Macro economic outlook

2016

Ankhbayar Chuluunbat

Senior economist

Mandal General Insurance

Nov 11, 2015

Fiscal

policy External

environment

Monetary

policy

1

Banking

sector

China’s

economy

Commodity

price

Current

balance

Shortfall of

budget income

Fiscal deficit

Currency

required

Foreign currency

reserve

Growth of the

assets and

liabilities

Profitability

NPL

Deficit of

Balance of

payment

Default risk Fiscal deficit FX Risk

Тулгамдаж буй асуудал

FDI

Industries

Intervention

Growth sectors

Economic

Growth

Structural

risk

Composition

/ Structure

Key challenges

Money

Supply

BALANCE OF PAYMENT

DEFICIT

6.9%

6.1%

6.7%

5.5%

6.5%

7.5%

8.5%

9.5%

10.5%

11.5%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* 2016* 2017*

IMF WB EIU UN

Outlook of the China’s economy

Эх сурвалж: http://knoema.com

China’s economy growth is slowing down for sure.

2

Commidity price

Source: Bloomberg

35

55

75

95

115

135

155

175

195

215

Australian Coal Price ($/tn)

5217.3

2000

3000

4000

5000

6000

7000

8000

9000

10000

11000 LME Copper Price ($/tn)

1124.8

350

550

750

950

1150

1350

1550

1750

1950 Gold Price ($/oz)

56.4 50

70

90

110

130

150

170

190

210Iron Ore price ($/tn)

3

Where will this fall stop?

𝑆𝑡 = 𝑆0 + 𝑣 ∙ 𝑡 − 𝐷𝑖𝑠𝑡𝑎𝑛𝑐𝑒

𝑣 =𝑣 + 𝑣0

2− Average speed

𝑎 =𝑣 − 𝑣0

𝑡− Acceleration

𝑆𝑡 = 𝑆0 + 𝑣 ∙ 𝑡 −𝑎 ∙ 𝑡2

2− Distance

Physics formula

4

Stabilization of deterministic equation

∆2𝑆𝑡 = 𝜆 ∙ Δ𝑆𝑡−1

Speed and acceleration

𝑡∗ =1

𝜆+

1

𝜆2−2𝑣

𝜆𝑎

𝑣 = Δ𝑆𝑡

𝑎 = Δ2𝑆𝑡

Solution

5

Fall of the commodity price and

period

Commodity 𝒗 𝒂 𝝀 𝒕∗ Fall continues until

Coal 1.986 0.025 -0.74 13 2016M10

Copper 125.1 1.474 -0.78 13 2016M10

Gold 22.52 0.200 -1.14 13 2016M10

Iron Ore 11.51 0.122 -0.86 14 2016M11

Oil 1.41 0.015 -0.54 16 2017M01

6

From the calculation based on dynamic method, the fall of the commodity price shall

continue through Oct 2016.

Coal export has lost its leading position and copper took over. Coal and copper

combined contributes 61.5% of total export.

7

Эх сурвалж: Үндэсний статистикийн хороо

Export composition

0

500

1,000

1,500

2,000

2,500

0

500

1,000

1,500

2,000

2,500

3,000

Export of mineral commodities /YTD, in Million USD/

Мөнгөжөөгүй алт

Зэс

Төмрийн хүдэр

Боловсруулаагүй газрын тос

Нүүрс

Gold

Copper

Iron Ore

Raw oil

Coal

9.02%

49.21%

0.69%

1.27%

5.60% 2.24%

3.73%

0.94% 12.25%

8.08%

Мөнгөжөөгүй алт

Зэс

Молибдений хүдэр ба баяжмал

Жоншны хүдэр ба баяжмал

Төмрийн хүдэр

Цайрын хүдэр ба баяжмал

Бохир ноолуур

Самнасан ноолуур

Нүүрс

Боловсруулаагүй газрын тос

Gold

Copper

Molibdenium

Flour Spar

Iron Ore

Zinc

Cashmere,

Cashmere, washed

Coal

Oil

Source: National Statistical Office

Equipment imports has dropped back to its 2010 level, fuel import to 2011 level,

and car import to 2010 level. However they still make the most part (55.7%) of

the imports. 8

Source: National Statistical Office

Import Composition

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Нийт импорт /жилийн өссөн дүн, сая ам.доллар/

