The World Bank lowered its forecast for Mongolia’s economic expansion this year on falling exports and foreign investments, and said the government needs to better manage spending.
Mongolia’s gross domestic product may rise 13 percent this year, compared with a previous forecast of 16.2 percent, the World Bank said in a press statement. The government’s fiscal deficit jumped to 8.4 percent of GDP last year, a 13-year record, it said.
Slowing growth in Mongolia, which exports almost all of its products to China, may impede government spending in a country where 30 percent of the population lived in poverty in 2011. President Tsakhia Elbegdorj faces re-election in two months, as protracted disputes with investors including Rio Tinto Group led to a slump in foreign direct investments.
“Mongolia is still expected to maintain one of the highest economic growth rates in the world,” said Taehuyn Lee, senior economist for the World Bank in Ulaanbaatar. “However, high uncertainty over the economic prospects remains and it is advisable for the government to be more realistic in estimating revenue and less ambitious in spending.”
The budget deficit may reach 6 percent of GDP this year, the World Bank projected. The Mongolian government should cut back on populist plans, including a proposal to subsidize mortgages and build paved roads to all rural provinces from Ulaanbaatar, the Washington-based lender said.
“These are well-intended investments but ones that offer little financial returns,” said Coralie Gevers, the World Bank’s country manager.
Mongolia relies on coal exports, which plunged 43 percent in the first quarter after state-owned Erdenes Tavan Tolgoi LLC halted shipments to China because of a lack of funds to pay a warehousing services company. Shipments resumed this month after Erdenes renegotiated the terms of a loan and contract with customer Aluminum Corp. of China Ltd.
Mongolia, a country of 2.8 million people, has some of the world’s biggest undeveloped mineral reserves, including Oyu Tolgoi, a copper and gold mine, and Tavan Tolgoi, a coal deposit.
The $6.6 billion Oyu Tolgoi mine is at the center of a dispute between Rio Tinto and the government over alleged cost overruns and management control. The mine will be the largest contributor to Mongolia’s economy and is estimated to account for one-third of gross domestic product by 2020.
Foreign direct investment declined 17 percent in 2012, following the enactment of a law last May that restricted overseas companies from taking control of assets in industries including mining and telecommunications. Net investment inflows have continued to fall this year, slipping 58 percent in the first two months of 2013, according to the Bank of Mongolia and the World Bank.
The decline also signals “the growing wariness of foreign investors over the investment climate in Mongolia,” the World Bank said today.
Mongolia’s trade balance may face more pressure this year, following a deficit of $2.4 billion in 2012, because of weak coal sales, the lender said. Additional trade deficits will require Mongolia to seek funding on domestic debt markets, it said.
“They would be borrowing at 10 percent on domestic bonds, so they need to make sure that the return on their investment is greater than 10 percent,” said Gevers. “It’s a fine line they will be walking over time. International investors are looking at fiscal deficits.”
Mongolia raised $1.5 billion on the international debt market in November to spend on infrastructure to support its mining sector. It is planning a railway network to deliver coal to China, power plants and improvements to the road network in Ulaanbaatar.