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Mongolia Business Forecast Report Q4 2012

Mongolia Business Forecast Report Q4 2012 - new country guide report published

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2013-01-01 01:07:56 - Mongolia Business Forecast Report Q4 2012 - a new country guide report on

Our view that the opposition would grow in influence ahead of the June 28 parliamentary election and that resource nationalism would become a dominant theme in Mongolian politics has played out following the victory of opposition parties, which formed a governing coalition July 20. While uncertainty over ownership rights in mines is expected to grow, we believe that the government will remain willing to negotiate with foreign firms.

The introduction of a new law on foreign investment into sectors of strategic importance will have a material impact on Mongolian economic growth in the more distant future. For the time being, however, we see muted risks to a robust near-term growth outlook with new mining capacity coming online. At the same time,



we note that a lack of detail about the new law and the new government´s intentions mean that the Mongolian economy could lose as much as US$2.33bn in output over the coming decade.

Mongolia´s balance of payments is highly exposed to a more pronounced decline in external demand for its exports, as well as to a deterioration in the investment climate. We maintain our view that despite a negative net international investment position equivalent to 83.5% of GDP in Q112, the external position remains sustainable. However, a weaker global macro environment, event risks in Europe and the US, as well as stricter regulation in the mining sector could yet combine to put our sustainability scenario into question.

Major Forecast Changes

We have revised down our end-2012 policy rate forecast to 13.25% (from 14.00%), suggesting that we no longer expect interest rate hikes by the central bank this year. Declining inflation risks in H212 and signs that M2 money supply growth continues to slow suggest that the central bank´s focus will gradually shift away from price stability towards economic growth. We are therefore changing our 2013 policy rate forecast and now forecasts 50 basis points of cuts to 12.75%.

Key Risks To Outlook

We note that there is potential for a more ´adverse scenario´, under which real GDP growth would drop off more sharply as the feasibility of committing major funds into Mongolia´s increasingly regulated mining sector would begin to be eroded. A new law on foreign investment follows several previous attempts to renegotiate existing terms of mining agreements over Oyu Tolgoi with Ivanhoe Mines.

The unseating of the long dominant Mongolian People´s Party at the last parliamentary election in late June, and the victorious Democratic Party entering into a governing coalition with the so-called Justice Coalition, suggest that resource nationalism is firmly on the rise in Mongolia. We acknowledge that our baseline case for Mongolia´s economy may be overly pessimistic, as a more regulated investment climate in a country that has been displaying signs of overheating is not necessarily a negative development. On the contrary, we do not rule out the possibility that a more transparent regulatory framework for foreign mining firms could help to stave off future public backlashes, which endanger the sustainability of Mongolia´s mining-driven investment and export boom.

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