Машин, механик төхөөрөмж

Түлш, шатахуун

Тээврийн хэрэгсэл, эд анги

Төмөрлөгөөр хийсэн бүтээгдэхүүн

Хүнсний бэлэн бүтээгдэхүүн

Химийн бүтээгдэхүүн

Хуванцар, каучук

Чулуу, гөлтгөнө, цемент, шилэн сав

Ургамлын гаралтай бүтээгдэхүүн

Мал амьтны гаралтай бүтээгдэхүүн

19.5%

26.4%

9.8%

9.5%

8.6%

7.0%

3.9% 2.9%

2.0% 1.1%

Машин, механик төхөөрөмж

Түлш, шатахуун

Тээврийн хэрэгсэл, эд анги

Төмөрлөгөөр хийсэн бүтээгдэхүүн

Хүнсний бэлэн бүтээгдэхүүн

Химийн бүтээгдэхүүн

Хуванцар, каучук

Чулуу, гөлтгөнө, цемент, шилэн сав

Ургамлын гаралтай бүтээгдэхүүн

Мал амьтны гаралтай бүтээгдэхүүн

Equipments, heavy

Fuel

Cars

Metal products

Food

Chemical goods

Plastic goods

Stone, cement, glass

Natural products

Animal goods

Equipments &

machineries

Fuel

Cars

Metal products

Food

Chemical goods

Plastic goods

Stone, cement,

glass

Natural products

Animal goods

Equations of current account prediction

Export equation

Δ𝑒𝑡𝑥 = 0.1 − 1.82 ∙ 𝑒𝑡−1

𝑥 + 0.33 ∙ Δ𝑒𝑡−1𝑥 + 0.4 ∙ 𝑢𝑡−12

(3.4) (-13.5) (4.02) (5.03)

𝑛 = 138, 𝑅2= 0.74

Δ𝑖𝑡𝑚 = 0.05 − 1.45 ∙ 𝑖𝑡−1

𝑚 + 0.18 ∙ Δ𝑖𝑡−1𝑚 + 0.44 ∙ 𝑢𝑡−12

(2.0) (-10.8) (2.18) (5.64)

𝑛 = 138, 𝑅2= 0.67

9

Import equation

Gold export equation

Δ𝑔𝑡𝑑 = 20.94 − 0.88 ∙ 𝑔𝑡−1

𝑑 + 0.19 ∙ 𝑢𝑡−12

(6.38) (-10.31) (2.2)

𝑛 = 140, 𝑅2 = 0.44

Services equation

∆2𝑠𝑡𝑒 = −1.43∆𝑠𝑡−1

𝑒 − 0.40 ∙ 𝑠𝑡−6𝑒

(-9.18) (-2.51)

𝑛 = 37, 𝑅2 = 0.75

Net Income

∆𝑖𝑡𝑛 = 39.98 − 0.47𝑖𝑡−1

𝑛 + 0.88 ∙ 𝑢𝑡−12

(3.40) (-3.66) (29.34)

