Mongolia’s Economic Outlook: Recovery and Resilience

Asia House conducted research involving an overview of Mongolia’s economic outlook and an in-depth analysis of Mongolia’s reform programme. Produced by the Asia House Research and Advisory team, Asia House also conducted an assessment of Mongolia’s trade and investment relationships, along with outlining the key risks. This research was undertaken with the generous support of the Government of Mongolia.

Key Messages on Mongolia’s Outlook:

• Mongolia’s economy has fared well and is likely to show continued resilience in 2023 and beyond.
• The government’s new revival package of reforms aims to build an ecosystem of change to facilitate Vision 2050.
• With trade at approximately 120 per cent of its GDP, Mongolia’s economy benefits from global growth, but is vulnerable to external shocks.
•  Mongolia’s mineral sector is large in relation to the size of its overall economy suggesting a multiplier effect from commodity price shocks.
•  Mongolia’s growth diversification will be supported by increased participation in
  regional and global supply chains.

Key Messages on Mongolia’s New Recovery Policy:

• Connecting land ports via roads and railways to boost economic clustering and trade diversification will be key to growth.
• Energy recovery will help transition heat and electricity sources, through renewable energy and cost-effective storage and distribution systems.
• Industrial recovery aims to leverage innovation and digital technology for higher value-added exports; supply chain participation is key.
• Urban and rural recovery will be linked to mitigating Ulaanbaatar’s high population density through satellite cities and free economic zones.
• Green development is urgent in light of Mongolia’s pronounced vulnerability to climate change and the energy intensity of its production.
• Recovery of public sector efficiency is aimed at increasing the efficiency and capacity-building of the state, including state-owned enterprises.

This report was presented at the Mongolia Economic Forum in Ulaanbaatar on 9 July.

Download the full report here.

Executive Summary

Mongolia’s economy has fared well since the COVID-19 pandemic ended, and it is likely to show continued resilience in growth in 2023 and beyond. The benefits of the government’s New Recovery Policy, designed to support Mongolia following the pandemic, are starting to feed into and catalyse the recovery.

The policy’s six pillars also look to build an ecosystem of change to facilitate Vision 2050 – a long-term plan to turn Mongolia into a leading Asian country in terms of its social development, economic growth, and its citizens’ quality of life. The overarching goal is to double the country’s GDP.

The bedrock for this paradigm shift will be the large share of Mongolia’s economy that comes from trade (approximately 120 per cent of GDP), the country’s geographical position, and the new trading relationships that it forms in the next few years. In particular, the degree to which Mongolia diversifies its cross-border trade – above and beyond its close, resource-driven relationship with China and others – will be essential.

Its sector-diversification push is already starting to take hold. Mongolia’s further diversification of its trade relationships should align with its domestic diversification in production and employment. Boosting agriculture, textile manufacturing, and enhancing the depth, breadth, and scale of the digital economy with applications to industrial technology will help elevate Mongolia’s long-term productivity, innovation, and higher value-added production. It can then lever its trading relationships, particularly through global supply chains.

In the meantime, dependence on demand for its resources, particularly from China, constitutes both a benefit and a vulnerability for Mongolia as underlined in the data. Mongolia’s mineral products constitute approximately 81 per cent of total exports, 90 per cent of which are exported to China. A more diversified economy will catalyse higher productivity and lead to higher income levels for the economy.

The government’s prioritisation of energy distribution systems will help spur Mongolia’s energy transition in multiple sectors, engage multiple stakeholders, and bring the economy closer to meeting its climate commitments of reducing greenhouse gas emissions. Mongolia’s mitigation target of a national 22.7 per cent reduction in such emissions by 2030 will be a significant challenge given that 8 per cent of its energy needs come from coal production.

Mongolia’s contribution to regional and global supply chains is also growing and will continue to be essential to the quality of its export growth. Agriculture – where growth has reached a seven-year high – mining, raw materials, and animal products are the key supply chain sectors. However, supply bottlenecks and higher input and import prices (particularly in oil and food) due to supply disruptions and the Russia-Ukraine conflict (World Bank, 2023) constitute risks.

Central banks in both developed and developing economies have continued to raise interest rates to restrain and offset greater-than-expected inflation pressures, including in Mongolia. Higher US interest rates could pose a particular challenge for macroeconomic stability in Mongolia through multiple pathways. Combined with a broadly stronger US dollar, this could include a problematic US dollardenominated debt build-up, if economic fundamentals were to deteriorate.

More broadly, the likelihood of intermittent risk aversion and volatility in financial markets could mean capital and investment outflows from Mongolia as part of a global search for safe-haven assets away from investments deemed to be higher risk. The latter could include Mongolia’s assets and those of other emerging market economies. In the foreign exchange market, Mongolia’s tugrik could come under pressure if accompanied by further commodity price shocks.

The ongoing Russia-Ukraine conflict continues to pose risks, particularly to Mongolia’s inflation outlook, including through higher fuel and agriculture-related prices, such as wheat and fertiliser. Additionally, there is likely to be a continued loss of airline revenues for Mongolia’s sector in the light of its geographical proximity to Russia. Sanctions are likely to continue to pose challenges in payment systems to Russian companies on which Mongolia depends for fuel.

Overall, Mongolia has scope for robust growth in 2023 and beyond. Safeguards need to be put into place to improve macroeconomic and financial stability, but geographical and sector-specific diversification in trade will ensure that the economy is more resilient against shocks and financial headwinds. Mongolia’s openness, and the strength of its trading relationships, constitute both an opportunity and entail continued risks.

Download the full report here.

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