96497 Mongolia Monthly Economic Brief May 2015 Industrial production data in the first three Manufacturing production and sales data in months of 2015 indicates that Mongolia’s recent months signal slowing consumption. growth continues to slow. Industrial production Manufacturing production growth picked up to growth softened to 13% in the first quarter of 9% (y/y) in the first three months, from 3% 2015, from 16% of the previous quarter, on growth the previous three months. However, account of slower growth in mining and unsold production of manufacturing goods electricity production. reached 11.3% of gross manufacturing production in the first three months, up from 7% Mining industrial production growth slowed to in the previous quarter, indicating that increased 14% (y/y) in the first quarter of 2015, down production is absorbed by growing inventories from 21% of the previous quarter. Copper due to weakening consumption. Production of concentrate production growth (y/y) in the first electricity and energy grew 6% (y/y), moderately quarter declined to 13% from 26% the previous down from 8% the previous quarter. quarter, reflecting the waning high growth effect from the production of OT mine that entered National headline inflation slowed to single into the second year of full production. Coal digits in 2015, decelerating from 11% (y/y) at production increased 16% from a year ago, the end of 2014 to 9.3% in March 2015. Overall signaling the possibility of gradual recovery after food price inflation (UB) declined to 3.7% in continued contractions in the previous two March from 6.9% in December 2014. Core quarters. Crude oil production growth also inflation (UB) still remains in a double digit slowed but maintained a robust 20.3% growth. territory but also decelerated to 11.9% from Gold production contracted by 10% for the first 12.6% over the same period. three months from the same period the previous year. The Monthly Economic Brief was prepared by the MFM GP Mongolia Team, composed of Taehyun Lee (Senior Country Economist), Altantsetseg Shiilegmaa (Economist), Davaadalai Batsuuri (Economist), under the guidance of Chorching Goh (Lead Economist) and Mathew A. Verghis (Practice Manager). Figure 1. Manufacturing production increased in March Figure 2. Mining industrial production slowed in February but sales remained sluggish. and March. Y/Y growth of manufacturing industrial production (3 month Y/Y production growth of key commodities (3 month rolling sum, %) rolling sum, %) Coal Manufacturing production growth (y/y, %): LHS Crude oil Electricity production growth (y/y, %): LHS 100 Copper concentrates 40% 175% Sold/gross manufacturing production (%): RHS 30% 150% 70 20% 125% 40 10% 100% 10 0% 75% -10% 50% -20 -20% 25% -50 Jan-12 Mar-12 Sep-12 Jan-13 Mar-13 Sep-13 Jan-14 Mar-14 Sep-14 Jan-15 Mar-15 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 Jul-12 Jul-13 Jul-14 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Jan-12 Nov-12 Jan-13 Nov-13 Jan-14 Nov-14 Jan-15 May-12 May-13 May-14 Jul-12 Jul-13 Jul-14 Source: NSO, WB staff estimates The current account balance deteriorated in Coal exports continued to drop 23% (y/y) in the February and March due to weakening export first three months due to declines in export growth. The current account recorded a surplus volume and price. Imports continued to sharply of $117 million in January but deteriorated to a decline. Total imports (free-on-board term) deficit of $97 million in February and March. dropped 28.5% (y/y) in the first three months, Export growth dropped sharply from 54% in driven by a 30.8% drop in oil product imports. January to negative 11% in March. Exports of Non-oil imports also dropped 29% during the copper concentrates and crude oil dropped by same period signaling continued weak domestic 8% and 40% (y/y) respectively in March due to demand for consumption and investment. lower prices despite increasing export volumes. Figure 3. The current account balance deteriorated in Figure 4. Mineral export growth is slowing and imports of February and March amidst slowing exports. investment and consumption goods continue to drop. Growth of exports and imports and current