𝑛 = 44, 𝑅2 = 0.75

Equation of Current payment

∆𝑐𝑡𝑇 = 11.24 − 0.84𝑐𝑡−1

𝑇 − 0.87 ∙ 𝑢𝑡−12

(5.55) (-5.84) (-36.44) 𝑛 = 44, 𝑅2 = 0.57

10

Month Export Import Gold Services Net income Transfers Current

account

balance

2015M10 3859.4 3165.0 326.6 -624.3 -1051.6 148.4 -519.3

2015M11 4169.4 3450.9 350.1 -658.3 -1134.7 166.2 -570.8

2015M12 4494.8 3754.0 382.5 -690.6 -1245.2 184.2 -640.9

2016M01 325.3 273.0 26.4 -40.2 -79.7 20.4 -26.7

2016M02 609.8 529.6 57.0 -97.3 -167.0 33.3 -105.6

2016M03 911.2 787.0 75.9 -141.6 -274.0 51.0 -177.1 2016M04 1243.4 1076.0 102.9 -196.5 -359.5 61.3 -237.1

2016M05 1598.8 1399.1 123.3 -243.7 -456.0 62.5 -326.8

2016M06 1984.9 1718.6 148.2 -291.5 -568.7 68.2 -390.3

2016M07 2380.8 2031.1 171.2 -336.2 -681.6 84.3 -425.3

2016M08 2768.7 2336.6 204.5 -374.2 -771.4 87.6 -434.0

2016M09 3179.7 2644.7 229.3 -417.2 -851.1 102.6 -414.1

2016M10 3614.8 2953.3 253.3 -456.0 -933.4 116.3 -371.1

2016M11 4067.6 3261.4 277.1 -497.9 -1016.9 129.6 -314.5

2016M12 4549.8 3569.5 301.0 -539.5 -1101.1 143.0 -229.1

Projection of the current account balance

The condition of the Current account balance is improving.

In mln USD

Equations of the Foreign Direct Investment

11

Pessimistic case scenario

𝐹𝐷𝐼

𝐺𝐷𝑃 𝑡= 0.04 − 1.35𝑑1 + 1.56𝑑2 + 0.003 + 0.055𝑑1 − 0.039𝑑2 ∙ 𝑡

(4.4) (-10.5) (24.7) (4.6) (11.82) (-21.8)

𝑛 = 47, 𝑅2= 0.969

Realistic case scenario

𝐹𝐷𝐼

𝐺𝐷𝑃 𝑡= 0.04 − 1.35𝑑1 + 1.59𝑑3 + 0.003 + 0.055𝑑1 − 0.04𝑑3 ∙ 𝑡

(4.6) (-10.3) (23.9) (4.3) (11.7) (-20.9)

𝑛 = 47, 𝑅2= 0.968 Optimistic case scenario

𝐹𝐷𝐼

𝐺𝐷𝑃 𝑡= 0.05 − 1.36𝑑1 + 1.61𝑑4 + 0.002 + 0.055𝑑1 − 0.04𝑑4 ∙ 𝑡

(4.8) (-9.9) (22.7) (3.87) (11.36) (-19.7)

𝑛 = 47, 𝑅2= 0.966

Projections of the Foreign Direct Investment

Date Pessimisti

c Realistic Optimistic

Pessimistic

/abs/

Realistic

/abs/

Optimistic

/abs/

2015M12 -1.5% 0.8% 2.6% -181.6 99.3 310.9

2016M03 -1.9% 1.2% 3.6% -228.2 138.7 424.4

2016M06 -1.8% 2.1% 4.8% -218.5 244.8 570.8

2016M09 -1.7% 2.7% 5.8% -201.3 319.2 686.6

2016M12 -1.6% 3.7% 7.1% -190.7 441.3 850.5

In million USD

12

Pessimistic case scenario: There is no new investments but the current downward inertia will

continue and FDI will reach -190.7 million USD.

Realistic case scenario: Certain investments, such as Eg River Hydro power plant, will push the

investment up to 441.3 million USD.

Optimistic case scenario: First deployment of OT 2nd phase and Tavan tolgoi investment will

boost the investment to 850.5 million USD.

FISCAL DEFICIT

Source: Ministry of finance

As of Sep 2015, stabilized budget income fell short by 787.9 billion MNT and therefore budget

was at 865 billion MNT deficit. Major factor influenced was VAT of imported goods – 263.4 billion

MNT, privatization income – 141.5 billion MNT.

Shortfall of Fiscal income

-1,075.7

-886.3 -865.0

-1,200

-1,000

-800

-600

-400

-200

0

200

400 Төсвийн алдагдал, тэрбум төгрөг Fiscal deficit, Billion MNT

13

Source: Ministry of Finance

14

Total debt reached 216.7% of the country’s GDP. Out of this, state debts accounts for 61.4% and other

debts for 155.3%. Debt per capita is 16 million MNT and debt servicing per head per day is 45’345

MNT.

