Which countries are interested in Mongolia

Risk factors and outlook

Mongolia's thriving mining industry has historically had a positive impact on the country's risk profile. The Central Asian state has some of the world's largest copper, coal and gold deposits - the best prerequisites for keeping short-term political risks at a permanently low level. Experts also assume that Mongolia will remain politically stable until 2016 after the easy re-election of a business-friendly president last June. However, some effort is required to turn the enormous potential of the mining industry into a lasting blessing for the country. With its fledgling institutions, Mongolia is prone to changes in economic governance and external shocks. Due to the unpredictable macroeconomic developments, the risks have increased significantly again in the past two years. Despite the robust economic growth, which is expected to continue at a somewhat lower level in the future, the current account and the national budget show clear deficits.
This fact is mainly due to unfavorable external developments - such as lower prices for mining products and China's weaker demand for raw materials - and underscores Mongolia's growing dependence on its natural resources. In addition, there was an expansive fiscal policy surrounding the presidential elections, which made the rapidly increasing national debt less sustainable. In addition to a noticeably higher foreign debt, legal uncertainties regarding an important investment law (passed at the end of 2013; rather advantageous design for investors) have significantly reduced foreign direct investments in the past year. These factors, in turn, put pressure on Mongolia's balance of payments.

The significant decline in currency reserves, which can be attributed to weaker exports and lower foreign direct investment, has a negative impact on the country's external liquidity. This, on the other hand, makes a downgrade in the “political risk” category (2/7) more likely this year. Mongolia's business risk, which is in the highest category C, continues to be negatively impacted by downward pressure on the overvalued Mongolian currency togrog. Until appropriate course adjustments are made, macroeconomic stability is guaranteed and institutional reforms are implemented, caution is required.

Facts & key figures


  • Immense raw material deposits
  • Proximity to two economic powers with China as the main trading partner
  • Raw material potential is attractive for foreign direct investment
  • Overall stable political situation in a democratic system


  • Vulnerable to external shocks (commodity prices and demand)
  • Young institutions have to deal with raw material blessings
  • Unsteady economic policy
  • Increasing concentration of wealth, widespread poverty

Main export goods

  • Coal (33.9% of total current account revenues), copper (14.9%), crude oil (6%), transport goods (4.4%), tourism (3.8%), gold (2.2%)

Income bracket

  • Low middle income

Electoral system (elections every four years)

  • Presidential election: next election in 2017
  • Parliamentary elections: next election in 2016

Head of State / President

Country study

Government has to cope with the challenges of the economic boom

Experts expect politically stable conditions in Mongolia until the next parliamentary elections in 2016. The reason for this is the re-election of President Tsachiagiin Elbegdorsch in 2013, whose Democratic Party (AN) has had a comfortable parliamentary majority since 2012. Last June, the incumbent was able to extend his mandate for another four years in unproblematic elections. Elbegdordsch received a slim majority of the votes in the first ballot. For the presidential party AN, these electoral successes in one of the few democracies in Central Asia are of great importance.

President Elbegdorsch has committed to improving the legal framework for foreign direct investment and the business environment, increasing the transparency of public finances and strengthening Mongolia's fledgling institutions. The fight against corruption receives a lot of attention in the short term, but in a political landscape that is predominantly dominated by party personalities of the AN, efforts could soon fizzle out.

Indeed, the current situation could adversely affect the goals of the anti-corruption campaign if Mongolia's enormous resource wealth mainly benefits the country's political and economic elites - a fact that is unfortunately often seen in resource-rich developing countries.

Since the ruling party AN suffers from trench warfare within the party, it will not be easy to establish a common economic policy. In the past there have been isolated violent unrest, particularly on the occasion of elections, most recently in 2008/2009. The country has remained stable since then.

In the ethnically homogeneous state, tensions often express themselves on the socio-economic level. Despite the rapid economic growth, the stability of Mongolia is mainly threatened by the following factors: high poverty, growing inequalities within the population, insufficient redistribution of the enormous income from the mining sector, a lack of employment opportunities and a lack of environmental protection.

New investment law is welcomed

The government will be judged by 2016 on how it deals with the problem of corruption and the above-mentioned political risks. Foreign investors are closely following which measures the Mongolian government is taking. Investor interest in Mongolia's gigantic mines is high, and investors reacted with relief when the new investment law was passed by parliament last October. The law provides for clearer conditions and puts foreign and domestic investors on an equal footing. At the same time, it confirmed the investor-friendly attitude of President Elbegdordsch, who, in contrast to representatives of the opposition, is only moderately nationalist. However, some minor restrictions remain. For example, the investment law prevents foreign majority holdings in the strategic sectors - most likely with the aim of preventing China from having too much access to the most important mines.

In addition, foreign state-owned companies need the approval of a state investment agency if they invest a certain amount in the mining, banking and telecommunications sectors. Although restrictions in the mining industry as a whole have been significantly reduced, caution is still required in the regulatory environment for investment. Finally, experience shows that the establishment of legal provisions can be fraught with obstacles and, especially in the mining industry, there are frequent attempts to renegotiate contracts.

