Writer: Gan-Ochir Doojav, Financial institution of Mongolia
The Mongolian economic system has confronted sharp recession through the COVID-19 pandemic. The federal government applied immediate measures to include the unfold of the virus, comparable to social distancing and border closures. These have confirmed profitable, as there was no reported group transmission till the center of November 2020.
The financial costs although have been important. The autumn in exterior and home demand led to a 9.7 per cent contraction in GDP within the first half of the yr. Opposed exterior shocks are mirrored within the change fee and gross reserves. In comparison with the start of the yr, the home foreign money, the Togrog, depreciated in opposition to the US greenback by 4 per cent and gross worldwide reserves have fallen by US$700 million, though that is primarily as a result of a home financial institution paid a US$500 million US greenback bond compensation.
Financial coverage has loosened considerably to take care of stability and shield probably the most susceptible. On the fiscal coverage entrance, the Ministry of Finance launched fiscal stimulus equal to 7.2 per cent of GDP, together with lowering the social safety contribution, will increase within the common switch program (often known as little one cash), and well being spending. In response to the finances handed by the parliament, the general fiscal stability is projected to achieve –12.5 per cent of GDP this yr and –5.1 per cent in 2021.
The Financial institution of Mongolia (BOM) has reduce coverage charges by 500 foundation factors, diminished the reserve requirement by 4.5 share factors, suspended the debt-service-to-income ceiling on client loans, and offered focused longer-term financing to the banking sector as permitted beneath COVID-19 legal guidelines. These direct coverage measures will assist financial restoration.
For the monetary sector, the BOM has taken short-term forbearance measures, softening asset classification necessities, to increase maturities on client and mortgage loans and to restructure enterprise loans within the banking sector. These measures have diminished stress on debtors and banks.
For the reason that mining sector began to bounce again in August there have been promising indicators of restoration within the economic system. Exports have soared in current months with the excessive stage of coal deliveries to China. Gold manufacturing has elevated dramatically with the opening of a brand new mine and excessive world costs.
The home COVID-19 outbreak that started in November, nevertheless, has delayed additional financial restoration and elevated uncertainty, however the baseline financial outlook stays beneficial. The BOM tasks a contraction of 5.4 per cent for 2020 and an growth of 6 per cent for 2021. Inflation stays subdued and under the goal stage for 2020 and can possible stabilise across the goal stage of 6 per cent in 2021.
The restoration displays the rising demand for coal and copper from China, the loosening of financial and monetary insurance policies and the optimistic spill-over results of the mining sector on the transportation and commerce sectors. However there are nonetheless important draw back dangers within the near-term because of the credit score crunch within the banking sector, the continuing home quarantine measures and uncertainty within the exterior surroundings, specifically in commodity demand and costs.
Although Mongolia has efficiently resolved two longstanding dangers — rolling over its near-term sovereign debt obligations and delisting from the Monetary Motion Activity Pressure (FATF) gray listing — challenges stay for the economic system.
First, regardless of excessive authorities debt of about 70 per cent of GDP — over 90 per cent of which is denominated in international change — the federal government has applied a beneficiant stimulus bundle. However the bundle is poorly focused with a small estimated multiplier, so there’s an ongoing problem of methods to enhance coverage effectiveness with restricted fiscal house.
Second, the economic system’s excessive complete exterior debt (220 per cent of GDP), persistent present account deficits (about 15 per cent of GDP every year) and restricted gross reserves (equal to eight months of imported items) make it susceptible to modifications within the exterior surroundings. Authorities want to extend the nation’s sovereign credit standing and preserve world traders’ confidence to efficiently roll over maturing Eurobonds for 2022–2026.
Third, the continuing credit score crunch and a excessive stage of non-performing loans might additional weaken monetary intermediation and the banking sector’s well being. A financially weak, under-capitalised banking sector might adversely have an effect on financial restoration and stabilisation.
Fourth, the federal government wants to enhance financial resilience by imposing coverage self-discipline, rising gross reserves and monetary room, and sustaining cooperation with donors, world traders, and worldwide monetary establishments. Fiscal self-discipline will likely be an necessary consider lifting the economic system out of recession.
Total, regardless of the challenges of 2020, Mongolia’s financial prospects within the medium time period look comparatively vivid given its untapped pure wealth and a big and fast-growing neighbour capable of take up its exports.
Gan-Ochir Doojav is Chief Economist and Member of the Board of Administrators of the Financial institution of Mongolia.
This text is a part of an EAF special feature series on 2020 in overview and the yr forward.