In 2016 government is to pay some 857 billion MNT for debt repayment.

Government debt /billion MNT/ 2015M03

Government foreign debt

10191.9 - Foreign loan

- Securities

- Guarantees

Domestic debt 3720.6

- Government securities

State debt 13912.5

GDP (Nominal, billion MNT) 22672.4

State debt / GDP 61.4%

Total Debt

Other debts /million USD/ 2015M06

Central bank 1851.3

Banks 2099.8

Other industries 3458.4

Private companies 10521.6

Total 17931.1

GDP (Nominal, Million USD) 11546.6

Other debts / GDP 155.3%

Source: Mongolbank

15

In 2015, we will pay some 233 million USD for interest payment.

Foreign currency stock required for debt servicing

Borrowings Currency Amount

/ in mln USD /

Interest Interest payment

/ in mln USD /

Development

bank bond USD 580 5.75% 33.35

MMC bond USD 600 8.875% 53.25

TDB 2017 Yuan 115 10% 11.5

TDB 2020 USD 500 9.375 46.875

Chingis 2018 USD 500 4.125% 20.625

Chingis 2022 Usd 1000 5.125% 51.25

Samurai 2023 JPY 290 1.52% 4.408

Mongol 2018 USD 160 7.5% 12

16

Equations of the budget forecasting

Equation of fiscal income projection

∆2𝑖𝑡𝑏 = 10.3 − 3.40∆𝑖𝑡−1

𝑏 + 1.68∆2𝑖𝑡−1𝑏 + 1.03∆2𝑖𝑡−2

𝑏 + 0.55∆2𝑖𝑡−3𝑏 + 0.16∆2𝑖𝑡−4

𝑏 (1.72) (-10.09) (5.76) (4.65) (3.96) (2.60)

−0.38∆2𝑖𝑡−11𝑏 + 0.24𝑢𝑡−1

(-10.88) (2.39) 𝑛 = 128, 𝑅2= 0.926

Equation of fiscal expense projection

∆2𝑐𝑡𝑏 = 39.77 − 9.20∆𝑐𝑡−1

𝑏 + 7.24∆2𝑐𝑡−1𝑏 + 6.39∆2𝑐𝑡−2

𝑏 + 5.57∆2𝑐𝑡−3𝑏 + 4.73∆2𝑐𝑡−4

𝑏 (4.32) (-9.67) (7.83) (7.28) (6.81) (6.38)

+3.96∆2𝑐𝑡−5𝑏 + 3.37∆2𝑐𝑡−6

𝑏 + 2.79∆2𝑐𝑡−7𝑏 + 2.14∆2𝑐𝑡−8

𝑏 + 1.46∆2𝑐𝑡−9𝑏 + 0.80∆2𝑐𝑡−10

𝑏 (6.18) (6.51) (7.02) (7.50) (8.21) (9.88)

𝑛 = 128, 𝑅2= 0.934

17

Projection of budget income and expenditures

Date Income Expenditure Balance

2015M10 4,555.68 5,472.07 -916.39

2015M11 4,989.87 5,996.29 -1,006.42

2015M12 5,781.43 7,125.83 -1,344.40

2016M01 357.02 348.89 8.13

2016M02 769.82 782.64 -12.81

2016M03 1,301.06 1,226.59 74.48

2016M04 1,753.30 1,718.22 35.08

2016M05 2,205.10 2,200.70 4.41

2016M06 2,767.12 2,927.63 -160.51

2016M07 3,251.93 3,477.49 -225.56

2016M08 3,706.48 3,959.45 -252.97

2016M09 4,194.40 4,495.02 -300.62

2016M10 4,792.86 5,080.84 -287.99

2016M11 5,057.47 5,610.72 -553.25

2016M12 5,848.17 6,778.39 -930.23

Billion MNT

Looking at the historical performance, budget deficit is likely to stay around

4 percent of the GDP.

FX RISK

As of August 2015, total loan has exceeded money supply by 2 billion MNT. An excessive lending has

eroded external net assets.