account balance Y/Y growth of key export/import goods (3 month rolling sum, %) Exports (y/y, %): LHS Copper concentrate exports Imports (y/y, %): LHS Coal exports CA balance (million $, 3 month rolling sum): RHS Oil exports 60 300 250% Investment-related imports 40 200 200% Consumption-related imports 20 100 150% 0 0 100% -20 -100 50% -40 -200 0% -60 -300 -50% -80 -400 -100% Sep-11 Sep-12 Sep-13 Sep-14 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Jun-11 Jun-12 Jun-13 Jun-14 Dec-11 Dec-12 Dec-13 Dec-14 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Jan-12 Nov-12 Jan-13 Nov-13 Jan-14 Nov-14 Jan-15 May-12 May-13 May-14 Jul-12 Jul-13 Jul-14 Source: BoM, WB staff estimates Further dampening of FDI strained the balance caused by discrepancies across different data of payments in the first three months. FDI sources. The data discrepancy is expected to be recorded a net outflow of $72 million in the first corrected by a revision of the BoP data. A net quarter, a significant deterioration from a net financial inflow of $136 million through currency inflow of $294 million in the same period a year and deposit account helped ease the mounting ago. In March, FDI slightly recovered to a net BoP pressure. As a result, overall balance of inflow of $5.7 million. Portfolio investment and payments deficit reached $271 million in the first loans also displayed a net outflow of $29 million quarter. in the first quarter. A significant net capital outflow of $320 million was recorded under net Gross international reserves remained stable in errors and omissions account which is usually February and March and the currency depreciation slowed in April. Gross reserves sharply dropped by $324 million (19.6%) in value of the tugrik depreciated by 5.1% against January from the end-2014 level ($1,649 million) the US dollar in Jan-Mar but gradually stabilized and was maintained at $1,323 million (about 2½ since mid-April, on the back of growing months’ imports of goods and services) in March expectations on early conclusions of large mining as the PBoC bilateral currency swap facility investment projects. helped mitigate pressures on gross reserves. The Figure 5. FDI further weakened in Jan-Mar to a net outflow Figure 6. Gross FX reserves remained above $1.3 billion in of $72 million, straining the balance of payments. Feb-Mar and currency depreciation slowed in April. Net capital flows (in millions of US$, 3 month moving average) Nominal exchange rate and gross FX reserves Portfolio investment & loans Currency and Deposits Gross FX reserves (billions of $): LHS Errors and omissions FDI 4.5 2,100 1,000 Exchange Rate (MNT/USD): RHS Overall BoP balance 4.0 800 1,900 600 3.5 3.0 1,700 400 200 2.5 1,500 0 2.0 -200 1,300 1.5 -400 1.0 1,100 Jan-12 Jan-13 Jan-14 Jan-15 Apr-12 Jul-12 Apr-13 Jul-13 Apr-14 Jul-14 Oct-12 Oct-13 Oct-14 Oct/11 Jan/12 Oct/12 Jan/13 Oct/13 Jan/14 Oct/14 Jan/15 Apr/11 Jul/11 Apr/12 Jul/12 Apr/13 Jul/13 Apr/14 Jul/14 Apr/15 Source: BoM, WB staff estimates Bank asset qualities continued to deteriorate in year. Slowing credit growth reflects tighter tugrik Jan-Mar. Outstanding NPLs and past-due loans liquidity conditions and continued weak foreign have increased by 63% and 108% respectively currency loan growth on account of sluggish over the past twelve months. Deterioration of domestic currency deposit growth, unwinding of asset quality intensified in March. NPLs the Price Stabilization Program, and persistent increased 9.4% and past-due loans increased wariness over currency depreciation pressure. 41% in March compared with February. NPL ratio Net domestic credit growth also slowed but to bank loans climbed to 3.9% in March, up from maintained robust 27% growth (y/y) in March, 3.1% at the end of 2014 and 2.5% at the end of reflecting increasing net credit to the 2013. Past-due loans ratio also rose to 4.6% of government and BoM’s liquidity support to the bank loans in March from 2.5% a year ago. corporate sector provided via banks in late 2014. Despite the robust net domestic credit growth, Credit and liquidity conditions became tighter broad money growth slowed to a negative 0.5% in March. Bank credit growth (including growth (y/y) in March due to continued large securitized mortgaged loans) continued to declines of net foreign assets reflecting decelerate to 15% (y/y) in March from 20% at the persistent BoP pressure on net international end of 2014 and 58% in the same month last reserve positions of depository corporations. Figure 7. NPLs increased 9% and past-due loans increased Figure 8. Growth of bank loans and net domestic credit slowed 41% in Mar from the previous month. to 15% and 27% (y/y) respectively in March. Size and ratio of NPLs and past-due loans (billions of MNT, %) M2 growth contribution (%p, y/y) and bank loan growth (%, y/y) Size of NPLs (billions MNT) Private sector Non-bank financial institutions Size of past-due loans (billions MNT) Government & public sector Net Foreign Assets 1,400 NPL ratio (incl. failed banks, %): RHS 20 100% Past-due loan ratio (incl. failed banks, %): RHS 75% 1,200 1,000 15 50% 800 25% 10 600 0% 400 5 -25% 200 -50% Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Sep-11 Dec-11 Sep-12 Dec-12 Sep-13 Dec-13 Sep-14 Dec-14 Jun-11 Jun-12 Jun-13 Jun-14 0 0 Feb-08 Oct-09 Sep-12 Feb-13 Oct-14 Mar-10 Jan-11 Nov-11 Mar-15 May-09 Jun-11 May-14 Jul-08 Aug-10 Apr-12 Jul-13 Dec-08 Dec-13 Source: BoM, WB staff estimates The BoM continued to unwind the Price Weak budget revenue performance continued Stabilization Program (PSP) in March and to strain the fiscal space in March. Budget strengthened capital requirement of banks in revenues increased by 7.9% in Jan-Mar, April. BoM’s credit to the PSP has been gradually compared with the same period the previous withdrawn since late 2014 as one of the year. Budget revenues of the first three months, measures to phase out unconventional policy however, fell short of the planned revenue lending programs. Outstanding BoM’s credit to receipts by 7.2%. The revenue shortfall largely the PSP declined 10% over the first three months came from foreign trade taxes (customs duties, of 2015. A working group was formed to transfer VAT and excise tax on imported goods) and the PSP to the government by June. Outstanding corporate tax that fell short of the budget plan loans under the Housing Mortgage Program, by 25.6% and 12.8% respectively. Facing weak however, grew 8.3% over the first quarter, revenue receipts, the MoF has been containing reaching MNT 2.2 trillion in March. MNT 1.2 budget executions through tighter payment trillion of the mortgages were securitized by control. Budget spending executions in the first Mongolia Mortgage Corporation (MIK) as of three months increased by 6.9% from the March and 90% of securitized mortgages were previous year but remained at 70% of the purchased by the BoM. Plans to phase out and spending plan of the 2015 budget. In particular, transfer the mortgage program to the only 29% of the budget’s capital spending plan government are yet to be announced. BoM’s was executed, taking the brunt of revenue outstanding credit to banks declined to MNT 1.8 shortfalls. Tighter fiscal situation was further trillion in March from MNT 2.6 trillion at the end compounded by rising sovereign borrowing of 2014, reflecting the continued unwinding of costs amidst tighter liquidity of the banking PSP loans and securitizations of mortgage loans. system, with one-year government bond yields BoM’s outstanding credit to non-bank sectors hovering over 16% since last September. Despite (including MIK), however, increased to MNT 2 the MoF’s hard efforts to contain the spending, trillion in March from MNT 1.7 trillion at the end another amendment of the 2015 budget seems of 2014 amidst increasing purchases of necessary in the coming months to meet the securitized mortgages loans via MIK. On April 1, FSL’s structural deficit ceiling (5% of GDP), the BoM announced to raise the minimum paid- through proper commitment controls of in capital of banks from MNT 16 billion to MNT budgetary projects to avoid possible payment 50 billion, from 2016 for systemically important arrears that have to be eventually paid by the banks and from 2018 for other banks. budget later. Figure 9. BoM’s credit to banks continued to decline but claims Figure 10. Weal budget revenues and tighter bank liquidity on