Mongolia: Home on the plain
APASSING glance at Mongolia makes it hard to understand that it was once the scourge of the Eurasian land mass. Its thundering horsemen swept across the steppes during the 13th century, and penetrated deep into Central Europe, with Genghis Khan prominently leaving his genetic footprint in the form of 16 million direct present-day descendants.
The Mongols then turned their attention to China and northern parts of the Indian subcontinent. By deftly deploying its organisational skills to maximise battlefield mobility and project its firepower through the use of a new and innovative bow, the Mongols were able to subjugate most of Europe and Asia.
However, as the world industrialised, Mongolia’s power steadily eroded. China absorbed its eastern region as Outer Mongolia.
At the start of the 20th century, Mongolia was transformed into a buffer state separating China and the Soviet Union, although it is relatively poor, with a nominal gross domestic product (GDP) of US$11.4 billion and a per capita income of about US$3,400.
However, Mongolia sits astride one of the largest mineral deposits on the planet. Its gold, coking coal and copper deposits are huge. These commodities represent 90 per cent of Mongolia’s exports. It has also imbued its external accounts with a high degree of volatility. In an attempt to reduce some of the economic distress, the government embarked on an aggressive borrowing programme and accumulated a debt-to-GDP ratio of 90 per cent. From 2013, the Mongolian economy steadily decelerated, bottoming out at negative 0.2 per cent y/y growth last year. Fortunately, it began to turn the corner in 2018, growing 1.8 per cent y/y, and the IMF expects economic growth to top out at 8.1 per cent y/y in 2019.
The growth of the mineral sector is expected to jump 13.1 per cent y/y next year, thus turbocharging the economy. Much of the contribution will come from the Oyu Tolgoi Mine, deep in the Gobi Desert. The underground and open-pit operation, partially owned by Rio Tinto, can potentially produce 450,000 metric tonnes of copper per year. This makes it one of the top 10 copper producers.
The only obstacle to growth will be transportation bottlenecks. Nevertheless, it will provide an enormous boost to the Mongolian economy. Little did the Mongols realise that their humble yurts on the plain were sitting on top of one of the world’s largest mineral deposits.
With the government coffers fully dependent on mining roy-
alties, the fiscal deficit soared to 17 per cent of GDP during the commodity slump. The large government shortfall did not result in an inflationary spike. This was due to the recession. Inflation was only one per cent y/y in 2016, and it should begin to inch up to 1.8 per cent y/y this year.
Not surprisingly, the country’s current account deficit widened during the commodity slump, cresting over 25 per cent of GDP in 2013. However, it narrowed to 4.1 per cent of GDP last year on the back of a steep devaluation of the Mongolian togrog, the MNT. The large current account deficit eroded international reserves, forcing them to drop to US$1.3 billion from US$4.5 billion in 2012. While the sums appear to be small, it is important to recall that GDP is only US$11 billion.
The county’s metrics are consistent with its single ‘B’ credit rating. Nevertheless, concerns about the balance of payments forced the government to approach the IMF for an Extended Fund Facility. There were also bilateral assistance agreements with Korea, Japan and China.
In total, the programmes provided US$5.5 billion in assistance. They helped Mongolia avert default, and they put the economy back on the mend.
Like most of the countries in the region, Mongolia was a communist regime until the early 1990s. The fall of the Soviet Union heralded a transition to democratic rule and the rise of a multiparty system, with two major parties dominating the political landscape.
The Mongolian People’s Revolutionary Party is the remnants of the old Communist Party, and the Democratic Party of Mongolia tends to support populist anti-Chinese themes. There are several other smaller parties, including a Green party, which dot the political landscape. Although far from perfect, the Mongolian political system is much more democratic than the myriad of authoritarian states that emerged across Central Asia, such as Kazakhstan, Uzbekistan and Turkmenistan.
One of the reasons that the country’s leadership has not been captured by a single individual is because the constitution limits presidents to only two terms in office. In July 2017, Battulga Khaltmaa was sworn in as president and head of the national assembly, also known as the State Great Khural.
He will serve as the national leader for the next four years in Ulaanbaatar, and he will be eligible for re-election in 2021. This should provide a stable political backdrop for the economy to consolidate its recovery, thus providing Mongolians with a nice little home on the plain.