Source: Mongolbank

Money supply and Loan

18

-3742

14777

-5000

0

5000

10000

15000

20000 Гадаад цэвэр актив /тэрбум. төг/

Дотоод цэвэр зээл /тэрбум. төг/

External net assets /bln MNT/

Domestic net assets /bln MNT/

9938.6

11938.5

200

2200

4200

6200

8200

10200

12200

14200 Мөнгөний нийлүүлэлт /тэрбум төгрөг/

Нийт зээл /тэрбум төг/

Money Supply /bln MNT/

Total Loan /bln MNT/

Foreign exchange reserve, as of Sep 2015, is at 1.4 billion USD. Fluctuation of the Reserve money

is remained high.

Source: Mongolbank

Foreign exchange reserve and reserve money

1413

250

750

1250

1750

2250

2750

3250

3750

4250

4750 Foreign exchange reserve /million USD/

2410

0

500

1000

1500

2000

2500

3000

3500

4000Reserve money

/Billion MNT/

19

20

Central bank’s intervention to the local currency market

0

4

8

12

16

20

24

0 20 40 60 80 100 120 140

Series: USD_SUP

Sample 1 56

Observations 56

Mean 15.89018

Median 11.45000

Maximum 140.0000

Minimum 1.000000

Std. Dev. 20.19931

Skewness 4.573324

Kurtosis 27.26309

Jarque-Bera 1568.837

Probability 0.000000

0

1

2

3

4

5

6

7

8

10 20 30 40 50 60 70 80 90 100 110 120

Series: CNY_SUP

Sample 1 56

Observations 55

Mean 50.81582

Median 48.00000

Maximum 123.9000

Minimum 6.000000

Std. Dev. 24.38581

Skewness 0.870978

Kurtosis 3.985178

Jarque-Bera 9.178096

Probability 0.010163

So far this year, central bank has spent 869.4 million USD and 2.5 billion Yuan in intervention.

21

Equations of exchange rate

𝐵𝑂𝑃𝑡 = 𝐶𝐴𝐷𝑡 + 𝐶𝐹𝐴𝑡 + 𝑁𝐸0

EQUATION OF BALANCE OF THE PAYMENT

EQUATION OF ASSETS AND FINANCE

𝐶𝐹𝐴𝑡 = 𝐶𝐴0 + 𝐹𝐷𝐼𝑡 + 𝐹𝐴0 + 𝑂𝐼𝑡

EQUATION OF OTHER INVESTMENTS IN THE BALANCE OF PAYMENT

𝑂𝐼𝑡 = 𝑂𝐼0 + 𝜆 ∙ 𝐵𝐷𝑡

EQUATION OF THE SUPPLY AND DEMAND BALANCE OF THE CURRENCY

𝜀𝑡 = 𝛾 ∙𝐵𝑑 − 𝐵𝑠𝐺𝐷𝑃 𝑡

= 𝛾 ∙𝐵𝑂𝑃𝑡𝐺𝐷𝑃𝑡

EQUATION OF THE REAL CHANGE OF THE RATE

𝜀𝑡 = 𝜋 − 𝑒 − 𝜋𝑓

𝑀𝑡𝑣0 = 𝑃𝑡𝐺𝐷𝑃𝑡

EQUATION OF MONEY STOCK THEORY

EQUATION TO FORECAST THE EXCHANGE RATE

By combining the above mentioned equation, we can now build an equation of exchange

rate.

𝑒𝑡 = 0.22 + 0.42𝑒𝑡−1 − 0.43𝑀

𝐺𝐷𝑃 𝑡+ 0.69𝐸𝑡

𝐵𝐷𝑡+1𝐺𝐷𝑃𝑡+1

− 0.29𝐹𝐷𝐼

𝐺𝐷𝑃 𝑡− 0.81

𝐶𝐴𝐷

𝐺𝐷𝑃𝑡

− 0.6𝑦𝑡

(2.86) (3.13) (-2.07) (2.34) (-1.8) (-4.13) (-2.24)

𝑛 = 46, 𝑅2 = 0.75

∆2𝑀

𝐺𝐷𝑃 𝑡= 0.003 − 0.98

𝑀

𝐺𝐷𝑃 𝑡−1− 0.72𝑢𝑡−3

(2.26) (-6.11) (-2.07)

𝑛 = 45, 𝑅2 = 0.61

22

FX forecast

Assuming that economic would keep up its current pace of 3%, and Fiscal deficit is managed within 4% of

the GDP, then currency rate is forecasted as follows.

