Mongolia - 9% Growth In 2010, Downside Risks
BMI View: We hold to our forecast for the Mongolian economy to grow by 9.0% this year, on the back of strong capital inflows and relatively robust external demand. That said, we note that a crisis in the agricultural sector will remain a downside risk to our forecast. In addition, in line with our global macro strategy we believe that external (specifically Chinese) demand will cool in H210 and into next year, leading to a slowdown in growth, although we remain extremely bullish through the medium term.
A preliminary estimate from the Bank of Mongolia (BoM) shows real GDP growth of 7.6% y-o-y in Q110, confirming that the recovery is firmly on, and supporting our core view that the country would see a strong return to growth this year. The data follows on from 3.8% y-o-y growth in Q409, with the economy having contracted by 1.6% in 2009.
The industry, construction and services components of GDP all contributed positively to growth. Industry and construction contributed 3.8 percentage points (pps) to the headline figure, up from 3.5pps in Q409, and testifying to the improvement in manufacturing and mining activity that has taken place on the back of improved external demand for Mongolia's exports, particularly from China (which consumed 85.6% of Mongolian exports in the first four months of 2010). Meanwhile, services contributed 2.5pps, up from 2.0pps, supporting our view that legal, banking, real estate and other service sectors were likely to benefit on the back of a return in foreign investment (FDI) and increased export activity. To be sure, net FDI in Q409 totalled US$248.1mn, the biggest quarterly net inflow ever recorded in Mongolia.
The single biggest contributor to the uptick in real GDP, however, were net taxes on products, which contributed 3.7pps to growth. Although this was in a large part due to base effects (in Q109 net taxes on products detracted 5.1pps from growth), we also believe it is a further sign that Mongolia's recovery is firmly underway.
Growth Forecast On Track
As a result of the impressive Q1 number, we hold to our forecast for real GDP growth of 9.0% in 2010, driven by robust external demand for exports, strong foreign direct investment (including US$758mn for Oyu Tolgoi this year) and favourable base effects. Indeed, we note that exports are still showing strong growth, with goods exports rising by 53.1% y-o-y in April. While some of this is undoubtedly being driven by favourable base effects following a tough H109, we nevertheless highlight that export volumes are returning to pre-crisis levels (see chart below), which suggests that a fundamental recovery is underway. Although we believe that Chinese growth has peaked, and that monetary tightening going forward will see demand cool (see our online service, May 11, 'Inflation Up, Growth Down: Bearish Views Playing Out'), we nevertheless believe that Mongolia's low base should see export growth remain at a fairly healthy level through to the end of 2010.
The extent to which export demand is filtering through to the wider economy is emphasised by latest industrial production figures. Industrial production rose 11.0% y-o-y in April, up from 6.4% in March. Manufacturing grew particularly strongly, rising 31.1% y-o-y, although mining output growth fell to 2.2% y-o-y, following five consecutive months of double-digit expansion. Given the low base that Mongolian industry is starting from, we expect industrial output growth to remain volatile, though see it continuing to perform strongly through to end-year.
Winter Fallout Still A Risk
The main risk to Mongolian growth however, and one which we have long highlighted, is the fallout of the dire 2009-2010 winter (see our online service, February 24, 'Zud Unlikely To Derail Growth Story'). With agriculture accounting for over 22% of GDP, and providing employment for around one third of the population, we believe that the decimation of crops and livestock across large swathes of the country poses risks to Mongolian growth this year.
To be sure, the Q110 number showed agricultural output declining by a whopping 35.3% y-o-y, subtracting 2.5pps from headline growth, and we believe that agriculture is likely to remain a drag on economic activity through to 2011 at least.
Indeed, latest data from the National Statistical Office of Mongolia emphasise the extent of the damage. In the first four months of 2010, 18.5% of all animals in Mongolia died, compared to 2.0% in 2009 and 1.7% in 2008. This included 20.7% of all goats, 17.3% of sheep and 17.7% of cattle.
As we have previously highlighted, this poses huge risks to the banking sector, with many banks heavily exposed to rural communities (see our online service, April 28, 'Banking Sector: Winter Fallout To Keep Risks Elevated'). Indeed, many Mongolian banks have restructured large parts of their asset books towards farmers and herders in the past decade, with a recent World Bank Survey finding that 72% of herders have taken out loans with commercial banks in the past six years. This will keep asset quality and profitability weighed down, limiting the flow of credit to the domestic economy.
In addition, we have long highlighted the potential for interest rate hikes by the BoM, on the back of sharply rising inflation, which will increase borrowing costs for firms and households, further limiting loan growth. To be sure, with 18.5% of livestock killed, we see the potential for meat prices to spike higher, having grown by 19.0% y-o-y in March, up from 1.2% in January. This is turn saw food prices rise 9.3% in March, up from 3.3% in January, contributing to headline consumer price inflation of 7.7%.
2011: Double Dip Core Scenario
We believe that Mongolian growth will slow to 7.8% in 2011, mirroring our forecast for a cooling of Chinese economic activity next year on the back of monetary tightening by the People's Bank of China. That said, with strong capital inflows likely as investors increase their exposure to Mongolia's huge export potential, and the Chinese economy likely to pick up again in 2012, we remain extremely bullish on Mongolia's medium term growth potential. We forecast 8.8% real GDO growth in 2012, rising to a peak of 11.7% in 2014, Oyu Tolgoi's first full year of production.
