World Bank’s new report warns about weak external demand and COVID-19 impact on mining

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Mongolia would likely experience its first recession since 2009, with economic output projected to contract by 2.4 percent in 2020 as weak external demand and COVID-19 containment measures hit particularly mining and services sectors, according to “From Containment to Recovery”, the World Bank’s October 2020 Economic Update for East Asia and the Pacific.

The report projects Mongolia’s economic growth to accelerate to over 5 percent from 2021 to 2022, supported by private consumption and a stronger impetus on investment in the mining and manufacturing sectors.
In the update, the World Bank highlights triple shock to the developing East Asia and the Pacific (EAP) region in 2020, namely the COVID-19 pandemic, economic impact of containment measures, and reverberations from the global recession brought on by the crisis. It prompts countries to take swift action to ensure that the pandemic does not hamper growth and increase poverty for years to come.

The region as a whole is expected to grow by only 0.9 percent in 2020, the lowest rate since 1967. But prospects for the region are brighter in 2021, with growth expected to be 7.9 percent in China and 5.1 percent in the rest of the region, based on the assumption of continued recovery and normalization of activity in major economies, linked to the possible arrival of a vaccine.

However, output is projected to remain well below pre-pandemic projections for the next two years. The outlook is particularly dire for some highly exposed Pacific Island Countries where output is projected to remain about 10 percent below pre-crisis levels through 2021.

“Cambodia, Lao PDR, and Mongolia have suffered less from the disease, and their lockdowns have been relatively mild but are also vulnerable to the global recession. They have young populations, but the risk of infection is present because of poor living conditions and overcrowded dwellings,” the report read. “Dealing with outbreaks in some of these countries could be a challenge because of weaknesses in their health systems. Their main vulnerability, however, resides on the external front. All depend on tourism, trade, and external financing to varying degrees. They all have large current account deficits and sizeable external debt obligations. For all these countries, domestic economic activity is likely to revive, but the strength and sustainability of recovery will ultimately depend on external conditions.”

Poverty in the region is projected to increase for the first time in 20 years – as many as 38 million people are expected to remain in, or be pushed back into, poverty as a result of the pandemic (based on the upper-middle income poverty line of 5.5 USD a day).

In the wake of COVID-19, East Asia and the Pacific governments have, on average, committed nearly 5 percent of their GDP to strengthen public health systems, support households, and help firms to avoid bankruptcy, according to the report. Several countries have found it hard to scale up their limited social protection programs, on which they previously spent less than 1 percent of GDP, and continued support will put pressure on government revenue bases.

“COVID-19 is not only hitting the poor the hardest, it is creating ‘new poor’. The region is confronted with an unprecedented set of challenges, and governments are facing tough choices,” said Victoria Kwakwa, vice president for East Asia and the Pacific at the World Bank. “But there are smart policy options available that can soften these tradeoffs -- such as investing in testing and tracing capacity and durably expanding social protection to cover the poor and the informal sector.”

The report warns that without action on multiple fronts, the pandemic could reduce regional growth over the next decade by 1 percentage point per year, with the greatest impacts being felt by poor households, because of lower levels of access to healthcare, education, jobs, and finance.

School closures due to COVID-19 could result in a loss of 0.7 learning-adjusted years of schooling in East Asia and the Pacific countries, according to analysis in the report. As a result, the average student in the region could face a reduction of 4 percent in expected earnings every year of their working lives. Schools closed in China, Mongolia, and Vietnam in January – several other countries followed in mid-to-late March. The data indicate that every student in the region was out of school at one time or another since January 2020, and many for significant durations.

Public and private indebtedness, along with worsening bank balance sheets and increased uncertainty, pose a risk to public and private investment, as well as to economic stability -- at a time when the region urgently needs both. Large fiscal deficits in East Asia and the Pacific are projected to increase government debt on average by 7 percent of GDP in 2020. The report calls for fiscal reform to mobilize revenue through more progressive taxation and less wasteful spending. In some countries, the stock of outstanding debt might already be unsustainable and require greater external support.

On a positive note, the crisis is reportedly accelerating pre-existing trends in trade, including regionalization in East Asia and the Pacific, a relocation of some global value chains away from China, and faster growth in digitally-delivered services, but also increasing pressure to revert to protectionism.

Dulguun Bayarsaikhan