Source: Eurasia Capital                      Date: 03 June, 2011

In his keynote address at the second annual Mongolia Investment Conference organized by Eurasia Capital on May 25, Central Bank Deputy Governor N. Zoljargal listed factors that made the economic outlook for the next two years very positive.  The Bank’s monetary policy will be aimed at reining in "two wild horses", inflation and appreciation of the MNT. The National Development and Innovation Committee (NDIC) estimates the Mongolian economy will grow not less than 7.5% for the next ten years, GDP this year will grow 7.5%, reaching 20.6% in 2014 and gradually tapering off to 16.9% in 2020, making it one of the fastest growing economies in Asia.

Referring to terms of trade (ToT), which shows the ability of a country to finance its imports, Mr. Zoljargal said the export: import ratio is stable and rising, though it is yet to reach its earlier peak. Month-on-month (m-o-m) ToT change is related to the international prices of oil, copper and coal. Net capital inflows started growing in April 2010 and in December reached the highest level ever, with the whole year’s net capital inflow of USD1.6 billion growing 5.3 times compared to 2009. The growth continues, with this year’s January to March figures up 2.7 times more y-o-y. He noted that the trend could create difficulties in managing capital inflows. The current account deficit in 2010 was USD931.5 million and could stay negative for some time until the import of all capital goods for production purposes ends and exports increase. However, capital and financial account surpluses will fully cover the current account deficit. In 2010 total capital account, direct investment and portfolio investment was USD2.14 billion, and the Bank’s projection is that balance of payments (BOP) will reach USD870 million next year.

Mr. Zoljargal said the Central Bank evaluates the purpose and composition of capital inflows, whether it is for long-term investment, short-term investment or for speculative purposes. The Bank will neutralize the effects of short-term net capital inflow, while encouraging that for long terms. The MNT has appreciated 3% so far this year and the Bank does not plan to intervene except when the volatility affects daily business or is excessive.

Money supply increased 67% last year, but monitoring and timely measures kept inflation down to 13%. It was 7% and 5.5% in March and April, and Mr. Zoljargal was confident there would be nothing to worry this year. However, one third of the inflation is "imported" from China and Mongolia cannot do anything about prices rising there.

Mr. Zoljargal said the loan-to-GDP ratio was substantially lower than in developed countries, but the Mongolian banking system is safe and stable. He rejected suggestions that the economy was overheating, saying Mongolia is in an early stage of development and “is just warming up”.