Source: Frontier Securities                   Date: 31 August, 2011

World Bank reports say Mongolia's economy grew 7.4 percent in the second quarter to 17.3 percent year-over-year. This results from growth in a number of sectors, higher incomes, and growth in the mining and manufacturing sector. However, inflation is on the rise as well.

As Mongolian incomes are rising, so is consumption. Construction grew by 39.9 percent, transportation 38.4 percent, and retail and wholesale by 24.7 percent. The mining and manufacturing sectors grew by 8.3 percent and 12.9 percent respectively.

Success in the mining sector, specifically because of Oyu Tolgoi copper and gold project, resulted in mass imports for transport equipment and machinery. This put debt further in the red to USD 1.349 billion in July. Crude oil also experienced growth, increasing 42 percent. However copper exports declined in addition to the poor performance by gold and cashmere.

Once again, however, inflation in Mongolia is on the rise. In the capital, inflation grew by 11.4 percent from the last quarter. Food prices are rising as herds still recover from the 2009 and 2010 dzud and the rise in China's food prices. Increased spending in the private and public is exacerbating the issue further.

Mongolia is in a vulnerable position,” said Senior Emerging Markets Economist Kenrick Drijkoningen at Frontier Securities. In the case of another recession Mongolia will be affected and the decision made by China will guide its fate.

If China reacts as fast and as strongly as it did in 2008 and 2009, then the effects of a global recession on Mongolia will be mitigated,” said Drijkoningen. “Beyond this, it is up to Mongolia to capitalize on its excellent long term prospects by continuing the reform agenda it embarked on during the 2008 and 2009 crisis.