Download THE MONGOLIAN ECONOMY Unless otherwise

THE MONGOLIAN ECONOMY
Unless otherwise expressly stated, the information set out in this section is derived from publicly
available sources. Such information and statistics have been not verified by us or any of the Initial
Purchasers or their or our respective affiliates or advisers. The information may not be consistent
with other information compiled within or outside Mongolia.
As the world’s second-largest landlocked country, Mongolia is located in northern Asia bordered
by Russia in the north and China in the south, east and west. Its strategic location, providing direct
access to markets in neighboring countries, has enabled Mongolia to serve as a transit country with a
long history of international trade, dating from the Silk Road in the 13th century to modern export
activity.
Mongolia has a diverse and abundant supply of natural resources, including some of the world’s
largest known reserves of coal, copper and gold. Of the 86 minerals discovered thus far in Mongolia,
only 20 minerals are being exported commercially. One of the Government of Mongolia’s main
objectives is to use modern technology and international mine planning and exploitation strategies to
transform Mongolia’s mining industry from extraction and export of unprocessed commodities to the
domestic production of value-added mining products. The mining sector contributed approximately
22.7% and 20.2% of Mongolia’s gross domestic product (“GDP”) in 2010 and the first half of 2011,
respectively, and is expected to grow rapidly as various Government-approved projects become
operational in coming years and new development projects are approved.
Mongolia is geographically diverse. It has forested mountain ranges in the north; desert steppe
and steppe areas with low mountains in the south; high mountains and glaciers in the west; and vast
plains in the east. Mongolia has approximately 3,000 rivers with a combined length of approximately
67,000 kilometers, over 3,000 lakes, 6,900 springs, 190 glaciers and 250 mineral water springs.
Situated at an average altitude of 1,500 meters above sea level, Mongolia experiences an extreme
continental climate with long winters and short summers. Its average annual rainfall measures 200-220
millimeters and it has approximately 250 cloudless days each year, earning it the nickname “country
of blue sky.”
Ulaanbaatar is Mongolia’s capital. It is also Mongolia’s largest city – home to approximately
45% of the country’s population. Ulaanbaatar has the lowest average temperature of any national
capital in the world. Mongolia is divided into 21 aimags (provinces) which are further divided into
329 soums (districts). The Government of Mongolia administers its capital city, Ulaanbaatar, as an
independent municipality separate from Tov aimag, in which it is located.
As of December 31, 2011, Mongolia had a population of approximately 2.8 million people, of
which approximately l.9 million people were of working age. Ethnic Mongols comprise approximately
80% of the population (of which the Khalkha makes up approximately 90%) and Turkic, Tungusic,
Chinese and Russians make up the remaining population. Approximately 200,000 ethnic Mongols live
outside Mongolia. Buddhism is the most prominent religion in Mongolia, though a small number of
Christians, Muslims and Shamans reside in Mongolia. The official language is Khalkic Mongolian and
is spoken by 90% of the population. English is replacing Russian as the most popular foreign
language. Many Mongolians also speak Korean, Japanese, Chinese and other Western European
languages.
– 98 –
History
The Mongol tribes were united as a single nation in 1206 by Temujin, who took the title
Chinggis Khan. His series of successful military campaigns through Asia formed the Mongol empire,
which represented the largest contiguous land empire in history. Under Chinggis Khan’s successors the
Mongol empire stretched from present-day Poland in the west to the Korean peninsula in the east,
from Siberia in the north to the Arab peninsula and Vietnam in the south, covering approximately 33
million square kilometers. After Chinggis Khan’s death, the Mongol empire was subdivided into four
kingdoms. One of these, encompassing the Mongolian homeland and China, was controlled by Kublai
Khan, who established his capital on the site of present-day Beijing. Kublai Khan’s empire fell to the
Chinese Ming dynasty in 1368. After expulsion from China, the Mongols continued to control the
Mongolian homeland, but subsequent centuries were marked by power struggles and repeated Chinese
invasions. In the 17th century, the Chinese Qing dynasty, after conflicts with the Mongols, brought all
of present-day Mongolia under its control.