Bright future in mining threatened by external downside risks

Mongolia was able to record the world's highest average growth rate in real gross domestic product of 13.9% in the past three years. The economy should continue to grow in the coming years, albeit at a lower level (an average of 7.8% by 2018). The export of mineral resources, but increasingly also construction and infrastructure projects, which are intended to create the transport infrastructure necessary for mining, is and will remain the key factors. The largest deposits are located in the south of the Gobi Desert: Tavan Tolgoi (coal) and Oyu Tolgoi (copper and gold), whose production started last summer. The raw material deposits there are enormous: The two mines mentioned are among the largest in the world and the mineral resources stored here will only be completely exhausted in a few decades.

There are risks associated with demand. The mining products are exported to China in particular. The People's Republic receives 90% of exports, making it the most important trading partner and at the same time the largest investor - even if the proportion is smaller here. In addition to the infrastructure projects with China and the other large neighboring country Russia, Mongolia is trying to diversify its trade and economic relations more broadly - to the advantage of Western corporations. The country's goal is to reduce its economic dependence on China. The demand for raw materials in the People's Republic is likely to decrease due to the economic adjustments that are taking place there. In addition, Mongolia's high dependence on the export of its mineral resources - which accounts for around 60% of current account revenues - makes the country more susceptible to the lower world market prices expected in the future. This was already evident in 2012 and 2013 when the value of exports declined. This was due to falling prices (especially for coal and copper), which had their origins in the slower growing global economy. Mongolia must improve the quality of its political institutions in the future and focus even more on the development of sectors that are not related to the country's mining industry, such as tourism. Since the importance of the export of mineral resources and the resulting income will continue to increase due to the good production prospects, the country is not immune to the so-called Dutch disease in the long term.

Economic policy crucial for a successful and stable development of Mongolia

The large resource reserves are both a blessing and a curse for Mongolia. The question of how the country's wealth of natural resources can be optimally used poses a major challenge for government representatives. If the government wants to put the country on a sustainable growth path, it has to get a grip on a number of factors, such as the overheating of the economy due to high credit growth, double-digit inflation rates and the expansionary fiscal policy that has been prevalent since 2011. In the medium term, the government has already promised to make appropriate adjustments to budget policy. The comfortable parliamentary majority of the ruling party gives every reason to hope that it is both willing and able to restore macroeconomic stability.

Previous governments have shown little consistency in their economic policies, unless they were subject to mandatory programs of the International Monetary Fund. The risk of bad governance with the resulting conflicts of interest and the misuse of income from mining should therefore not be underestimated. This is illustrated by the lengthy processes involved in renegotiating the contract with Rio Tinto regarding the Oyu Tolgoi deposit and the investment law.
If the necessary adjustments are delayed further, this would result in further excessive government spending, a higher deficit, a significant increase in foreign and government debt levels and possible negative effects on long-term GDP growth.

Earlier economic forecasts were overly optimistic and have only recently been revised down significantly due to poorer macroeconomic outcomes, persistent budget and current account deficits, and a deterioration in public finances in the wake of the 2012/2013 elections.

Higher foreign direct investment should reduce pressure on the current account

The balance of payments did not develop as expected; a surplus in the current account - predicted from 2015 - is no longer even expected in the medium term. Due to high imports, which were needed for the expansion of large mining projects, and a negative balance of services, it is expected that the balance of payments will remain in the deficit despite increasing exports of Oyu Tolgoi: The deficit will only gradually increase from the current 30% of GDP to 15% of GDP decrease in 2018.

The government representatives will therefore have to secure the financing in order to keep the pressure on the balance of payments at a tolerable level. Foreign direct investments are therefore of great importance - after all, they support economic growth and develop the infrastructure that is so important for mining in a landlocked country of this size. The abrupt decline in FDI in 2013 (-50% year-on-year) is mainly due to the ongoing uncertainty surrounding the Investment Act. This in turn led to funding gaps and higher external borrowing. The situation shows the Mongolian government how important it is to improve the business climate and make the domestic economy more attractive for foreign direct investment. A first step in the right direction was the passage of the investment law, as foreign direct investment is the most important source of financing Mongolia's current account deficit. Investor confidence has recently increased again, but the cautious attitude remains. In recent years, changing policies and government interventions have resulted in multiple mining litigation (the largest involving Oyu Tolgoi, which is owned by the Rio Tinto Group), damaging Mongolia's reputation.

Stability law is intended to limit expansive spending policies and the recent rise in national debt

Mongolia's public finances paint a mixed picture. The recently functioning Fiscal Stability Law (FSL), which was passed in June 2010, is to be rated positively. It is intended to ensure responsible budgeting and sustainable management of the proceeds from the export of mineral resources. The establishment of a state fund is planned for this purpose. The aim of the FSL is to prevent excessive increases in expenditure and to contain the structural budget deficit (at 2% of GDP). Budget surpluses are to be saved in a stability fund, which can serve as a reserve in times of low raw material prices.

