Source: The World Bank Quarterly Report, April 2011                    Date: 11 May, 2011

In its latest quarterly report, the World Bank says Mongolia’s prospects in the medium term look “excellent” from the perspective of both growth and fiscal management, but cautions that “staying the course” means implementing the landmark Fiscal Stability Law passed last year, and adopting a supportive integrated budget law in the present session of parliament.

The Bank tempers its optimism with pointing out several similarities with the situation that obtained prior to the 2008 crisis. Now, as then, there are plans for large cash handouts, exerting upward pressure on prices for the second half of 2011, with the risk of substantial second-round effects in the form of a wage-price spiral. Real interest rates are currently positive due to the fall in inflation, but these could return to negative territory as was the case before the crisis. Similarly, with the trade deficit continuing to widen with the mining boom, the current account is also in deficit, as was the case in 2008. High domestic inflation will cause the currency to appreciate in real terms, ultimately hurting the export sectors, and possibly creating a macroeconomic scenario known as the Dutch Disease.

The last quarter of 2010 ended with a broad-based recovery, mostly in transportation, construction and wholesale and retail trade, but the agriculture sector experienced double digit contraction in all four quarters in 2010. There has been a moderation in inflation but food prices are rising in Russia and China, from where Mongolia imports the bulk of its main food commodities.

On a 12-month rolling basis, the fiscal surplus increased to 2.4 percent of GDP in March 2011, up from a 5 percent deficit in March last year, but the 2011 Budget envisages a steep increase in government spending to an unprecedented MNT779 billion, which is more than 52 percent of GDP. The trade deficit continued to widen, reaching USD646 million in March.

The steady rise in NPL ratios in 2009 has been reversed, but solvency concerns continue to plague small and medium banks. Outstanding loans have been on the rise, up 35 percent y-o-y in March 2011 or 29 percent in real terms. With credit growing this fast, as was the case prior to the 2008 crisis, regulatory and oversight issues among Mongolian banks (along with capital adequacy) remain crucial.