non-bank sectors have been growing since late 2014.. conditions continue to constrain the fiscal space. Key domestic credit components of BoM’s balance sheet (in Y/Y growth of budget revenue/spending (year-to-date rolling sum, trillions of MNT) %) and one-year government bond yields (%) Budet revenues (ytd rolling sum, y/y, %): LHS 5.0 BoM claims on banks Expenditures (ytd rolling sum, y/y, %) excl. DBM: LHS BoM claims on non-bank FIs 60% One-year government bond yields (%): RHS 18 4.0 BoM claims on companies BoM claims on government 40% 16 3.0 20% 14 2.0 0% 12 1.0 -20% 10 0.0 -40% 8 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Jun-11 Jun-12 Jun-13 Jun-14 Dec-11 Dec-12 Dec-13 Dec-14 Source: BoM, WB staff estimates Annual external debt statistics released by the Private external debt also steeply grew over the BoM shows that Mongolia’s external debt rose last two years. Private external debt excluding 10.1% to $20.9 billion at the end of 2014, from intercompany lending rose from 19.1% of GDP in $19 billion in 2013. The external debt of 2012, to 25.7% in 2013 and 31.7% of GDP in Mongolia rose to 175% of GDP in 2014, up from 2014. Banks’ external debt rose 52% and non- 152% in 2013. External debt has increased bank private sector debt rose 71% over the last steeply over the past four years from 92.5% of two years reflecting increasing loans and bond GDP in 2011 amidst growing public external issuances of major banks and companies. financing and FDI-related intercompany debts. Intercompany lending – which accounted for Intercompany borrowings of foreign-invested 56% of external debt increase in 2011-13 in companies took up 51% of external debt in 2014, tandem with large FDI inflow – increased only by followed by general government debt and $273 million in 2014, a sharp slowdown from guarantees (24%), private sector debt (18%), and $1.9 billion increase in 2013, amidst declining FDI central bank foreign liabilities (7.5%). inflow. Public and publicly guaranteed (PPG) debt Short-term external debt markedly increased in continued to increase in 2014. External PPG both public and private sectors in 2013-14. debt more than doubled in 2012 due to the Short-term external debt reached $2.4 billion issuance of Chinggis bond ($1.5 billion) and (19.8% of GDP) in 2014, up by 163% from $902 DBM’s euro bond ($580 million), and further million (7.3% of GDP) in 2012. BoM’s short-term increased in 2013-14 reflecting growing foreign liabilities sharply increased over the last government guarantees and BoM’s foreign two years, from $336 million in 2012 to $1,497 liabilities. External PPG debt to GDP ratio million in 2014 reflecting increasing drawings on climbed to 54% in 2014, from 21% in 2011 and a bilateral swap line between the central banks 43% in 2013. Outstanding government of Mongolia and China. Private sector’s short- guarantees almost doubled from $0.7 million in term external debt increased 44% to US$ 877 2013 to $1.3 billion in 2014, due to new million in 2014 from $605 million the previous guarantees issued to DBM’s external financing year. Short-term debt accounted for 23% of including samurai bonds (30 billion yens), loans private sector’s external debt in 2014. Reflecting from Credit Suisse ($300 million) and China the increasing short-term debt and weakening Development Bank ($112 million). BoM’s foreign FX reserves, short-term debt to reserve ratio liabilities significantly increased in 2013-14, from deteriorated to 144% in 2014 from 71% in 2013. $413 million in 2012 to $ 1,567 million in 2014. Figure 11. External debt climbed to 175% of GDP in 2014 Figure 12. ST external debt has been rapidly increasing in driven by rising PPG debt and private external debt. 2013-14. External debt by holders (in percent to GDP, %) ST external debt by holders (billions of US$) PPG 2.5 Private sector ST debt 160% 100% billion $ Private BoM's ST foreign liabilities 140% Intercompany lending 2.0 ST debt to GDP (%): RHS 80% 120% ST debt/gross FX reserves (%): RHS 1.5 100% 60% 80% 1.0 60% 40% 40% 0.5 20% 20% 0.0 0% 0% 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Source: External Debt Position 2014 (BoM), 2015 Budget (MoF), WB staff estimates