2012-11-14 20:46:56 - Mongolia Business Forecast Report Q3 2012 - a new country guide report on companiesandmarkets.com

As economic growth continues to be buoyed by strong external demand for mining exports, we believe that new mining output over the course of 2012 and 2013 will help to keep real GDP growth in the double digits. However, with increasing signs of resource nationalism and regulatory uncertainty appearing against the backdrop of rising political tensions, the investment climate will very likely take a hit, which will see growth moderate from the 17.3% growth recorded in 2011. Mongolia´s balance of payments position will remain heavily dependent on the goodwill of foreign investors, as the country needs to be able to finance its enormous capital goods and transportation services imports over the coming years.

Although new mining output capacity will offer some

 

 

respite, a marked deterioration in the investment climate could create considerable systemic risks. Rising political tensions in the run-up to parliamentary and local elections at the end of June will intensify the uncertainty surrounding Mongolia´s investment climate, particularly relating to the mining sector. Resource nationalism could become an increasingly dominant political theme among the opposition, which will have received a boost from the controversial arrest of former president Nambaryn Enkhbayar in April.

Major Forecast Changes

We have revised our 2012 current account forecast for Mongolia and now project a deficit of 27.9% of GDP, from 23.7% previously, on account of higher capital goods and transportation services imports. We have revised up our average exchange rate forecast for 2012 to MNT1,350/US$, from MNT1,420 previously, owing to a boost from new mining capacity.

Risks To Outlook

We note that the risk of growing resource nationalism and a more uncertain regulatory outlook in light of new regulation on foreign direct investment into the country could yet shake up investor confidence and compromise much-needed future capital inflows of a long-term nature. This could lead to a major balance of payments crisis given Mongolia´s enormous current account deficit. An escalation in the eurozone debt crisis, and any departure of a member state from the monetary union, would result in major capital outflows from frontier markets, such as Mongolia. This would force a sharp correction in the balance of payments dynamics and potentially require a large nominal devaluation of the exchange rate.

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