surplus and higher international reserves The current account registered a surplus (0.7 increase in volumes stemming from the start percent of GDP) in 2023 owing to a surge in of operations at the OT underground mine in coal exports (Figure I.12). Merchandise March 2023. Despite a harsh winter, goods exports increased to 68 percent of agricultural exports (around 5 percent of GDP (from 56 percent in 2022 and 50 total exports) increased by 40 percent (y-o- percent on average during 2017-2019), y) in 2023, driven by higher shipments of buoyed by a 35 percent y-o-y increase in coal processed meat from inventory built up in export revenues. Coal demand from China late 2022. Nevertheless, higher merchandise soared as its steel exports reached a six-year export revenue was partially offset by a high in 2023,10 and the elimination of large services deficit. While tourism exports pandemic-related border restrictions doubled y-o-y, surpassing pre-pandemic allowed for the resumption of coal imports. levels, the services balance was still in a Consequently, Mongolia’s coal export deficit of 13 percent of GDP partly owing to volumes rose 111 percent y-o-y in 2023, higher demand for mineral-related transport outweighing a 24 percent y-o-y reduction in services.11 More recently in Q1 2024, coal prices (Figure 13). On the other hand, copper and copper exports remained robust, even as export earnings declined, dragged down by 8.5 percent lower prices, despite a 5 percent 10 Coking coal imports to China are used in steel production for domestic use and exports. 11 International airline passenger arrivals in 2023 were 9 percent higher than in 2019. Source: OAG Traffic Analyzer. 14 Mongolia Economic Update – May 2024 the price of coal continued on a downward hand, import prices—especially trajectory (a y-o-y decrease of 23 percent). international prices of food and fuel— declined steadily in 2023 as supply chains Declining prices of imported goods also normalized after the pandemic and energy supported the current account. Goods and food markets adjusted following the imports stood at 46 percent of GDP in 2023 initial shock from Russia’s invasion of (compared to 49 percent of GDP the year Ukraine. Food prices fell by 9 percent while prior) (Figure 12). On the one hand, the oil prices declined by 17 percent despite the recovery in domestic demand bolstered the ongoing geopolitical tensions.12 Import data imports of machinery and equipment for in Q1 2024 point to an uptick in prices, as oil investment projects and mining activities, and other commodity prices remain fuel, and consumer durable goods including volatile.13 passenger vehicles (Figure 14). On the other Figure 12. Strong export growth resulted in a current account surplus in 2023 Current account balance and its components, in percent of GDP 80% 60% 40% Income balance 68% 51% 52% 52% 56% 20% 1% Services balance -5% 0% -15% -13% -13% Imports of goods -20% -42% -39% -43% -46% Exports of goods -49% -40% Current account balance -11% -11% -14% -13% -9% -13% -60% -11% -14% -9% -10% -80% 2019 2020 2021 2022 2023 Source: BoM. Figure 13. Export earnings rose in 2023 as higher coal Figure 14. The import bill increased modestly, driven by and copper volumes more than offset lower prices higher fuel and capital goods Export volume and prices of key minerals, coal and copper Goods imports bill growth and percentage contributions of key items Coal export volumes (2019=100) Fuels Capital goods Copper export volumes (2019=100) Intermediate goods and industrial materials WB commodity price index (y-o-y, RHS) Consumer goods 200 80% Total imports bill (y/y, %) 40% 150 60% 29% 27% 30% 100 40% 20% 50 20% 6% 10% 0 0% 0% -50 -20% -10% -100 -40% -20% -14% 2019 2020 2021 2022 2023 2020 2021 2022 2023 Source: BoM and the World Bank Commodities Outlook 2024 Source: BoM. Note: Coal and copper exports constitute about 75 percent of Mongolia’s export basket in 2023. 12 Food price trends from World Bank’s Global Economic Prospects (January 2024). Oil price changes calculated from World Bank Commodity Outlook Annual Commodity Price dataset (March 2024). 13 World Bank Commodities Price Data (May 2024). 15 Mongolia Economic Update – May 2024 Despite weaker net capital inflows, the early 2024 which helped to limit net capital current account surplus supported a rebound outflows (see Section 1.3). Consequently, in gross international reserves. In 2023, FDI gross international reserves increased from inflows declined by 10 percent (y-o-y) to 15 US$3.4 billion in December 2022 (about percent of GDP, compared to 20 percent in three months of import coverage) to US$4.9 2022—still well below pre-pandemic levels billion (a little over four months of import (Figure 15). Alongside the impact of financial coverage) in December 2023, and further to tightening in advanced economies on global US$5.2 billion in March 2024 (Figure 16). capital flows, net financial inflows declined With less pressure on the external balance, because of lower investment needs for the the nominal MNT exchange rate OT underground mine development. Taking experienced a broad-based appreciation in advantage of narrower sovereign bond 2023, following a steep depreciation of 21 spreads, the government refinanced most of percent against the US dollar in 2022. the sovereign Eurobonds due in 2023 and Figure 