1997 1994

2017

1983

2011

1977

1997

1981

1999

1961

1986

1934

1997

1971

1985

1945

1968

1905 1900

1920

1940

1960

1980

2000

2020

2040

2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4

Гутранги Нейтрал Өөдрөг Pessimistic Neautral Optimistic

US dollar exchange rate us forecasted to be at 1977 if the FDI stays at today’s

level, at 1934 if the FDI increases by 441 million USD, at 1905 of the FDI

increases by 850 million USD annually. 23

DEFAULT RISK

Growth of assets and liability of banking sector

Growth of the loan portfolio has been decelerated and went below the growth of its

funding. One can observe that correction is done over 6-10 months time period

until its finally ready to grow again. 24

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%Банкны салбарын активын өсөлт

Банкны салбарын зээлийн өсөлт

Банкны салбарын харилцах, хадгаламжийн өсөлт

Growth of the total assets of the banking sector

Growth of loan portfolio

Growth of Current account and deposits

Margin

Source: Mongolbank

25

Profits of the banking industry fell back to 2013 level.

-143.4

358.9

206.0

-180

-80

20

120

220

320

420

200

4M

03

200

4M

07

200

4M

11

200

5M

03

200

5M

07

200

5M

11

200

6M

03

200

6M

07

200

6M

11

200

7M

03

200

7M

07

200

7M

11

200

8M

03

200

8M

07

200

8M

11

200

9M

03

200

9M

07

200

9M

11

201

0M

03

201

0M

07

201

0M

11

201

1M

03

201

1M

07

201

1M

11

201

2M

03

201

2M

07

201

2M

11

201

3M

03

201

3M

07

201

3M

11

201

4M

03

201

4M

07

201

4M

11

201

5M

03

201

5M

07

Банкны салбарын тухайн оны ашиг, алдагдал, тэрбум төгрөгөөр Net profit after tax, in billion MNT

Non performing loan(NPL) grew 41.7 percent for the first 9 months, y-o-y. The

NPL ratio is increased to 7% as lending is reduced.

Source: Mongolbank

Non-performing loan

7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%NPL rate of banking sector

87

189

266

353

462

317

453

590

747

837

0

100

200

300

400

500

600

700

800

900

1,000

Amount of the NPLs /in billion MNts/

26

Non-performing loan by industries

Source: Mongolbank, as of 2nd quarter of 2015

Industries Total Loan Non-Performing

loan NPL Ratio

Mining 1,113.38 261.6 23.5%

Manufacturing 1,289.46 96.18 7.5%

Construction 1,593.02 86.64 5.4%

Trade 1625.01 200.17 12.3%

Agreculture 355.26 16.44 4.6%

Transportation, Warehouse 154.67 22.1 14.3%

Housing and food 226.58 17.79 7.9%

Mining industry is classified as Toxic, Trade industry as Severe, transportation

and warehouse industry as Severe.

27

Equation of the NPL forecasting

𝑁𝑃𝐿𝑡 = 0.008 + 1.014 ∙ 𝑁𝑃𝐿𝑡−1 + 0.033 ∙𝐶𝐴𝐷

𝐺𝐷𝑃𝑡

− 0.029 ∙ 𝑚𝑡 + 0.061 ∙ 𝑒𝑡

(1.90) (26.48) (2.93) (-3.13) (3.49)

𝑛 = 46, 𝑅2 = 0.94

7.0%

8.0%

9.0%

9.9%

10.7%

11.5%

6%

7%

8%

9%

10%

11%

12%

2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4

Зээлийн чанаргүйдлийн хувь NPL Ratio

28

NPL is set grow further and hit 11.5% by the end of 2016.

