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Mongolia:
Investment Flows and Macro Stability
Bank of Mongolia
“Foreign Investment in Mongolia: Challenges, Risks and Solutions”
Kempinski Khan Palace Hotel, Ulaanbaatar
19 April 2013
Bold Sandagdorj
Chief Economist and Advisor to the Governor
Bank of Mongolia
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2Монгол Улсын гадаад секторын тойм, тулгамдсан асуудлууд
Contents
• Macroeconomic overview
• Investments flows in Mongolia
• Challenges and opportunities
• Concluding remarks
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3Монгол Улсын гадаад секторын тойм, тулгамдсан асуудлууд
Real economic growth: Short-term slowdown, but still in double digits
Source: NSO, Bank of Mongolia
10.2%8.9%
-1.3%
6.4%
17.5%
12.3%
-10%
-5%
0%
5%
10%
15%
20%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Agriculture Industry
Services Net taxes on products
GDP -8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
2006
Q1
2006
Q3
2007
Q1
2007
Q3
2008
Q1
2008
Q3
2009
Q1
2009
Q3
2010
Q1
2010
Q3
2011
Q1
2011
Q3
2012
Q1
2012
Q3
2013
Q1
2013
Q3
Blanchard Quah with 2 factors
Blanchard Quah with 2 factors, forecast
Blanchard Quah with 4 factors
Band pass filter
Hodrick Prescott filter
Kalman Filter
Real economic growth
• 2006-2008 Average: 9.2%
• 2010-2012 Average: 12.1%
No overheating pressure
Forecasts
Output gap
Gap is
neutral
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4Монгол Улсын гадаад секторын тойм, тулгамдсан асуудлууд
Terms of trade in 2012: Short-term deterioration
Source: Bank of Mongolia
0.0
0.5
1.0
1.5
2.0
2.5
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
20
07
/01
05
09
20
08
/01
05
09
20
09
/01
05
09
20
10
/01
05
09
20
11
/01
05
09
20
12
/01
05
09
20
13
/01
Terms of trade (right scale)
Export price index
Import price index
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
20
01
/01
09
05
20
03
/01
09
05
20
05
/01
09
05
20
07
/01
09
05
20
09
/01
09
05
20
11/0
1
09
05
20
13
/01
YoY change in ToT
YoY change in Xp
YoY change in Ip
2013/02:
1.432
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BOP and FX international reserves
Source: Bank of Mongolia
-225
1123
-1500
-1000
-500
0
500
1000
1500
2000
2500
I '09
II '0
9
III '
09
IV '0
9
I '10
II '1
0
III '
10
IV '1
0
I '11
II '1
1
III '
11
IV '1
1
I '12
II '1
2
III '
12
IV '1
2
Capital and financial account
Current account
Overall BOP
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2007
/01
05 0920
08/0
105 09
2009
/01
05 0920
10/0
105 09
2011
/01
05 0920
12/0
105 09
2013
/01
Mo
nth
s
Mill
ion
$US
Gross international reserves
Imports coverage (RHS)
Rule of thumb (3 months)
Reserves:
4 billion
$USBOP surplus:
1.37 bln. $US
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14.2
9.4
-5
0
5
10
15
20
25
30
35
I II III IV I II III IV I II III IV I II III IV I
2009 2010 2011 2012 2013
OtherState regulated (administrative)FuelMeatFoods (excl. meat)
Inflation is under full control
Source: NSO, Bank of Mongolia
Low inflation
Fiscal Stability Law
Proactive & Transparent
Monetary Policy
Better Policy Coordination
Supply Shock
Elimination Program with
the Govt.