The government's commitment to budgetary discipline suggests that the budget deficit will fall to a significantly lower level. Nevertheless, the Stability Act does not include processes outside of the budget. These grew strongly in 2013 to an estimated 9% of GDP and are handled by the state development bank (Development Bank of Mongolia, DBM), for which the state guarantees with budget funds. In this way, the rules of the Stability Act can be circumvented, with the result that high contingent liabilities could cancel out the financial benefits of the Stability Act.

The government's pro-cyclical expansionary financial policy led to a significant widening of the budget deficit (into the double-digit range) in 2012/13. This negative development was exacerbated by the cost of restructuring the banking sector (in 2010/11), wage increases for civil servants, increases in social spending and additional spending in the run-up to the elections.

The government has committed itself to reducing the budget deficit to a significantly lower level in the region of 2% of GDP from 2016 onwards. Since there are no elections to be held by 2016, spending cuts are to be expected. But in the past there have been repeated setbacks in budget consolidation. This still represents a major challenge for Mongolia. High raw material revenues as well as the conclusion of new raw material contracts or the issuing of licenses at better conditions are important building blocks for reaching the budget target.

Budget overruns and, in particular, the successful placement of a weighty international bond (amounting to 15% of GDP) by the DBM to finance large infrastructure projects have resulted in the national debt in relation to GDP rising from 38.8% in 2011 to 67.3%. skyrocketed in 2013, setting a nine-year record. Even if forecasts assume that the national debt is likely to be reduced to 50% of GDP by 2018, the debt situation of the Mongolian state has deteriorated significantly, so that difficulties in debt servicing could arise in future.

Over 75% of the national debt is borrowed in foreign currency. This increases the vulnerability of the economy to devaluations of the national currency togrog. This has been greatly overrated in recent years. It has been on a steady devaluation trend for some time, increasing inflationary pressures. Mongolia's currency moves freely and has depreciated sharply since 2011 (it lost around 30% against the USD), which is related to the growing deficit in the current account.

Banking sector recovers, but risks have not yet been averted

The banking sector was hit hard by the 2008-09 financial crisis. However, it has since recovered with the help of a bailout and improved regulation (a new banking law was passed in 2010) and banking supervision.But risks remain. The proportion of those in need

Loans are low (3.8% of all loans), but the capital backing on loans is inadequate. In view of the strong credit growth since 2010 (annual growth of 43% on an annual average from 2010 to 2012, stabilization to an increase of around 30% in 2013) and the weakening of economic growth, there is a risk that the share of non-performing loans will increase.

In addition, given Togrog's weakness, the loans are exposed to exchange rate risks: 1/3 of the loans were taken out in foreign currencies - especially in US dollars. Risk management, banking supervision and compliance with the established rules are also in need of improvement, as the bankruptcy of Savings Bank showed. Last July, Mongolia's fifth largest bank (8% of total bank capital) had to be nationalized due to insolvency and mismanagement (including failure to adhere to established lending rules).

Rising external debt ratios require careful debt management

In Mongolia, financial risks have increased noticeably in both the public and private sectors. Government external debt has more than doubled since 2011 and reached 51.8% of GDP in 2013. In an environment of strong growth, this debt ratio should slowly be brought back to a sustainable level. The government plans to increase local funding through bonds and reduce future foreign bond issuance compared to 2012. But the commodity cycle and government budgetary policies will be important drivers. Mongolia's rise to a middle-income country has changed the structure of debt and costs. The country is now eligible to take commercial loans from the World Bank and the Asian Development Bank. As can already be seen, this should reduce the share of loans on more favorable terms in total foreign debt.

That proportion had already halved in 2012, partly due to the dramatic increase in private debt (to 85% of GDP), mostly in connection with intra-group loans for mining projects. It is expected that the share of private external debt, amounting to 2/3 of total external debt, will continue to increase in the medium term, while the share of government external debt will decrease. In the face of such dramatic developments - Mongolia's total external debt reached 137% of GDP and 290% of export earnings in 2013 - external debt sustainability has declined. An unfavorable development in raw material prices and / or Chinese demand could put a further strain on the debt situation.

Serving the debt becomes a challenge

The recent surge in the debt burden will have a negative impact on Mongolia's external solvency. In the future, Mongolia will have to pay significantly higher debt servicing (30% of export earnings in 2013 and 44% in 2017), and additional costs will arise from the increasing share of commercial loans. In addition, the debt service to be paid (by the state and the private sector) could be made more difficult by the weaker Togrog, variable interest rates and problems with refinancing. There may be less foreign capital available from developed countries in the future as they gradually move away from loose monetary policy. It is estimated that Mongolia's currency reserves will continue to cover three months of imports, but there is a risk that the official currency reserves in 2015 and 2017 will not be sufficient to service the debt. In 2013, shortfalls in revenue led to a sharp decline in currency reserves and should result in a downgrade in the rating of short-term political risk. However, it is expected that the currency reserves will stabilize at the level already reached before slowly increasing again in the long term.

Country Risk Analyst: The Risk Management Team, [email protected]