STRUCTURAL RISKS

(INDUSTRY)

14.2%

16.8%

6.8%

20.0%

11.2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Хөдөө аж ахуй Уул уурхай

Аж үйлдвэр Тээвэр харилцаа холбоо

Худалдаа Үйлчилгээ

Барилга, үл хөдлөх хөрөнгө

Agreculture

Manufacturing

Trade

Consruction, real estate

Mining

Transportation and telecom

Services

Industrial composition

Our economy is has been closely tied with certain industries, such as Agreculture, Mining

and Services, and those industries were dependent on natural and global market risks.

29

Economic growth

Economy growth is not being preserved.

Эх сурвалж: Үндэсний статистикийн газар

-3.2%

-9.3%

-3.2%

2.1%

6.4%

2.2% 3.9% 3.1%

1.1% 3.0%

4.7%

7.0%

10.6%

7.3% 8.6%

10.2% 8.9%

-1.3%

6.4%

17.5%

12.4%

7.8%

3.0%

-15%

-10%

-5%

0%

5%

10%

15%

20% Mongolian economy

30

GDP growth projection equation

EQUATION OF GROSS DEMAND

𝐺𝐷𝑃𝑡 = 𝐶𝑡 + 𝐼𝑡 + 𝐺𝑡 + 𝑁𝑋𝑡

EQUATION OF MONEY DEMAND

𝑀

𝑃 𝑡= 𝑘 ∙ 𝐺𝐷𝑃𝑡 − ℎ ∙ 𝑟𝑡

EQUATION OF CONSUMPTION

𝐶𝑡 = 𝐶0 + 𝑐1 𝐺𝐷𝑃𝑡 − 𝑇𝑡 − 𝑐2𝑟𝑡

EQUATION OF REAL PRICE CHANGE

𝜀𝑡 = 𝜋 − 𝑒 − 𝜋𝑓

EQUATION OF DEMAND AND SUPLY

𝜋𝑡 = 𝛾 𝐺𝐷𝑃𝑡 − 𝐺𝐷𝑃0

31

GDP Growth projection

𝑦𝑡 = 0.07 + 0.46 ∙ 𝑦𝑡−1 −0.22 ∙ 𝑟𝑡 −0.14 ∙𝑁𝑋

𝐺𝐷𝑃 𝑡+0.06 ∙ 𝑚𝑡 − 0.12 ∙ 𝑒𝑡

(2.69) (4.58) (-2.28) (-2.67) (2.12) (-2.22)

𝑛 = 46, 𝑅2 = 0.75

3.4%

3.6%

3.8%

3.6% 3.6%

3.8%

4.0%

4.3%

4.1% 4.1% 4.0%

4.3%

4.6%

4.4% 4.4%

3.3%

3.5%

3.7%

3.9%

4.1%

4.3%

4.5%

4.7%

2015Q4 2016Q1 2016Q2 2016Q3 2016Q4

Гутранги Нейтрал Өөдрөг

32

There are many challenges to our economy. Most of them were caused by decreased FDI, acute

budget deficit, dollarization, rise of non-performing loan, and slowdown of economy overall.

China’s economy is showing no sign of acceleration, therefore the mining commodity prices have a

very thin hope for recovery. Mathematical calculation shows that the downward trend of their price

will continue for another 10 months.

On the other hand, current account is projected positively, and surplus of the trade balance shall

stay around 6.5% of the GDP. Other corrections of twin deficit crisis should continue as well.

In the likely environment of the budget deficit under 4% of the GDP and GDP growth of no less than

3%, the inflow of foreign direct investment equal to 3.7% (or 7.1%) will push the currency rate down

by 20-40 tugriks (or by 60-90 tugriks).

If the non-performing loan problem gets out of the hand, 11.5 percent of all loan might be at risk. If

NPL ratios goes beyond 14.2%, the capital of the entire banking sector will become inadequate.

Structural risks, improper industrial composition and vulnerability due to over dependence is making

our economy unstable and exposed to short-term shocks.

Economic growth for the next year is predicted to be around 3.6% to 4.4%.

Conclusion

33

THANK YOU FOR YOUR ATTENTION

34