Economic Woes To Force Government's Hand On OT
BMI View: The latest stream of incoming data suggests that Mongolia's economy is on course for a rude awakening in H113. Against this backdrop, a prolonged halt to operations at the Oyu Tolgoi (OT) development would risk tipping the country into recession, such is the importance of the project in driving economic activity. With this in mind, we continue to expect the government to take a more conciliatory view towards foreign miners, most likely once presidential elections in June are out of the way.
The latest stream of incoming data suggests that Mongolia's economy is on course for a rude awakening in H113. Firstly, foreign trade has collapsed. Using three month moving averages to smooth out volatility, monthly exports and imports registered year-on-year (y-o-y) contractions of 11.7% and 15.0%, respectively, in February 2013. The last instance we saw such weak numbers in the external accounts was in 2009, when real GDP fell by 1.3% over the course of the year. Secondly, monetary aggregates are weak. Narrow (M1) money supply growth is back in the red, while the broader M2 metric is expanding at its slowest pace in around three years. Given these numbers, our decision to put out a conservative 2013 real GDP growth projection of 11.0% in January appears timely (the IMF and World Bank are forecasting 16.8% and 16.2%, respectively). Still, there does appear scope for a further downgrade to our outlook should data continue to disappoint.
|A Rude Awakening|
|Mongolia - Exports, Imports & Money Supply|
Against this backdrop, a prolonged halt to operations at the Oyu Tolgoi (OT) development - one of the world's largest untapped copper and gold reserves - would risk tipping the country into recession. The OT asset is expected to start generating commercial production this year, which will be a game changer for economic output, providing that current wrangling between the government and foreign miners does not lead to prolonged delays. Our view that the stalemate over the government's threats to renegotiate contractual terms would prove temporary has been tested of late ( see 'The Government Vs Rio Tinto: Investor Q&A', February 4 2013). Still, with the economy already suffering, we continue to see the authorities adopting a more pragmatic tone, most likely once June's presidential elections are out of the way.