15. FDI inflows have slowed as investment in a Figure 16. … even so, robust exports and the rollover of key copper mine declined and global financial market some external debt supported an accumulation of uncertainties persisted … reserves Foreign direct investment inflow, percent of GDP Balance of payments (percent of GDP) and gross international reserves (million US$) Mining Non-mining Total Financial account Current and capital account 25% Official foreign reserves (months of import) (RHS) 22% 25% 7.1 8.0 19% 20% 20% 20% 7.0 17% 5.9 17% 16% 15% 15% 6.0 15% 13% 12% 10% 19% 4.3 5.0 12% 4.1 5% 3.0 4.0 11% 13% 7% 10% 9% 7% 0% 3.0 5% -4% 1% 4% -5% 2.0 5% 3% 3% -14% -13% -12% -10% 1.0 0% -15% 0.0 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Source: BoM. Source: BoM. 16 Mongolia Economic Update – May 2024 2. Outlook, Risks, and Challenges The global economic outlook is expected to growth in 2024 will be underpinned by be challenging in 2024 with global growth robust private consumption and investment. and commodity prices projected to decline In particular, household incomes and private from last year. Global growth, weighed down consumption are expected to be boosted by by tight financial conditions and weak trade the increase in public sector wages and and investment, is expected to decline to 2.4 pension benefits, introduced as part of the percent in 2024 (far below the 3.1 percent 2024 budget and effective on April 1, 2024, average of the 2010s). Growth in China is along with dividends distributed by a state- also expected to moderate to 4.5 percent in owned coal mine.16,17 While public sector 2024 from 5.2 percent in 2023, due to the investment (planned to increase by 21.2 continued weakness in the property market, percent y-o-y in the 2024 budget) is and weak consumer confidence.14 Global expected to dominate gross fixed capital commodity prices are also projected to formation, private investment is also decline in 2024, with annual average prices expected to recover due to a stabilization in of crude oil and metals & minerals down by production costs and a higher bank lending 1.2 percent and 2.2 percent, respectively.15 to businesses amid declining interest rates and improving asset quality. Mongolian economic growth is projected to moderate in 2024, hampered by harsh A moderate fiscal deficit is expected in 2024. weather conditions affecting the agriculture Budget revenue as a share of GDP is sector and coal exports declining from their expected to decline to 33.7 percent in 2024, peak in 2023. After expanding by 7.1 percent down from 34.5 percent recorded in 2023. in 2023, the economy is expected to grow by While this is still a strong performance 4.8 percent in 2024 (Table 2). On the supply compared to the 2010-2019 average of 29.6 side, this slowdown is primarily attributed to percent, the normalization in mining export a worsening downturn in the agriculture volumes and declining commodity prices are sector caused by the ongoing dzud, which is expected to weigh on budget revenue this expected to be as severe as the dzud cases year. Total expenditure is planned to in the early 2000s. Meanwhile, the mining increase to 34.7 percent of GDP, up from sector is expected to continue to expand but 31.9 percent in 2023, mainly reflecting at a slower pace in 2024 compared to 2023, increased public wages and bonuses, as coal exports moderate from their peak in transfers to the pension fund, and capital 2023 while higher production of both copper expenditure. As a result, a deficit of 1.0 and gold at OT more than offsets this percent of GDP is anticipated in 2024. decline. On the demand side, net exports are Nevertheless, public debt is expected to anticipated to decrease, as coal exports decrease slightly owing to strong nominal revert to historical levels and imports of economic growth and a partial payment of a investment and consumer goods rise. Hence, 14 Global Economic Prospects, January 2024. 15 The November 2023 edition of the Mongolia Economic Update bases its price projections on the forecasts released in the World Bank Commodities Outlook from October 2023, and current projections are based on the Commodities Outlook from April 2024. 16 Erdenes Tavan Tolgoi (a state-owned coal miner) distributed dividends from its 2022 retained earnings to 3.4 million Mongolians (a total of MNT351 billion or US$30 per person) in February 2024 and dividends from its 2023 earnings (a total of MNT760 billion or US$65 per person) in April 2024. 17 As approved in the 2024 budget, public sector wages are planned to increase by 10-20 percent (higher raise for lower wages) and additional bonuses (equivalent to 20-40 percent of the wage) will be introduced for employees in rural areas. Monthly pensions of about 500,000 retirees will be increased by MNT100,000 each, and social welfare pensions and welfare for the caretakers will rise by 10 percent. 