Blue Sky Is the Limit
Mongolia's GDP Surge 14.3% in First Half of 2011
The National Statistics Office of Mongolia data released yesterday reveals that the Mongolian economy had its best first half of the year in a decade.
Record GDP Growth. The economy registered breakneck GDP growth rate of 14.3% year-on-year (y-o-y) in 1H2011. In nominal terms GDP growth rate stood at incredible 29.1% y-o-y. Furthermore, 2Q2011 with 17.3% y-o-y real growth was the fastest quarter since 2005. In 1H2011 industry and construction expanded 10.1% y-o-y in real terms, services grew 16.2% y-o-y and net taxes on products increased 27.1% y-o-y. Relative laggard agriculture still registered solid 6.0% y-o-y growth.
Strong mining sector output fueling GDP growth. Industrial production contributed 19.4% to GDP growth. Mining sector output, the largest component (58.2%) in industrial output advanced 12.4% y-o-y. Coal mining surged 39.4%. Share of coal production in mining output increased to 25% in 1H2011 from 20% in the previous period. Iron ore output jumped 279.1% y-o-y.
Surging investments and revenues support increased expenditures. Mongolia remains an attractive destination for foreign investors. Favorable commodity prices, abundance of opportunities in resource sector and improving business environment brought record high FDI of US$1.44bn, up 127% y-o-y in 1H2011, according to the Bank of Mongolia data. The Government revenues enjoyed a 58.6% increase to MNT1,966.7bn and achieved a surplus of MNT98.4bn (expenditures reached MNT1,868.2bn) vs a deficit of MNT167.5bn a year earlier. Whilst many economies are struggling with budget deficits and ballooning debt, the Mongolian Government face “less challenging” issues of managing growth, inflows of capital and budget surplus. Therefore, it has set up vehicles like Stabilization Fund and Human Development Fund.
Resources driving exports. Mongolia continues to benefit from strong demand for resources in China and attractive international commodity prices. Mineral products exports that jumped 72% y-o-y in 1H2011 accounted for majority of a 52.3% y-o-y increase in total exports. Impressive growth was registered by coal +135%, copper +31%, iron ore +122% and crude oil +39%. Exports to China surged +64% y-o-y representing 91% of Mongolia’s total exports (vs 84% a year earlier). Resource-hungry China consumed almost all exports of resources, including coal, copper, iron ore and crude oil from Mongolia. Another important milestone was achieved as Mongolia overtook Australia as the largest coking coal exporter to China in 1H2011. Chinese imports of coal from Mongolia have dramatically increased on the back of declining Australian exports caused by extreme flooding earlier in the year. Coal remains the largest export revenue earner for Mongolia.
Bank financing is growing. Improving financial health of banks has also contributed positively to economic growth. Loans outstanding increased significantly while non-performing loans declined both as a share of loans and in absolute terms. This indicates that the banks are getting more active in lending as bank loans grew +57% y-o-y during 1H2011. Trade & Development Bank (+107%), State Bank (+137%), and Erel Bank (+115%) have more than doubled their loans outstanding.
In our view, Mongolian economic performance is set to beat our expectations of 10% y-o-y annual GDP growth in real terms, articulated in Eurasia Capital Mongolia Outlook 2011 at the beginning of this year. The economy traditionally accelerates in the second half of the year. Although inflation accelerated in 7M2011 to 10.1% y-o-y from 6.2% in 1H2011, we believe the Mongolian Central Bank will manage to keep it in single digits through 2H2011. We expect the Mongolian economy to maintain its current breathtaking growth rate through the remainder of the year. The primary growth drivers will be strong. Investments across the mining sector and other asset classes are expected to grow further. The government expenditures are likely to increase to finance important projects thanks to strong revenues. Positive outlook for commodity prices should fuel export revenues coupled with continuous Chinese demand. Therefore, we continue to recommend our clients to gain or increase their exposure to Mongolia’s various asset classes, particularly local equities, fixed income and property.
Source : Eurasia Capital
