ADB predicts economic forecast at 5.7%
- By Amarjargal Munkhbat -
- Sep 22,2023
On September 20, Asian Development Bank (ADB) presented Mongolia’s economic prospects. In the Asian Development Outlook, the growth forecast in 2023 revised slightly up from its previous projection of 5.4 percent in April to 5.7 percent but went down from the 2024 outlook of 6.1 percent estimation to 5.9 percent. However, inflation is likely to trend downward in the second half of 2023, though average inflation will remain high at 10.5 percent for this year before moderating down to 8.6 percent for 2024.
Mongolia’s economic recovery continued through this year and GDP growth will be maintained in the near term. It is anticipated to be driven by robust external demand, recovery in exports, and revived domestic demand, though tempered by persistently high inflation, contractionary monetary policy, and tight domestic financing conditions. The bankers emphasized that supporting economic immunity through ensuring price stability, improving employment, and structural reforms will have a positive impact on sustainable and accessible GDP growth, reports Asian Development Outlook. GDP growth in 2024 will be driven by mining, with positive spillover into transport and other services, as well as private sector lending.
Senior Country Economist from ADB Mongolia Edward Faber said, “Although recovery was uneven in terms of sector contributions, the economy’s near-term growth prospects remain robust. Maintaining price stability, improving employment, and strengthening economic resilience through structural reforms are imperative to make growth more sustainable and inclusive.”
Economic expectations in Mongolia have improved since the beginning of this year, mainly due to the re-opening of China, subsequent recovery in exports, significant improvements in the current account balance, rebounding of foreign exchange reserves and lowered risks associated with the external debt repayment.
Senior Economics Officer of ADB S.Bold informed, “Mongolia’s economy grew by 6.4 percent in the first half of 2023. The reasons for economic growth for the third quarter in a row was mainly because of the service and mining sectors. On the other hand, the contribution of net exports has increased significantly due to the significant improvement in the current balance of payments compared to the same period last year. Total consumption also has a positive effect. After a three-year crisis, Mongolia’s economy is now transitioning to a new growth cycle, which is the third expansionary cycle since the 2009 recession. While the numbers may be good, we need to look at this growth in terms of quality. In the past 20 years, profit was gained only in six years. During a time of strict monetary policy, one sector shrinks as the agricultural sector depends on weather conditions. On the other hand, the non-mining sector “absorbs” the labor market. A strict policy has a significant impact on each sector.”
If you look at the economic history of Mongolia over the last 20 or 30 years, the balance of payments, foreign currency reserves, and inflationary pressures have increased during crises and difficulties. S.Bold informed that as the fiscal policy expands, the budget deficit will increase, which in turn will add to national debt. Due to this, there is no room for monetary policy. Thus, the choice is made to tighten the monetary policy. However, when the economy is expanding rather than shrinking, monetary policy is less flexible. Due to the increase in the current account deficit, they significantly weaken the monetary policy and cannot support the private sector. It only leaves an option for a policy based on structural distortions of the economy. He informed that the reason for inflation staying high and the slow economic growth despite Asia and the Pacific inflation dropping was that the policy implementers were failing to regulate a policy that is fit for the problem. If the right policy is implemented, effects on citizens and companies in the future will be positive.
He also mentioned that the economy can grow steadily if the external balance improves. In addition, he said that it is necessary to expand the tax base, prioritize the reduction of budget expenditures, and increase savings. In terms of spending, it is necessary to stop the expansionary budget policy implemented during the pandemic and switch to the policy of normal times. Furthermore, S.Bold also advised to invest in public investment funds, refuse to invest in projects that are not completed throughout the year, and increase the capital of savings funds when the income is high, and ensure the stability of the budget. On the other hand, it is important to remember that just because the budget is profitable, not everything will be fine. There are positive indicators such as foreign exchange reserves of Mongolia have reached the level of 3.5 months of import needs or 3.9 billion USD, but if the right measures are not implemented, the influence of the mining industry is dominant, the growth of the government will be temporary after the pandemic, and it will disappear if the next external shock occurs. If we do not carry out structural reforms, we cannot rule out another crisis.
Downside risks to the outlook would arise from any decrease in China’s demand for bulk commodities, a fall in coal and metals prices, new trade restrictions, disruption caused by exacerbated geopolitical tensions, negative spillover from tighter financing conditions, global uncertainty and slowdown, or capital flow reversal.
ECONOMY EXPERIENCES 2 MAJOR RISKS
S.Bold said that in order to ensure sustainable and accessible economic growth, we need to pay attention to two things. First, the high level of inflation should be reduced and kept at a low
and stable level. As mentioned above, inflation has been above the target level for more than two years. Although the economy is said to have grown, it should be noted that it does not affect households and the private sector. Recently, the Mongol Bank pointed out that inflation is increasing due to demand. Supply-side inflation cannot be fought with policy rates. But it is desirable to increase the supply of goods and products in the consumer basket.
Second, employment should be increased, and the number of employees is not increasing. As of Q2, 1.16 million citizens were employed in Mongolia. During this period, the employment rate was 54.5 percent, which is an impressive figure. However, this does not even reach the pre-pandemic numbers of 62.5 percent. We need to support the private sector to create quality and stable jobs, and we need to reform the labor market.
It was also mentioned that Mongolian banking sector is stable. It’s important to create the right expectations in the industry, and that the regulatory environment and untimely decisions have a negative effect on expectations. It’s necessary to attract foreign and domestic investment to further strengthen the banking sector. To attract capital from abroad, it is necessary to reduce the risk of Mongolia’s financial sector and at least improve its credit rating. Central banks of some large economies are raising their interest rates, while some Asian countries have started lowering them. In general, the bankers clarified that there will be room for softening of the strict monetary policy in the coming year. Economic growth will not be felt by citizens and enterprises if a strict monetary policy is maintained. Therefore, it is advisable to follow a policy aimed at attracting foreign investment, which is fiscally stable money-wise, and supports the private sector.
REGION FACES SOME RISKS AS WELL
ADB has estimated that the economy of the Asia and the Pacific region will grow steadily, but risks will increase. The “Asian Development Outlook” report noted that the economies of developing Asian countries are expected to grow by 4.7 percent this year. This means that the figure has changed slightly from the previous estimate of 4.8 percent. Then, it has maintained its estimate that it will grow by 4.8 percent next year. The situation in China’s real estate sector is weighing on the outlook for the region. High global interest rates have increased the risk of financial instability. Sporadic supply disruptions from the continuing Russian-Ukrainian war, export restrictions, and the increased risk of droughts and floods caused by El Nino could once again trigger rising food prices and challenge food security.