Interview with D. Gan-Ochir, Chief Economist of the Mongol Bank, Doctor of Economic Sciences (D.Sc.).
Last month, nearly 50% of China’s coking coal imports came from Mongolia
In the first quarter of 2023, the economic growth of Mongolia reached 7.9%. How long can this growth be sustained?
Economic growth reached 7.9% in the first quarter of 2023butslowed down to 5.9% in May. International banking and financial organizations report that unpredictable situations such as sudden recession and banking crises may occur in the global economy.
Inflation around the world is high.. Although it has been declining in recent months, it still remains above the target level. Therefore, most countries are implementing tight monetary policies to reduce inflation and central banks are keeping interest rates high. There is an assumption that high interest rates will affect economic activity and slow down economic growth worldwide.
The prospects for Mongolia’s economy are directly dependent on world market prices and demand for coal and copper, our country’s principal export commodities. The price of raw materials is determined by the world market. Mongolia exports more than 90% of its minerals to China. Therefore, China’s economic growth has a direct impact on the physical volume of exported products.
Mineral exports have direct impact on transportation, trade and services. Growth is also slowing down in non-mining sectors (agriculture, manufacturing, construction). So, it is highly unlikely that our economy will grow beyond the current 5.9%.
In the first five months of this year, the physical volume of coal exports reached 23 million tons. What are the chances of maintaining this level in the last half of the year?
It is unlikely that this amount of coal can be exported in the second half of this year. China has been steadily building up its coal reserves. Stockpiles fell to a low level in the post-Covid period when the borders were just opened. But there are reports that warehouses are now well stocked. Once stockpiles are built up, there is a risk that coal will not be purchased at previous levels. For example, China’s coal imports have been declining consistently in May-June. At the same time, China’s domestic coal production is increasing significantly. In addition, coal exports from countries such as Australia and Russia to China are also increasing.
On July 1, the Law on Mineral Commodity Exchange came into force. As far as I understand, according to this law, especially state-owned enterprises will have to sell a certain part of their coal (at least 30%) on the Exchange. In addition, compared to six months ago, the price of coal on the world market has almost halved, averaging $110-120 per ton. Therefore, if you ask for too high a price at the exchange, there is a risk that the buyer will not actively participate in exchange trading.
I think that due to these factors, the volume of coal exports in the second half of the year will not exceed the volume of exports in the first half of the year. Of course, the situation with coal transportation, border crossings and border railroad are improving. However, we do not expect significant changes in the near future with regard to the above problems. If the physical volume of coal exports does not reach the initial targets, it will, to some extent, have direct impact on economic growth and balance of payments.
What percentage of China’s coal consumption is provided by our country?
Our country is one of the leading exporters of coking coal to China. Our country exported 35.8 million tons of coal in 2018, 36.5 million tons in 2019, 28.6 million tons in 2020, 15.7 million tons in 2021 and 31.7 million tons in 2022. It is reported that nearly 50% of the coking coal imported into China in May this year came from Mongolia. If such a dynamic continues, our country will export 40-50 million tons of coal this year and maintain the leading position in the Chinese coking coal import market for three consecutive years. Our country’s coal exports by rail also increased by about 33% this year compared to May last year.
However, Australian coal exports to China have increased sharply this year due to the renewed relationship between Australia and China. China is expected to import up to 9 million tons of coal per year from Australia.
Everything has both positive and negative sides. What are the risks for our economy if coal exports do not reach the planned level?
Economic growth will be lower than expected. At the time of the 2023 budget amendment, with a fairly optimistic revenue forecast, there is a risk that revenues will not reach this level. When the 2023 budget is revised to $1.9 trillion, the budget deficit is not expected to exceed 2.6% of the originally approved GDP. Therefore, if there is a risk on the revenue side of the budget, the deficit will increase by this amount.
At the end of the first five months of the current year, the balance of payments surplus amounted to $500 million, and the total volume of foreign exchange reserves reached $3.8 billion. However, if the actual volume of coal exports is lower than initially estimated, it will have a negative impact on the balance of payments and foreign exchange reserves through export earnings.
The Prime Minister paid an official visit to China. During the visit, the two sides agreed, at the highest level,to connect the major export railroads of both countries What will be the outcome of the government agreements?
Positive effects related to coal transportation are expected in the long term. However, agreeing on the connection points and the actual connection of railroads is likely to bring more results in the medium term. On the other hand, if the physical volume of coal exports does not decrease due to good relations between the two countries, it will have a positive impact. If coal exports reach 45-50 million tons per year as a result of this visit, economic growth will be 5-6%, foreign exchange reserves will be maintained at current levels, and the MNT exchange rate will be stable.
What impact will the budget amendments have on monetary policy? Do you see risks as an economist?
Much depends on how strong the impact of the budget revision will be on imports and inflation through consumer spending. Before the budget revision, Mongol Bank expected inflation to be 8-9% at end of 2023. Depending on the budget amendments, this estimate will increase by at least two percentage points and the balance of payments is estimated to shrink by about $300 million. But for this year, economic growth is expected to increase by 0.5%. Inflation and its impact on the balance of payments may continue into next year. Therefore, easing of monetary policy from the current level is not feasible.
Perhaps the impact on inflation and the balance of payments will be smaller than assumed here, and if there are positive developments in foreign investment, exports and food supply, opportunity will arise for interest rate cuts.
It is a government policy to jointly take the necessary measures to attract investment
The government is going to submit a draft Law on Investment to the Parliament. What do you think will be the main changes?
