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3G MONGOLIAN GROWTH: GDP GREW 17.3% IN 2011 ON VERY STRONG CONSUMER SPENDING AND SENTIMENT , GROWTH IS BROAD-BASED

Please click here for our Research Report  on latest National Statistics of Mongolia data on GDP growth in Mongolia in 2011 in PDF format.

Key Highlights

Mongolia economy finished 2011 at a furious pace following an equally remarkable outturn of 16.7 percent in Q3 according to NSO and 20.8% in Q3 according to World Bank. This is close to tripling GDP growth in 2010 of 6.4 percent(2.7 times), and almost double the average 9 percent outturns during the previous mining boom in 2004-08.

According to World Bank, overall growth is being driven by infrastructure spending related to the mining sector boom, as the economy gears up for the Oyu Tolgoi mine to become operational. Expansionary fiscal policies of the government are adding additional pressure to domestic demand.

According to NSO, net taxes on products are biggest contributor to GDP followed by mining and quarrying, agriculture, forestry and fishing, transportation and storage, wholesale and retail trade, repair of motor vehicles.

Wholesale and retail trade, repair of motor vehicles contributed the most to growth(42.5%), after net taxes on products(52.2%), followed by administrative and support service activities (19.6%), manufacturing (16%),accommodation and food service activities(14.6%), construction(14.3%), transportation and storage(13.8%),other services activities(11.8%),financial and insurance activities(11.4%) and mining and quarrying(8.7%)

In 2011 GDP growth was achieved mainly by increase of gross capital formation. 

Wholesale and retail trade sector grew by 42.5 percent in constant prices reflecting very strong consumer spending and sentiment.

According to NSO, in 2011, the total industrial output increased by 182.2 bln.tog or 9.7 percent to 2056.8 bln.tog (at 2005 constant prices) compared to the previous year. The increase in the industrial output was mainly due to 16.8-77.3 percent, increases in mining and quarrying products such as crude oil, coal and iron ore and 0.8-86.5 percent increases in industrial main products of manufacturing sector such as bakery products, combed down, knitted goods, meat, bread, soft drinks, milk, cigarettes, alcohol, juice, beer, pure water and concrete mortar.

Manufacturing continued to grow at a healthy pace : output rose by 17 percent yoy almost same as on 3 month moving average (3mma) basis of 16 percent—the same as average growth since May.

One of biggest contributors to GDP, the mining sector itself is growing at a somewhat slower pace: output rose by 8.7 yoy compared to 6 percent yoy (3mma) basis in September, down from 15 percent in May—due to a number of bottlenecks and constraints. According to World Bank, these include: increased fuel prices and fuel shortages during the operational summer season; increasingly expensive equipment and parts due to the increase in global steel prices over the past year; several hikes in electricity tariffs over the past year that have raised input costs; and growing demands on existing rail and transport networks as mining imports surged.

According to NSO, in 2011, a total of 450.7 bln.tog of construction and installation work were carried out at the national level. The 99.9 bln.tog or 28.5 percent increase of construction and installation work compared to the previous year was mainly due to the 101.4 bln.tog or 31.1 percent increase in works executed by domestic entities. Share of construction in overall GDP in 2011 was 1.4%. Currently, the construction sector has grown 28% yoy after growing at 67 percent yoy in Q3 and 38 percent in Q2. Actual rental prices are increasing. Prices of key construction materials have also climbed since last year .

 

FRONTIER SECURITIES CONCLUSION:

We agree with the World Bank and the IMF and view the overall growth as being driven by infrastructure spending related to the mining sector boom, as the economy gears up for the Oyu Tolgoi mine to become operational. Expansionary fiscal policies of the government are adding additional pressure to domestic demand. This aggressive recovery has also been fueled by strong global commodity prices. Mining output, moreover, is set to increase substantially as two huge projects underway will soon start production. Growth has accelerated sharply this year, reflecting booming mineral exports driven by global prices and rising coal production, ongoing development of large mining projects, surging credit growth, improved agricultural output (primarily a base effect from last year’s severe winter), and, again, expansionary macroeconomic policies.

Frontier Securities views that latest NSO data shows that infrastructure spending, expansionary fiscal policies, strong commodity prices, booming mineral exports, ongoing development  of large mining projects, surging credit growth is translating into very strong consumer spending and sentiment indicated by booming wholesale and retail trade and auto repair sector. At the same time, growth is broad-based as shown by robust growth in manufacturing, transportation, construction and mining itself.

The industry consensus view is that furious expansion of the Mongolian economy will continue in 2012 in case of favorable commodity prices. GDP growth is forecasted between 15.1% to 16.6% for 2012 but forecast do not assume significant falls in commodity prices and therefore growth will be potentially more subdued and less then these rates in case of softening of commodity prices. Growth from private sector (OT, TT and others) will continue but lower commodity prices resulting in lower tax receipts will mean lower growth from Government expenditures. Most infrastructure spending (fundamental driver of growth) still comes from Government.   Mongolia is completely at the mercy of commodity prices being a mineral dependent economy and bust is just around the corner. If commodity prices fall the growth will follow.

These increased global and domestic risks make Mongolia enter a phase reminiscent of pre-crisis years. The approved 2012 budget is leaving Mongolia vulnerable to a bust similar to the one that occurred in 2008-9. Accordingly, pro-active, prudent and risk-averse investment management is now needed more than ever, as the economy shows signs of overheating while global and domestic risks are rising, and mineral prices are falling.  Mongolia’s future road is certainly not clear of bumps yet ripe with rewards as never before. 


For further inquiries please contact:

Chief Investment Strategist

Dale Choi

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