MPC decisions from 2013:
Jan: Cut the policy interest rate by 0.75 pp
Feb: Interest rate corridor
Apr: Cut the policy interest rate by 1.00 pp
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0.8
1.3
2.0
2.8
2.5
2.2
0.6
0.2
0.8
1.8
1.0
0.8
0.0
0.5
1.0
1.5
2.0
2.5
3.0
OCT NOV DEC JAN FEB MAR
Oct 2011 - Mar 2012 (without PSP)
Oct 2012 - Mar 2013 (with PSP)
Headline and core inflation: Downward trend
Source: Bank of Mongolia
2012 Jan-Mar: 7.5%
2013 Jan-Mar: 3.6%
2011 Oct-Dec: 4.1%
2012 Oct-Dec: 1.6%
9.4%9.5%
9.3%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
20
07
/01
05
09
20
08
/01
05
09
20
09
/01
05
09
20
10
/01
05
09
20
11/0
10
50
92
01
2/0
10
50
92
01
3/0
1
CPI inflation
Food inflation
Non-food inflation
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Monetary policy guideline - 2013
Macroeconomic Stability
Financial Stability
Financial infrastructure and institutional development
• Inflation targets: 8% end-2013, 5-7% for 2014-2015
• Flexible exchange rate
• Central bank independence, openness and transparency
• Financial sector soundness
• Risk-based supervision
• Legal environment on collateral assets
• Deposit insurance system
• Payments system
• Financial service accessibility and inclusiveness
• Securities Law
Financial Stability
Macro Stability
Long-run sustainable growth
Monetary policy
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Mongolia: Investment flows
Source: Bank of Mongolia
1 630
4 620
3 860
894
2 315
(2 000)
(1 000)
0
1 000
2 000
3 000
4 000
5 000
6 000
2004 2005 2006 2007 2008 2009 2010 2011 2012
Mill
ion
US
D
Other investments
Portfolio investments
FDI
Capital account
CAPITAL & FINANCIAL ACCT.
85%
4%
3%
5%
Mining Telecommunication
Building and construction Banking and finance
Railway Real estate
Others
FDI composition, by sectors
MMC
Sovereign
DBM
TDB
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FDI attraction index (2011)
Source: UNCTAD, World Investment Report 2012
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Why slowdown in growth and BOP pressure in 2012?
• Real GDP growth slowed down from 17.5% in 2011 to 12.3% in 2012
• FDI declined by 17%
Why?
• China effect uncertainty in regional and global investment environment
• Euro zone risks
• Legal environment uncertainty
Source: UNCTAD, IMF, WB, Central banks’ statistics
FDI decline
2011 2012 (%)
Mongolia 17.5% 12.3% -17%
Vietnam 5.9% 5.1% -15%
India 6.8% 5.4% -15%
Kyrgyzstan 5.7% 1.0% -46%
Peru 6.9% 6.0% -4%
Malaysia 5.1% 4.4% -24%
Real GDP Global FDI inflows declined by 18% in
2012 (UNCTAC).
Total Chinese outward investment in 2012
reached $79.7B, grew by 6.9%, but
Chinese outward investment to developing
and emerging countries in 2012 declined
by 49.7% to $22.6B.
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Recent developments
Chinese leadership change is done Less uncertainty
Amendment to the “Strategic foreign investment law” (Parliament floor)
- Applicable only for foreign state-owned companies
- Not applicable to private foreign companies
- No benchmark level on investments for approval
- Private & small-scale investments are expected to be encouraged
Overall Macroeconomic Stability and Confidence
- Monetary policy has been more coherent and proactive
“Mongolia needs a long-term, stable environment for investments…”
Elbegdorj Tsakhia, President of Mongolia Source: Official speech for Opening the Spring Session of the Parliament
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More attractive and stable FDI environment
Investment Law (“Investment Constitution”) will be approved during
this spring parliament session (Govt. draft).
- Investments in real sectors, rural vs. urban areas
- Export-oriented and High-tech investments
- Overall investment stability Investment attraction and stimulation
- Legal rights, interests and obligations of investors …
National Security Council Guidance:
- Only 1/3 of any (infrastructure and industrial) project investments to be
financed by sovereign bond proceeds
- Bond proceeds will attract more FDI (at least $3B) into Mongolia
EPA with Japan
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Concluding remarks
• Fiscal policy Countercyclical and disciplined
– Fiscal Stability Law: Budget rules and Stabilization fund
– Public investments to abolish supply shocks
– Targeted social welfare program
• Monetary policy Countercyclical and proactive
– Low and stable inflation (from double digit to 6% inflation)
Macro stability and sustainable growth
– Financial stability
– Flexible exchange rate policy
– Supply shock elimination program with the Govt.
– Financial infrastructure and institutional development
– Legal environment
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Concluding remarks
• Economic policy
– Overall economic competitiveness
– Essential infrastructure investments and development
– Export promotion: EXIM
– Industrial clusters: Value-added products
– Light industry: Ecological food products, cashmere, wool, leather etc.
– Financial market development: Pension fund reform, Wealth fund,
Government bond market, Sustainable mortgage financing scheme,
Legal environment
– Increase nationwide savings and investments
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Thank you for your kind attention
BANK OF MONGOLIA
BANK OF MONGOLIA
Baga toiruu – 3, 15160
Ulaanbaatar 46, Mongolia
www.mongolbank.mn