I have not reviewed the project or shared my opinion. However, it would be very good if we learned from our previous mistakes, studied the positive experience of others and created favorable conditions for investors. The legal framework is only one factor of investment law. In addition, the overall business environment is important. There are many problems that hinder business development, such as bureaucracy, duplication of inspections, delayed time and costs, corruption, contract enforcement, solvency and infrastructure.
Moreover, Mongolia’s economic and social problems are not solved just by attracting investment, implementing large projects or providing low-interest loans.
Having an investment policy is good. However, we need a “comprehensive industrial policy” that includes foreign trade domestic tax, financing, restructuring , technology personnel, and other policies.
For example, when we address the issue of financing, other problems arise, such as transportation, logistics, border delays and obstacles on the other side of the border. The private sector talks about the lack of skilled labor to implement large projects in Mongolia.
If all these challenges are comprehensively tackled, it will become clear where state policy and support should be directed, and how public-private cooperation may be developed. Foreign and domestic investors will then be able to do business properly. Problems also need to be addressed comprehensively at all levels of the supply chain, from natural or agricultural raw materials to export earnings.
In our country, these policies have always been separate. Therefore, it is important to ensure coordination between government agencies and industrial sectors. The government’s policy is to work towards a common goal, consider the problem from all angles and jointly take the necessary measures to attract foreign investment to Mongolia.
It is also important to listen to the concerns of the private sector, talk about their problems, and discuss policies at the National Industry Council to see if there is need for supportive laws. That requires support of the political leadership from the Prime Minister and making “down to earth” decisions. We need to create the necessary system to ensure continuity of the process.
Thus, we need to solve our problems comprehensively. We can’t just pass a single law and then expect investments to come and economy to diversify.
The Oyu Tolgoi project started in 2009, but it was only this year, after 14 years, that underground mining began. The project has had many obstacles and difficulties in the past, but it is gradually moving in the right direction. Large projects with foreign investment have a positive impact on Mongolia. In terms of economic statistics, it will influence the emergence of positive trends over the coming years. But we should check again and again for further opportunities to reap more benefits.
Can you elaborate more on the benefits?
The Oyu Tolgoi project raised more than $12 billion from global financial institutions for investing in Mongolia. The investors will also begin paying off its debts, exporting copper and gold, and building up foreign exchange reserves. A certain percentage of foreign currency will remain in Mongolia for salaries, services and procurement, and another percentage will go to repay loans. Statistics show positive growth in our country’s gross domestic product (GDP), but the difference between GDP and gross national income (GNI), or the income left for Mongolians, will grow. GNI is the real income of the Mongolian people. GDP is the production that takes place in Mongolia.
Mongolia’s export revenue will also increase. But even if the revenue is $5 billion, all that will not come to Mongolia. The money coming to Mongolia will be spent on employee salaries, spare parts for equipment, other purchases, investments in railroads or other construction projects. The rest will go to repay previous debts. Not only the investor, but also the state will get its share of future dividends. Therefore, special attention should be paid to how to absorb this economic growth into other projects, industries and future Mongolian income. A system of wealth management and income redistribution should be established.
With the realization of a large project like Oyu Tolgoi, economic growth will increase. Emphasis needs to be placed on channeling this into other sectors and increasing household incomes. When the Oyu Tolgoi underground mine starts operating at full capacity in 2027, it will have a greater impact on the economy, which means that the gap between GDP and GNI will start to widen at that time. So the idea is to focus on creating jobs, increasing productivity and building demand to ensure all Mongolian households benefit from economic growth, and increase their income.
What benefits should Mongolia get from these major projects?
International organizations recommend that the revenues generated by the mining sector should be used for two main purposes. First, capacity building of people. We need Mongolians to master global technologies and become able to contribute. The revenues from natural resources must be properly distributed to raise healthy citizens with high potential. In this way, the foundation will be created to attract foreign investors, conclude trade agreements with foreign countries, and adopt the world’s best practices and technologies in Mongolia.
Second, there is need to spend that revenue on strengthening and building institutional capacity. There is a lot of talk about rampant corruption and people thinking of working outside the law rather than enforcing it. This situation needs to be remedied and a system with proper monitoring mechanisms must be put in place to ensure that good practices are followed. Citizens should have skills and capacities, and the system should be right.
Thus, when skilled people turn natural resources into capital and quality institutions, product diversification occurs and basic conditions are created for the development of non-extractive industries, including advanced processing, high-tech and productive industries. Combined with foreign direct investment, this can lead to export and economic diversification and more sustainable and inclusive economic growth. This is well illustrated by the example of many countries whose development is based on the use of natural resources.
The Mongolian government should have a long-term memory
Politicians and economists assess the mistakes and achievements of the last 30 years. Do you think that the government has realistically assessed the situation, defined a development policy and is beginning to take bold steps to ensure economic growth?
Talking is one thing, it is more important to act. Over the last 30 years, including the last 15 years, we have made many mistakes. The point is not to repeat them. The Mongolian government must have a long-term memory. Memory is not only documents to be archived, but also what political mistakes were made, how to avoid repeating them and how to develop further based on the achievements.
When economy grows, the government increases its spending and wages which keeps inflation high for a long time. On the other hand, trying to solve all problems with low-interest loans adds economic costs.
These expenses, in turn, affect the livelihoods of the population, increase income inequality, create a gap between rich and poor, and lead to social unrest. There are lessons learned during 30 years of the market economy. In some cases, there are fears that the mistake of “falling into the same hole again and again” will be repeated. Therefore, it is necessary to correct mistakes and strengthen the work that produces good results. In addition, issues such as establishing justice, eradicating corruption, and protecting the interests of foreign investors should be further strengthened. These are the basic principles to be followed by countries that have chosen the market system.