With the fall of the Chinese Qing Dynasty in 1911, Mongolia sought assistance from Russia to
gain independence and established a theocratic government under the leadership of the Bogd Khan, the
spiritual leader of Mongolia’s Tibetan Buddhism. In 1919, after the October Revolution in Russia,
Chinese troops occupied Mongolia again. In 1920, the Russian White Guard, aided by Japan, took
control of Mongolia’s capital city, Ulaanbaatar. Mongolia sought assistance from the Russian
Bolsheviks who regained control of the capital city in July 1921. Ultimately, the Russian Bolsheviks
supported the establishment of a communist government in Mongolia.
Under heavy influence from the former Soviet Union, Mongolia’s independence was declared in
1921 and a “people’s republic” established in 1924. The new government under Choibalsan Khorloo
took control of the economy which became a centrally planned economy based on state and
cooperative ownership. For the next 65 years, Mongolia closely aligned itself with the former Soviet
Union, especially after the Sino-Soviet split in the late 1950s. In the 1980s, an estimated 55,000
Soviet troops were based in Mongolia. The ruling MPRP, established on 1 March, 1921, was modeled
closely on the organizational structure of the Communist Party of the former Soviet Union. The
concepts of Glasnost and Perestroika in the Soviet Union influenced Mongolian policies, leading to a
peaceful revolution and the introduction of a market economy in 1990. A new constitution was framed
in 1992, followed by a new election law and the appointment of the first unicameral legislature.
The MPRP was the ruling party of Mongolia from 1921 to 1996 (until 1990 in a one-party
system) and from 2000 to 2004. From 2004 to 2006, it was part of a coalition government with the
Democratic Party and two other parties, and since 2006 it has been the dominant party in two other
coalition governments. The MPRP won the last round of parliamentary elections in June 2008.
Recent Political Development
The Mongolian political system is established under the framework of parliamentary democracy.
The State Great Hural (Parliament) holds legislative power and elects the Prime Minister of Mongolia
who heads the executive branch and appoints the Cabinet Ministers. The President of Mongolia is the
Head of State and the Commander-in-Chief of Mongolia’s armed forces with limited executive powers.
There have been six parliamentary presidential elections since 1991, each election being held
once every four years. Although the MPRP won the parliamentary and presidential elections in 1992,
MPRP was defeated by the Democratic Party in the subsequent parliamentary election in 1996. The
MPRP won the 2000 election, but its representation in the Parliament was subsequently reduced in
2004.
– 99 –
After the 2004 election, a coalition government was formed and the leader of the Democratic
Party, Mr. Elbegdorj Tsakhia, was elected as the Prime Minister. He was replaced by MPRP leader Mr.
Enkhbold Miyeegombo in January 2006. On November 7, 2007, the Prime Minister submitted a letter
of resignation to the Parliament following his failure to be re-elected as the Chairman of the MPRP.
Subsequent to Mr. Enkhbold Miyeegombo’s resignation, Mr. Bayar Sanjaa was appointed Prime
Minister and a new government, comprised of the Prime Minister, ministers from the MPRP and
ministers from other parties, was formed in November 2007. Mr. Bayar held the position of the Prime
Minister until October 2009 and was replaced by the previous Minister of Foreign Affairs, Mr. Batbold
Sukhbaatar.
The next parliamentary elections were held in June 2008, in which the MPRP won the majority
of the parliamentary seats. Accusations of electoral fraud brought forward by the opposition led to the
first-ever riots in Mongolia causing a number of deaths and property damages. Subsequently, despite
of MPRP’s majority position in the Parliament, it invited opposition politicians to the Cabinet, forming
a coalition government. The MPRP changed its name to the Mongolian People’s Party (“MPP”) in
2010 and remains the ruling party.
In May 2009, the Democratic Party member Elbedorj Tsakhia was elected President of Mongolia,
ending the long tenure of MPRP politicians in the presidential seat.
Elections will be held in June 2012 and May 2013 to elect a new Parliament and president,
respectively.