Issue date: Tuesday, May 25, 2010
A preliminary estimate from the Bank of Mongolia (BoM) shows real GDP growth of 7.6% y-o-y in Q110, confirming that the recovery is firmly on, and supporting our core view that the country would see a strong return to growth this year. The data follows on from 3.8% y-o-y growth in Q409, with the economy having contracted by 1.6% in 2009.
The industry, construction and services components of GDP all contributed positively to growth. Industry and construction contributed 3.8 percentage points (pps) to the headline figure, up from 3.5pps in Q409, and testifying to the improvement in manufacturing and mining activity that has taken place on the back of improved external demand for Mongolia's exports, particularly from China (which consumed 85.6% of Mongolian exports in the first four months of 2010). Meanwhile, services contributed 2.5pps, up from 2.0pps, supporting our view that legal, banking, real estate and other service sectors were likely to benefit on the back of a return in foreign investment (FDI) and increased export activity. To be sure, net FDI in Q409 totalled US$248.1mn, the biggest quarterly net inflow ever recorded in Mongolia.
The single biggest contributor to the uptick in real GDP, however, were net taxes on products, which contributed 3.7pps to growth. Although this was in a large part due to base effects (in Q109 net taxes on products detracted 5.1pps from growth), we also believe it is a further sign that Mongolia's recovery is firmly underway.
Growth Forecast On Track
As a result of the impressive Q1 number, we hold to our forecast for real GDP growth of 9.0% in 2010, driven by robust external demand for exports, strong foreign direct investment (including US$758mn for Oyu Tolgoi this year) and favourable base effects. Indeed, we note that exports are still showing strong growth, with goods exports rising by 53.1% y-o-y in April. While some of this is undoubtedly being driven by favourable base effects following a tough H109, we nevertheless highlight that export volumes are returning to pre-crisis levels (see chart below), which suggests that a fundamental recovery is underway. Although we believe that Chinese growth has peaked, and that monetary tightening going forward will see demand cool (see our online service, May 11, 'Inflation Up, Growth Down: Bearish Views Playing Out'), we nevertheless believe that Mongolia's low base should see export growth remain at a fairly healthy level through to the end of 2010.
The extent to which export demand is filtering through to the wider economy is emphasised by latest industrial production figures. Industrial production rose 11.0% y-o-y in April, up from 6.4% in March. Manufacturing grew particularly strongly, rising 31.1% y-o-y, although mining output growth fell to 2.2% y-o-y, following five consecutive months of double-digit expansion. Given the low base that Mongolian industry is starting from, we expect industrial output growth to remain volatile, though see it continuing to perform strongly through to end-year.
Winter Fallout Still A Risk
The main risk to Mongolian growth however, and one which we have long highlighted, is the fallout of the dire 2009-2010 winter (see our online service, February 24, 'Zud Unlikely To Derail Growth Story'). With agriculture accounting for over 22% of GDP, and providing employment for around one third of the population, we believe that the decimation of crops and livestock across large swathes of the country poses risks to Mongolian growth this year.
To be sure, the Q110 number showed agricultural output declining by a whopping 35.3% y-o-y, subtracting 2.5pps from headline growth, and we believe that agriculture is likely to remain a drag on economic activity through to 2011 at least.
Indeed, latest data from the National Statistical Office of Mongolia emphasise the extent of the damage. In the first four months of 2010, 18.5% of all animals in Mongolia died, compared to 2.0% in 2009 and 1.7% in 2008. This included 20.7% of all goats, 17.3% of sheep and 17.7% of cattle.
As we have previously highlighted, this poses huge risks to the banking sector, with many banks heavily exposed to rural communities (see our online service, April 28, 'Banking Sector: Winter Fallout To Keep Risks Elevated'). Indeed, many Mongolian banks have restructured large parts of their asset books towards farmers and herders in the past decade, with a recent World Bank Survey finding that 72% of herders have taken out loans with commercial banks in the past six years. This will keep asset quality and profitability weighed down, limiting the flow of credit to the domestic economy.
In addition, we have long highlighted the potential for interest rate hikes by the BoM, on the back of sharply rising inflation, which will increase borrowing costs for firms and households, further limiting loan growth. To be sure, with 18.5% of livestock killed, we see the potential for meat prices to spike higher, having grown by 19.0% y-o-y in March, up from 1.2% in January. This is turn saw food prices rise 9.3% in March, up from 3.3% in January, contributing to headline consumer price inflation of 7.7%.
2011: Double Dip Core Scenario
We believe that Mongolian growth will slow to 7.8% in 2011, mirroring our forecast for a cooling of Chinese economic activity next year on the back of monetary tightening by the People's Bank of China. That said, with strong capital inflows likely as investors increase their exposure to Mongolia's huge export potential, and the Chinese economy likely to pick up again in 2012, we remain extremely bullish on Mongolia's medium term growth potential. We forecast 8.8% real GDO growth in 2012, rising to a peak of 11.7% in 2014, Oyu Tolgoi's first full year of production.
Issue date: Tuesday, May 25, 2010
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