The economic rebound is stronger than expected and the economy shows signs of overheating, reported the World Bank. Rising inflation, especially in goods and services in strong demand, which cannot easily be imported or local supply cannot be easily manipulated, is a sign of this.

Mongolia's gross domestic product (GDP) growth reached 20.8 percent year-on-year in the third quarter. Growth this year could hit 15 percent, if not more, up from 6.4 percent in 2010. Growth is primarily driven by spending in the mineral sector.  Mining and manufacturing output are both rising at a healthy rate, but fears are growing about another construction bubble similar to the previous boom in 2004 to 2008. Unemployment is trending down, but overall levels remain high at around 9 percent. Survey results from October indicate that real wages have fallen and almost half of those surveyed indicate their earnings don't meet their basic needs.

The difficulty to afford basic needs is a symptom of inflation, which has continued and upward trend to 11.9 percent year-on-year in September from 9.9 percent. Food and energy prices continuously rose throughout the year, reflecting wage and price pressures from a booming economy and government cash handouts, and will likely lead to continued inflation growth.

The trade deficit is close to record levels at USD 1.4 billion in September, driven by a surge in mining related equipment and fuel imports. Exports are growing strongly too, driven by large coal shipments to China. Copper exports have, however, barely grew in volume, and cashmere exports are doing even worse. The tugrug has depreciated against the U.S. dollar since August by 4.8 percent as other currencies in the region have done due to rising global risk aversion.

Bank capital buffers are apparently doing much better than 2009, when two banks failed. High lending growth is focusing attention on asset quality, and credit growth reached 52 percent year-on-year in real terms in September, which is higher than underlying real growth in the economy and is highly concentrated. The volume of non-performing loans remains high. Although deposits are hitting new peaks, the loan to deposit ratio has risen to about 100 percent.

The Bank of Mongolia raised its policy rate by 0.5 percent to 12.25 percent. Meanwhile, the 2012 Budget continues its fiscal expansion and targets a 75 percent increase in expenditures, mostly on wages and social transfers. The 2012 budget deficit is estimated at 4.1 percent of GDP.