Overview of the Mongolian Economy
Mongolia operated as a Soviet-style centrally planned economy until the establishment of a new
coalition government in 1990, which undertook a sustained transition to a free market economy with
the private sector constituting over 70% of the nation’s GDP in 2010, as compared to only 4% in
1990. The Government relinquished its role as the central planner of Mongolia’s economy and began
limiting itself to making policies supporting a market-oriented economy. Main objectives of the
Government include:
•
increasing mining sector development, revising mining legislation and using a portion of
mining revenues from strategic mining deposits for distribution among Mongolian citizens;
•
developing and implementing Mongolia’s industrial program, planning and developing
mining-based industries and small and medium enterprises which use locally produced raw
materials;
•
improving agricultural production in particular, production of meat, milk, flour, potatoes
and vegetables;
•
providing health services and employment opportunities to Mongolian citizens and
providing vocational training; and
•
providing transparency and accountability in public administration.
Today, Mongolia’s economy is one of the fastest-growing economies in the region, largely due to
its rapidly developing mining industry and related increasing foreign investment. ADB in its report
Asian Development Outlook 2011 expects Mongolia’s economic growth to accelerate in 2012,
supported by high global mineral prices, development of new mines, and fiscal spending, while the
IMF estimates that Mongolia will be the fourth-fastest growing economy in the world over the next
– 100 –
five years. Mongolia’s GDP growth averaged nearly 9% annually from 2004 to 2008, underpinned by
an increase in foreign direct investment, with capital inflows predominantly directed to the mining
industry and assisted by upward price trends for commodities such as copper, gold and iron. In 2010
and 2011, the country’s economy continued to expand and achieved nominal GDP of approximately
MNT8,414.5 billion and MNT10,829.7 billion, respectively. Nominal GDP per capita was
approximately MNT3,045.0 in 2011, a 35% increase from 2010.
Fitch’s outlook for Mongolia in November 2011 was “Stable,” its long-term foreign and local
currency issuer default ratings (“IDR”) was “B+” and short-term IDR was “B.” In December 2011,
Standard & Poor’s revised the outlook for Mongolia to “Positive” from “Stable” and affirmed its
“BB-” rating. In May 2011, Moody’s outlook for Mongolia was “Stable” and its rating was “B1.”
Year ended December 31,
Macroeconomic data
Nominal GDP (MNT billions) . . . . . . . . . . . .
Nominal GDP (US$ millions) . . . . . . . . . . . .
Real GDP (MNT billions) . . . . . . . . . . . . . .
Real GDP (US$ millions). . . . . . . . . . . . . . .
Nominal GDP per capita (US$) . . . . . . . . . . .
Exports (US$ millions) . . . . . . . . . . . . . . . .
Imports (US$ millions) . . . . . . . . . . . . . . . .
Balance of payments (US$ millions) . . . . . . .
Policy lending rate . . . . . . . . . . . . . . . . . . .
Unemployment rate (1) . . . . . . . . . . . . . . . . .
External debt (US$ millions) . . . . . . . . . . . .
Total foreign exchange reserves (US$ millions)
CPI (Ulaanbaatar) (y-o-y change) (2) . . . . . . . .
Real GDP growth . . . . . . . . . . . . . . . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
2007
2008
2009
2010
2011
4,956.6
3,554.4
3,640.0
2,610.2
1,435.7
1,947.5
2,061.8
288.0
8.4%
9.2%
1,528.7
1,000.6
14.0%
10.2%
6,555.6
4,701.0
3,964.0
2,842.6
1,837.1
2,534.5
3,244.5
(232.6)
9.8%
9.2%
1,602.2
657.4
24.2%
8.9%
6,590.4
4,726.0
3,913.7
2,806.5
1,817.0
1,885.4
2,137.7
555.5
10.0%
11.6%
1,818.1
1,327.4
1.9%
(1.3%)
8,414.5
6,034.1
4,162.7
2,978.8
2,908.5
2,908.5
3,200.1
873.1
11.0%
9.9%
1,767.0
2,2287.9
0.1%
0.1%
10,829.7
7,766.0
4,881.4
3,500.4
3,045.0
4,780.4
6,526.9
33.7
12.3%
9.0%
2,650.1
2,457.0
11.1%
17.3%
Source: National Statistical Office of Mongolia, Monthly Bulletin of Statistical Yearbooks
Notes:
(1)
Labour Force Survey.
