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Rogier van den Brink Lead Economist for Mongolia Poverty Reduction and Economic Management

Financial and economic crisis in Mongolia: Causes, lessons learnt and recommendations Workshop organized by the Ministry of Finance for Parliament on fiscal reform October 30, 2009 Ix Tenger complex. Rogier van den Brink Lead Economist for Mongolia Poverty Reduction and Economic Management

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Rogier van den Brink Lead Economist for Mongolia Poverty Reduction and Economic Management

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  1. Financial and economic crisis in Mongolia: Causes, lessons learnt and recommendations Workshop organized by the Ministry of Finance for Parliament on fiscal reformOctober 30, 2009Ix Tenger complex Rogier van den Brink Lead Economist for Mongolia Poverty Reduction and Economic Management East Asia Region World Bank

  2. Mineral prices collapsed in mid-2008 Index=100 in January 2004

  3. The copper price shock was not observed by a flexible exchange rate

  4. Budget surplus became a budget deficit % of GDP

  5. Major trading partners’ industrial production dropped dramatically between June 2008 and first quarter of 2009 % year-on-year change, 3-month moving average

  6. Large trade deficit developed $ mn (12-month rolling sum) Source: National Statistical Office, World Bank

  7. The copper price collapse hit an overheated banking sector

  8. High inflation led to negative real interest rates on MNT deposits leading to large MNT deposit outflows MNT billion, month-on-month change MNT billion, stock % Note: Interest rate deflated by CPI inflation. Source: Bank of Mongolia, National Statistical Office, World Bank Note: Numbers are the end-August stocks of MNT and FX deposits in MNT billion. Source: Bank of Mongolia, World Bank

  9. While attempting to defend USD peg, BoM lost about $500 million in international reserves, before external sector stabilized $ billion, stock $ million, month-on-month change Note: Number is box is end-August stock of BoM international reserves in $ million. Source: Bank of Mongolia, World Bank

  10. How did other copper exporters experience global downturn? Export concentration index (right axis, bar), copper share in exports in 2007 (left axis, line)

  11. Mongolia harder than the world’s other major copper exporters, e.g. Chile, Peru, Papua New Guinea and Zambia

  12. But beginning of 2009 strong policy actions

  13. External financing requirements

  14. The exchange rate stabilized Last observation: October 1, 2009. Source: Mongolian Financial Association, World Bank

  15. Inflation fell Percentage point contribution to CPI inflation yoy, % Note: This is the UB city CPI. Source: National Statistical Office, World Bank

  16. But fiscal balance remains under pressure % of GDP*, 12-month rolling sum * GDP interpolated using actual 2008 GDP (MNT 6,130 billion) and projected 2009 GDP (MNT 6,209 billion). ** Adjusted fiscal balance excludes net lending from expenditure, leaving current and capital expenditure only. Source: Ministry of Finance, World Bank

  17. NPLs and loans in arrears risen strongly

  18. Total loan growth come to standstill, as bank prefer safe CB bills % year-on-year change % year-on-year change Source: Bank of Mongolia, World Bank

  19. Industrial production continues to contract, particularly in the manufacturing sector, with Mongolia facing a sharp GDP growth slow down for 2009 as a whole % year-on-year real change, 3-month moving average % change Q2 2008 to Q2 2009 Source: Top 180 companies financial statements, National Tax Administration, World Bank Source: National Statistical Office, World Bank

  20. With the poor hurt the most…informal wages fell sharply between 2008 and 2009.. Daily wages of unskilled workers in selected informal labor markets in UB

  21. Lessons learnt and recommendations • Implement fiscal responsibility framework to avoid repeat of boom-and-bust spending pattern • Improve planning and budgeting for public investments, including infrastructure maintenance—critical during the downturn • Take decisive action on implementing resolution for individual banks and banking sector reforms • Protect poor during downturn: start to target currently untargeted social grants (CMP) (ADB and World Bank technical support to government) • Use recent experience gained during negotiations of OT investment agreement to improve overall policy environment in mining sector

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