FEDERATION OF EURO-ASIAN STOCK EXCHANGES
SEMI ANNUAL REPORT OCTOBER 2006
MONGOLIAN STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Politic and Economic Environment
Notwithstanding the advances that have been
made since Mongolia held its first elections in
1992, the country's young democracy will
remain fragile in 2006-07. There are three
main threats to political stability over the short
term. The first is the question of whether the
Mongolian People's Revolutionary Party
(MPRP) will be able to maintain the stability of
the fractious four-party coalition that it
currently leads. The second is how far the
government will be able to assert its
legitimacy. The third risk is the turbulence
within the parties themselves. Mongolia's
political parties are fragile creatures that are
held together less by agreement on
ideological goals and more by loyalties to
political clans and strong political leaders. Poverty reduction will remain a key policy
priority for the new government, not least
because, as the demonstrations in April this
year suggested, the government badly needs
success in this area in order to broaden its
support base. Mongolia remains one of the
world's poorest countries, with around 40%
of the population of 2.5m living below the
poverty line, defined as living on an income
of Tg25,000 (US$20) a month. The potential
for this to spill over further into political
discontent has been increased by the wide
income disparities created in the transition to
a market economy and the continued scares
over diseases such as avian influenza (bird
flu) and foot-and-mouth disease that threaten
the already precarious livelihoods of the
country' still-large agricultural population.
The new government is maintaining its
predecessor's pragmatic approach to foreign
policy, largely reflecting the need to balance
its own interests against those of its larger
and more powerful neighbours. The key
driver of foreign policy will therefore remain
the need to balance relations with Russia, on
which Mongolia depends for energy, and
those with China, on which it relies for export
markets. At the same time the US and Japan,
which are important aid donors, will continue
to be seen as useful counterweights to
dependence on Russia and China. The need
for balance will also ensure that Mongolia
continues to court India actively. Economic Outlook
Mongolia's economic outlook in 2006-07 is
fair, with real GDP likely to grow by 5-6% a
year in the two-year period. However, prices
for key mineral exports are likely to fall over
the forecast period. The textile sector will
also continue to struggle, although there
could be some relief this year as the EU
generalised system of preferences scheme
opens up markets in Europe to Mongolian
goods. Foreign direct investment (FDI)
flows, particularly into the mining sector,
should, however, be supportive of growth.
This depends on the government's being
able to maintain an investment environment
favourable to inward FDI.
Mongolia is likely to be hit hard by continued
high prices for oil, on which it is import-
dependent. This could produce some
volatility in consumer price inflation, although
the influx of cheaper Chinese-made
consumer goods should help to keep the
lid on inflationary pressures overall.
Mongolia's merchandise trade deficit
narrowed to US$95m in 2005, from US$158m
in 2004. However, this improvement is not
expected to be sustained. This will largely
reflect continued high global prices for
oil–mineral products typically account for just
over one-fifth of the total import bill. We
forecast that oil (dated Brent Blend) will
average US$60/barrel this year, up from
US$54.7/b in 2005, and will ease only
modestly to US$55.3/b in 2007. Export
revenue, meanwhile, will be hit by declining
prices for key products such as copper, gold
and zinc, even if demand from Mongolia'
largest export market, China, remains brisk.
But the external position will continue to be
supported by inflows of aid and credit, all of
which will be on concessional terms.*
* Economic Intelligence Unit Ltd, May 2006
Key Information Contacts
Parliament of Mongolia www.parl.gov.mn
Ministry of Finance www.mofe.pmis.gov.mn
The Central Bank of Mongolia www.mongolbank.mn
Mongolian Chamber of Commerce & Industry www.mongolchamber.mn
National Statistical Office of Mongolia www.nso.mn
2004-ORIGINS OF GROSS DOMESTIC PRODUCT (%) (a)
Industry
Services
Trade
Agriculture, hunting & forestry
Transport
Communications
Construction
2003-COMPONENTS OF GROSS DOMESTIC PRODUCT (%) (b)
Private consumption
Change in stocks
80
25.6
24.6
Government consumption
Gross fixed capital formation
Net exports of goods & services
Statistical discrepancy
78.7
60
2.6
3.0 40
9.7 20
27.5
19.1
3.5
0
13.2
21.3
-7.5
-20
-21.4
-40
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* World Bank reports