(2)
Bank of Mongolia – December 2011 Monthly Statistical Bulletin.
Economic History
Mongolia suffered a “transformational recession” between 1990-1993 due to restructuring and
privatization of state enterprises. As a result, there were massive layoffs and most workers lost their
pensions and other retirement benefits. Since 1993, however, the Mongolian economy has grown
steadily.
The Government launched its free trade zone programme in 2004. Currently there are two free
trade zones located along the trans-Siberian railway: one at the Russia-Mongolia border town of
Altanbulag and the other at the Sino-Mongolian border town of Zamiin-Uud. The third free trade zone,
the port of entry of Tsagaan Nuur in Bayan-Olgii province is under construction and is expected to be
completed in 2015.
Until 2008, Mongolia was predominantly an agricultural-based economy, with heavy reliance on
the growth of cereals and animal husbandry, particularly yaks, goats and sheep, but recently the focus
has shifted to the mining sector as the country has some of the richest mineral deposits in the world.
According to Erdenes MGL, a state-owned limited liability company, Mongolia currently has the
fourth-largest copper reserves and ninth-largest coal reserves globally. It also possesses significant
– 101 –
deposits of uranium, gold, lead, zinc and rare earth metals. The mining sector represents the
predominant source of foreign currency for the country with mineral products representing
approximately 80.5% of total exports in 2010 and approximately 89.2% in 2011. Mineral products,
textiles, livestock, precious metals and jewelery, raw and processed animal hides and skins, fur and
related products were the main export commodities in 2011.
Economic Turnaround
Mongolia continues its transformation to a market economy notwithstanding the severe adverse
impact of the global financial crisis and ensuing economic slowdown. Mongolia experienced a
turnaround in late 2009 and the beginning of 2010. The last quarter of 2010 ended with a broad-based
recovery, supported by transportation, construction and wholesale and retail trade. The economy
recorded a 6.1% recovery in real GDP in 2010, following a contraction of 1.3% of real GDP in 2009.
Total foreign exchange reserves reached US$2.5 billion as at December 31, 2011.
Mongolia’s turnaround may be attributable to the Government’s policy response to the global
financial crisis, supported by significant financial assistance from the international community,
including a US$229.2 million loan facility from the IMF under the 2009 Stand-By Program, of which
US$180 million was drawn down, In addition. the overall global economic recovery, continuing strong
demand for natural resources from China and strong copper prices contributed to the recovery. At the
same time, legislative reforms and a tightened fiscal framework, including the Fiscal Stability Law,
contributed to Mongolia’s stability.
The signing of an Investment Agreement in October 2009 with Rio Tinto and Ivanhoe Mines to
develop the Oyu Tolgoi mine, which is considered to be one of the world’s largest untapped copper
and gold deposits, represents a major milestone in the development of Mongolia’s mining sector.
According to Asian Development Outlook 2011 by the ADB, over the next two years, it is expected
that US$4 billion will be invested in this project alone, which is approximately equivalent to
Mongolia’s entire GDP in 2009. The mine construction is ahead of schedule, and production is
expected to start in mid-2012.
Preparations are also being made to develop the coal deposits of Tavan Tolgoi, which is one of
the largest undeveloped coalfields in the world. Tavan Tolgoi’s resources are located mainly in the east
and west sections of the Tsankhi coalfield. Erdenes MGL has been appointed by Parliament to develop
the east section of Tsankhi and a third round of negotiations is ongoing between the Government and
six short-listed companies for developing the west section of Tsankhi.
As at 31 December, 2011, the fiscal deficit of Mongolia was MNT632.4 billion or approximately
5.8% of nominal GDP. In 2011, exports increased by 64.4% and imports increased by 104.0%, each as
compared to 2010, reflecting the recovery in broad-based economic activity, imports and favourable
commodity prices. Revenues have increased by 29% in 2011 as compared to 2010. Imports increased
104.0% in 2011 compared to 2010, primarily as a result of increased transport equipment and
machinery imports for the expanding mining sector, particularly related to the Oyu Tolgoi mine. On
the other hand, Mongolian exports increased 64.4% in 2011 compared to 2010 supported by the
upward momentum in metal prices and large coal and copper imports by China, the export destination
for 92.1% of Mongolia’s exports in 2011.