17 Mongolia Economic Update – May 2024 sovereign bond on March 9 (a net payment double output between 2023 and 2025. of US$42.6 million). Stronger growth and increased mineral production are expected to support the fiscal Inflationary pressures will likely build in revenue and current account balance, 2024 due to supply constraints for some resulting in narrower deficits. domestic foods and demand pressures. Continued lower prices of food and fuel at Downside risks remain, both domestically the international market are expected to and externally. A more severe and prolonged keep imported inflation down. However, dzud would lead to a greater contraction in inflation is expected to accelerate in H2 agriculture production and larger spillover 2024 from 7.0 percent in March and reach an effects, including on cashmere and meat average of 8.5 percent in 2024. The manufacturing and on herders’ livelihoods. contraction in domestic agricultural Meanwhile, a greater-than-expected fiscal production could create supply constraints expansion (including through SOE (especially for meat), while the expansion of investments) could result in larger fiscal and domestic demand mentioned above is current account deficits and further add to projected to create demand pressures, inflationary pressures. Externally, Mongolia mostly in the second half of 2024. Rising could face large negative spillover effects food prices pose greater risks to poor non- from: (i) slower-than-expected growth in agricultural households, who spend a larger China leading to lower external demand for share of their budget on food. In addition, Mongolia’s exports; (ii) an escalation of high reliance on agricultural income among geopolitical tensions resulting in higher herder households means that the prices of imported oil; and (iii) a shortage in agricultural contraction can impede further Russia’s domestic gasoline supply leading to poverty reduction. a reduction in Mongolia’s imports. The current account is expected to turn into Alternatively, earlier- and larger-than- a deficit in 2024, weighing on the balance of expected production at OT’s underground payments. Normalization in China’s demand mine and stronger global economic growth, for imported coal following its peak in 2023 especially improvements in China’s and declining commodity prices are economic outlook, would support activity in projected to reduce exports revenue. Mongolia through higher commodity prices Meanwhile, imports of goods and services and larger mineral exports. are expected to remain elevated close to the On the policy side, fiscal and structural 2023 level as declining import prices more reforms can enhance Mongolia’s economic than offset increased demand. Upcoming resilience, stability, and productivity. large external payments include US$600 Achieving the nation’s Vision 2050 ambition million in a sovereign bond and US$1.5 will require prudent fiscal and monetary billion in the BOM’s FX swap deal with the policies to increase macroeconomic PBOC due in 2026. reslieince and structural reforms to develop The medium-term outlook remains the non-resource economy. Implementing favorable, mainly supported by the countercyclical fiscal policies—supported by expansion in OT’s underground mining transparent and credible fiscal rules and a activities. Economic growth is expected to well-functioning stabilization fund to accelerate to over 6 percent in 2025-2026, smooth consumption over the business driven by a recovery in agricultural cycle—can help achieve both higher, less production following two years of volatile growth and improved debt contraction and the continued expansion in sustainability. Along with greater mineral production at OT, which plans to macroeconomic resilience, building the 18 Mongolia Economic Update – May 2024 foundations towards a more diversified, aligning the supply of skills from education high-income economy will require: (i) institutions to the demand from employers. microeconomic reforms to enhance Increasing frequency and intensity of natural competition, secure investor rights, and disasters, as evidenced by the harsh winters create a more level playing field that of two consecutive years and last year’s enables productive firms to invest and grow; floods, call for attention to institutions, and (ii) better utilization of its young and policies and investments to make the educated (especially female) labor force by country more resilient to the adverse creating better-quality jobs and better impacts of climate change. Table 2. Selected macroeconomic indicators 2021 2022 2023 2024f 2025f 2026f Real GDP Growth, at constant market prices 1.6 5.0 7.1 4.8 6.6 6.3 Private Consumption -5.9 8.1 7.4 8.6 5.3 6.5 Government Consumption 9.2 6.9 6.6 17.7 4.8 6.8 Gross Fixed Capital Formation 17.7 13.2 7.0 17.1 9.8 6.1 Exports, Goods and Services -14.6 32.3 42.9 3.5 16.0 6.3 Imports, Goods and Services 13.6 29.1 21.0 9.2 14.7 6.6 Real GDP Growth, at constant factor prices 0.4 4.2 7.0 4.8 6.6 6.3 Agriculture -5.5 12.0 -8.9 -9.5 8.0 6.5 Industry (including mining) -2.2 -4.5 12.6 6.4 11.2 7.8 Services 3.9 6.9 9.0 7.7 3.8 5.3 Inflation (CPI, period average) 7.3 15.2 10.6 8.5 8.3 7.5 Current Account Balance (% of GDP) -13.4 -13.2 0.7 -11.5 -10.2 -10.1 Net FDI, Inflow (% of GDP) 13.1 13.9 7.3 7.0 7.1 6.3 Fiscal Revenue (% of GDP) 32.0 33.8 34.5 33.7 34.8 33.9 Fiscal Expenditure (% of GDP) 35.0 33.1 31.9 34.7 35.5 34.4 Fiscal Balance (% of GDP) -3.0 0.7 2.6 -1.0 -0.7 -0.5 Primary Balance (% of GDP) -1.1 2.1 4.2 0.2 0.4 0.5 Debt (% of GDP) 64.5 62.1 44.1 43.8 42.0 40.1 Source: World Bank staff estimates. Note: Public debt does not include contingent liabilities or the BoM’s liability under the PBOC swap line (8 percent of GDP in 2023). 19 Mongolia Economic Update – May 2024 20