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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 MONGOLIAN STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Politic and Economic Environment Notwithstanding the advances that have been made since Mongolia held its first elections in 1992, the country's young democracy will remain fragile in 2006-07. There are three main threats to political stability over the short term. The first is the question of whether the Mongolian People's Revolutionary Party will be able to maintain the stability of the fractious four-party coalition that it currently leads. The second is how far the government will be able to assert its legitimacy. The third risk is the turbulence within the parties themselves. Mongolia's political parties are fragile creatures that are held together less by agreement on ideological goals and more by loyalties to political clans and strong political leaders. The new government is maintaining its predecessor's pragmatic approach to foreign policy, largely reflecting the need to balance its own interests against those of its larger and more powerful neighbours. The key driver of foreign policy will therefore remain the need to balance relations with Russia, on which Mongolia depends for energy, and those with China, on which it relies for export markets. At the same time the US and Japan, which are important aid donors, will continue to be seen as useful counterweights to dependence on Russia and China. The need for balance will also ensure that Mongolia continues to court India actively. Poverty reduction will remain a key policy priority for the new government, not least because, as the demonstrations in April this year suggested, the government badly needs success in this area in order to broaden its support base. Mongolia remains one of the world's poorest countries, with around 40% of the population of 2.5 million living below the poverty line, defined as living on an income of Tg25,000 (US$ 20) a month. The potential for this to spill over further into political discontent has been increased by the wide income disparities created in the transition to a market economy and the continued scares over diseases such as avian influenza (bird flu) and foot-and-mouth disease that threaten the already precarious livelihoods of the country' still-large agricultural population. Economic Outlook Mongolia's economic outlook in 2006-07 is fair, with real GDP likely to grow by 5-6% a year in the two-year period. However, prices for key mineral exports are likely to fall over the forecast period. The textile sector will also continue to struggle, although there could be some relief this year as the EU generalised system of preferences scheme opens up markets in Europe to Mongolian goods. Foreign direct investment (FDI) flows, particularly into the mining sector, should, however, be supportive of growth. This depends on the government's being able to maintain an investment environment favourable to inward FDI. Mongolia is likely to be hit hard by continued high prices for oil, on which it is importdependent. This could produce some volatility in consumer price inflation, although the influx of cheaper Chinese-made consumer goods should help to keep the lid on inflationary pressures overall. Mongolia's merchandise trade deficit narrowed to US$ 95 million in 2005, from US$ 158 million in 2004. However, this improvement is not expected to be sustained. This will largely reflect continued high global prices for oil–mineral products typically account for just over one-fifth of the total import bill. We forecast that oil (dated Brent Blend) will average US$ 60/barrel this year, up from US$ 54.7/b in 2005, and will ease only modestly to US$ 55.3/b in 2007. Export revenue, meanwhile, will be hit by declining prices for key products such as copper, gold and zinc, even if demand from Mongolia's largest export market, China, remains brisk. But the external position will continue to be supported by inflows of aid and credit, all of which will be on concessional terms. According to the report of the Bank of Mongolia, at the end of October of 2006 money supply (M2) increased by 0.4% against September, reaching 1,546.3 billion togrogs. At the end of October 2006 currency issued in circulation decreased by 0.8% compared to previous month. Saving time deposits increased by 4.8%. As for foreign currency deposits, they increased by 3.8%. At the end of October, 2006 the remainder of loans outstanding increased by 0.7% over the previous month of which loans in the public sector decreased by 4.9% and other sectors decreased by 0.3% and private sectors and individuals loans increased by 1.3 and 2.2% respectively. Meanwhile, principals in arrears decreased by 14.4% and substandard, doubtful, loss loans decreased by 2.1%. The non-performing loans reached 5.9% of the total loans outstanding. In October of 2006, tugrugs average annual weighted lending rate of banks reached 27.6 which increased by 1.5 point, and dollars average annual weighted lending rate reached 16.1%, increased by 0.8 points compared to previous month.* * The Economic Intelligence Unit Ltd, May 2006 Key Information Contacts Parliament of Mongolia: www.pmis.gov.mn Ministry of Finance: www.mof.pmis.gov.mn Financial Regulatory Commission: www.frc.mn The Central Bank of Mongolia: www.mongolbank.mn Mongolian Chamber of Commerce & Industry: www.mongolchamber.mn National Statistical Office of Mongolia: www.nso.mn 2004-ORIGINS OF GROSS DOMESTIC PRODUCT (%) (a) 2005-COMPONENTS OF GROSS DOMESTIC PRODUCT (%) (b) Industry Services Trade Agriculture, hunting & forestry Transport Communications Construction Private consumption Government consumption Gross fixed capital formation Change in stocks Net exports of goods & services Statistical discrepancy 25.6 60 57.8 24.6 50 2.6 3.0 9.7 40 30 20 14.8 31.0 13.2 21.3 10 0 -10 3.7 -7.2 * World Bank reports PAGE 106
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 MONGOLIAN STOCK EXCHANGE MONGOLIA ECONOMIC CHARTS AND TABLES 2002 (a) 2003 (a) 2004 (a) 2005 (a) 2006 (b) GDP at current prices (Tg billions)(c) 1,329.5 1,549.1 1,976.9 2,316.4 n/a GDP (US$ millions)(c) 1,197.4 1,348.5 1,667.8 1,921.8 n/a Real GDP growth (%)(c) 4.0 5.6 10.6 6.2 7.5 Consumer price inflation (av; %)(d) 1.8 4.6 11.0 12.7 n/a Population (millions)(c) 2.55 2.58 2.61 n/a n/a Merchandise exports (FOB) (US$ millions)(e) 524.0 615.9 869.7 1,064.9 n/a Merchandise imports (FOB) (US$ millions)(e) 690.7 801.0 1,021.1 1,148.4 n/a Current-account balance (US$ millions)(c) -158.0 -148.1 -24.6 n/a n/a Reserves excl gold (year-end; US$ millions)(c) 349.5 236.1 236.3 430.1 n/a Total external debt (US$ millions)(c) 978.0 1,237.0 1,360.0 1,380.0 n/a Exchange rate (av; Tg:US$)(c) 1,110.3 1,146.5 1,185.3 1,205.3 1,180.0 (a )Actual.( b) Economist Intelligence Unit estimates. (c) IMF, International Financial Statistics; Mongolia: Selected Issues and Statistical Appendix; World Bank, Mongolia Macroeconomic Brief. (d )Asian Development Bank. (e) Bank of Mongolia. 2004-PRINCIPAL EXPORTS (b) (US$ millions) Copper 284.3 Textiles 96.5 Cashmere & cashmere products 78.9 2004-PRINCIPAL IMPORTS (b) (US$ millions) Petroleum 210.2 Machinery & equipment 201.5 Transportation equipment 103.9 2004-MAIN DESTINATION OF EXPORTS (%) (a) 2004-MAIN ORIGINS OF IMPORTS (%) (a) China Russia USA UK Singapore Japan Other Russia China Japan South Korea USA Germany Other 18.0 15.8 22.0 7.3 46.8 3.8 2.4 2.3 33.5 6.0 4.6 3.3 10.9 23.3 The Economic Intelligence Unit Ltd., August 2006 PAGE 107
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