Mongolia imports all of its domestic oil requirements including processed ready-to-use oil
products from Russia. Mongolia consumes approximately one million tonnes of processed oil products
per year. Mongolia has approximately 100 million barrels of registered oil reserves, according to the
Petroleum Authority of Mongolia. It is estimated that Mongolia has approximately four to six billion
barrels of recoverable oil. The Government of Mongolia is encouraging the development of domestic
– 102 –
oil processing industry in order to enhance Mongolia’s ability to meet its future domestic oil
requirements. As part of this initiative, the Government is planning to develop an oil processing plant
in Darkhan Uul province.
Recent Economic Developments and Reforms
Mongolia enacted tax reforms, which became effective on 1 January, 2007. In addition, several
key amendments to mining laws and regulations have been made to adjust the Government of
Mongolia’s equity participation in mining ventures. Amendments to the mining laws in 2006 enabled
the Government to acquire up to 50% equity stake in mines designated as strategic deposits if the
exploration is state-financed and up to 34% equity stake if the exploration is privately financed.
In 2009, the Government of Mongolia negotiated an Investment Agreement with Rio Tinto and
Ivanhoe Mines to develop the Oyu Tolgoi copper and gold deposit. The Investment Agreement came
into force in October 2010.
In August 2009, following the decline in mineral prices and mining activity during the global
financial crisis, Parliament amended the Windfall Profit Tax to end its application effective 1 January,
2011. Other legislative changes include the passing of state policy on public private partnerships
(“PPP”) in October 2009, amendments to the law relating to roads to permit private entities or
individuals to construct and manage certain roads, amendments to the law relating to water to permit
private entities or individuals to extract water resource and manage water supply infrastructure, and
amendments to the income tax law improving the loss-carry forward provisions and making them more
consistent with international practice. The State Property Committee has announced five PPP biddings
of which one PPP for establishing a thermal power station in Khuvsgul aimag was signed on 11 May,
2011 and the remaining four are in various stages of the bidding process.
A new law governing the budget process was approved in 2011 spring session of the Parliament,
The main objective of the new law is to make the budget process more supportive of prudent fiscal
policy, sound investment planning and accountable fiscal decentralization. To achieve this objective,
amendments to other laws were also approved, in particular to those that govern the procedures that
define how laws that have an impact on the budget should be submitted to and approved by the
Parliament.
Key Statistical Indicators
The following tables set forth selected recent information on the geography, climate, population,
economy and politics of Mongolia:
Geography:
Location ..........................................
Northern Asia, between China and Russia (landlocked)
Area ................................................
1,564.9 thousand square kilometers(1) (19th largest in the world)
Land boundaries..............................
Total: 8,253 kilometers, with China (4,710 kilometers in the
south), and with the Russia (3,543 kilometers in the north)
Climate ...........................................
Dry continental climate with desert, steppe and mountain zones
with large daily and seasonal temperature ranges
– 103 –
Major natural resources ..................
Copper, coal, iron ore, gold, silver, fluorspar, uranium and rare
earth elements
People:
Population .......................................
2.8 million (l)
Population growth rate....................
1.7% (2) (2008-2010)
Life expectancy at birth ..................
Total population average: 66.9 years (2) (2009 actual)
Ethnic groups ..................................
Mongol (94.9%), Kazakh (5%), others (including Chinese and
Russian) (0.1%)
Religious.........................................
Buddhist (50%), Others (6%), Muslim (4%), none (40%)
Government:
Government type.............................
Mixed parliamentary/presidential
Capital ............................................
Ulaanbaatar
Head of State ..................................
President (elected by a universal popular vote for a term of four
years)
Executive branch ............................
Prime Minister and Cabinet: Prime Minister and Cabinet
appointed by the State Great Khural (Parliament) in consultation
with the President
(Prime Minister is usually the Chairman of the political party
having majority in Parliament)
Legislative branch...........................
State Great Khural (Unicameral, 76 seats; members elected for a
term of four years)
Judicial branch ................................
Supreme Court (serves as appeals court for people’s and
provincial courts; judges are nominated by the General Council
of Courts for approval by the President)
Political parties ...............................
With the departure of the Democratic Party from the coalition
government effective January 5, 2012, the MPP is the current
ruling party
Suffrage ..........................................
18 years of age; universal
State structure .................................
Unitary State; territory of Mongolia is divided administratively
into 21 aimags and the capital city
– 104 –
Economy:
Nominal GDP .................................
MNT10.8 trillion (US$7.8 billion) (2011 actual)
Real GDP growth rate.....................
17.3% (1) (2011 actual)
GDP per capita ...............................
US$3,045 (1) (2011 actual)
Unemployment rate .........................
9.0% (1) (2011 actual)
Major exports..................................
Copper, coal, crude oil, zinc ore, iron ore, gold, cashmere
Exports............................................
US$4.8 billion (1) (2011 actual)
Key export partners ........................
China (92.1%), Russia (2.0%), Canada (1.9%), Italy (1.1%),
Korea (0.8%), United Kingdom (0.4%), Germany (0.3%) and
United States (0.1%) (1)
Major imports .................................
Oil products, machinery and equipment, vehicles, food products,
chemical and metallurgical industrial products
Imports............................................
US$6.5 billion (1) (2011 actual)
Key import partners ........................
China (30.8%), Russia (24.5%), USA (8.2%), Japan (7.4%),
Korea (5.4%), Germany (4.2%), Ukraine (2.3%) and Singapore
(1.0%) (1)
State Budget ...................................
Revenues and grants: MNT4.4 trillion (US$3.2 billion) (1)
Total expenditures and net lending: MNT4.8 trillion
(US$3.4 billion) (1)
Notes:
(1)
National Statistical Office of Mongolia, December 2011 Monthly Bulletin.
(2)
ADB, Mongolia Fact Sheet 2010.
– 105 –
GDP and major financial indicators
The following table sets forth the nominal GDP composition by industry for the periods
indicated:
Year ended December 31,
Nominal GDP composition by industry
Agriculture, forestry and fishing . . . . . . . .
Mining and quarrying . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . .
Electricity, gas steam and air conditioning
supply . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . .
Wholesale and retail trade repair of motor
vehicles and motorcycles . . . . . . . . . . .
Transportation and storage . . . . . . . . . . . .
Financial and insurance activities . . . . . . .
Real estate activities . . . . . . . . . . . . . . . .
Public administration and defense;
compulsory social security . . . . . . . . . .
Education . . . . . . . . . . . . . . . . . . . . . . . .
Human health and social work activities . .
Others (1) . . . . . . . . . . . . . . . . . . . . . . . . .
Source:
2007
2008
2009
2010
2011
..
..
..
18.4%
27.1%
6.2%
19.2%
20.2%
6.6%
17.9%
19.5%
6.4%
14.3%
22.7%
6.4%
13.0%
20.2%
7.1%
..
..
2.0%
2.8%
1.8%
2.5%
2.4%
1.6%
2.2%
1.7%
1.9%
1.3%
.
.
.
.
.
.
.
.
6.3%
6.5%
3.1%
3.8%
7.2%
6.4%
3.6%
5.3%
6.6%
8.3%
3.2%
7.3%
8.3%
7.7%
2.8%
6.6%
9.7%
7.2%
2.7%
6.6%
.
.
.
.
.
.
.
.
2.9%
3.4%
1.5%
24.7%
3.8%
4.2%
1.8%
27.4%
4.1%
4.7%
1.9%
26.1%
3.7%
4.0%
1.7%
27.2%
3.5%
4.0%
1.8%
29.6%
National Statistical Office of Mongolia, Statistical Yearbook 2010 and December 2011 Monthly Bulletin
Note:
(1)
Others is comprised of electricity, gas steam and air conditioning supply; construction; public administration and
defence; compulsory social security; human health and social work activities; water supply; accommodation and food;
information and communication; professional scientific activities; administrative and support; arts, entertainment; other
service activities and net taxes on products.
– 106 –