2010 1st half mongolia economic review

8/8/2019 2010 1st Half Mongolia Economic Review

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ECONOMIC REVIEW /First

1. EXECUTIVE SUM

Macro economic indicators

Main activities occurred in soc

Laws and policies approved by t

Following laws had bee

agreements such as Law on Proedition), Law on Minimum wag

cultural rights, Ratification o

Amendments on Charter of Inter

agreements, Ratification of Agre

Mongolian livestock program,

GDP growth (percentag

Industrial sector growth

Debt remainder (MNT

Budget balance ( MNT

Unemployment (thous

Inflation (percentage)

Foreign trade turnover

Foreign trade balance (

EC

alf of 2010/

ARY

ial and economic sectors of Mongolia in the f

he Parliament

approved by the State Great Khural. Laws

perty valuation, Law on Concession, Law on, Law on Asset certified security, Law on Eco

additional protocol on international pact,

national Labor Organization, Ratification of L

ement on Project on developing regional auto

General Program on Financial cooperation,

9.VI 1

e) -3.5

(percentage) -6.5

illion ) 2 558.9 2

billion) -35.4 1

nd people) 39.5

6.3

(million US$) 1.656

illion US$) -129.9

NOMIC REVIEW OF

FIRST

National Development and

NDIC 1

irst half of 2010

and international

anking (revisedomic, social and

Ratification of

an and financing

road addition,

Participating in

.VI

5

12.4

882.6

04.6

39.9

11.4

.665

47.6

ONGOLIA

HALF OF 2010

nnovation Committee


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ECONOMIC REVIEW /First half of 2010/ NDIC 2

peace operations (revised edition), Law on Medicine and medical equipment (revised edition),

Accession to Protocol on Agreement on issues involving trade of copyright ownership,

Accession to Singapore agreement on trademark law, Law on Competition (revised edition), Law

on Trademark and geographical indication (revised edition) and Law on Prohibition of granting

of licenses for mineral resources exploration have been approved.

Government policies and activities

Following important policy documents have been approved and are being implemented

by the Government of Mongolia in the first half of 2010.

Government of Mongolia has approved action plan of Business-enabling environment

reform year in February of 2010. In the action plan, goals and activities directed at resolving

difficulties occurring at every step of business are to be implemented in 2010 while actions

aimed at providing stability of business environment at macro level and developing infrastructure

are to be continuously executed until 2011-2012. In doing so, legal environment to conduct businesses will improve, new option for financing will emerge and financial risk as well as

business expenses will decrease.

Government of Mongolia has supborder pointed the Law on Fiscal Budget and has

agreed to present it to the State Great Khural. In the draft law, powers and rights to distribute

public spending for large repairing works, investment projects and procurement are to be given

to local offices. Upon approval, this draft law will determine budget, its principle, framework

and structural classification, define rights and responsibilities of stakeholders in the budget issues

and regulate formation, approval, spending, registration, reborder pointing and monitoring

processes of the budget.

Investment agreement signed among the Government of Mongolia, Ivanhoe Mines

Mongolia Inc LLC, Ivanhoe Mines Limited and Rio Tinto International Holdings have

come into realization. Also, Program to develop South Gobi infrastructure and Action Plan to

implement the Program have been discussed and approved. Purpose of this program is to

establish basic infrastructure in the South Gobi area and supborder point infrastructure

development that is needed for exploring, concentrating and processing mining industries. It will

also set up hard infrastructure for cities and towns that will develop following development of

these industries and establish social infrastructure and basic social services. As strategic deposits

including Tavantolgoi, Oyutolgoi, Tsagaansuvarga, Nariin Sukhait and Shivee-Ovoo start gettingexploited and utilized into economic cycle, annual economic growth is projected to reach 12.5

percent and gross domestic product per capita is to increase to 5250 US$ in 2015 which is 2.7

times higher than that of 2009. Prime Minister of Mongolia, Mr. S.Batbold will chair the Council

responsible for organizing the establishment of Sainshand industrial complex. Large industries

which will have huge impact on national development such as copper smelting, coke-chemical,


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citizens in the first half of this year. In addition, Government has introduced its findings of

survey on whether citizens prefer stimulus money in non-cash form to cash transfer and

2.358.432 people in recurring count have voted to get their stimulus money in non-cash

nationally.

Price of consumer goods increased

Inflation is 11.4 percent at national level and 16.2 percent in Ulaanbaatar city in the first

half of this year. The fact that inflation is relatively high is due to many factors such as impact of

economic crisis, granting of stimulus to all citizens and dzud of last winter as well as the

increase of energy price. For example, in the beginning of this year, Regulating Council of

Energy Regulatory Authority has authorized to increase energy price of electricity consumers by

17.35 percent starting from January 15th, 2010 other than citizens with normal electricity meter.

Moreover, although trading fair for meat was to be organized bi-weekly in spring season and

monthly in other seasons in Ulaanbaatar city in order to improve meat supply, to directly connect

customers with producers and to decelerate excessive price increase, meat price failed to declinesubstantially due to hoof-and-mouth disease, damage of dzud and imperfect distribution system

of meat supply.

97.5 thousand herder families were affected by dzud and 9.7 million livestock lost

As of first half of the year, 9.7 million heads of livestock died unnaturally due to harsh

winter season. 90.7 percent of total lost livestock occurred in Arkhangai, Uvurkhangai, Uvs,

Bayan-Ulgii, Bayankhongor, Zavkhan, Khuvsgul and Govi-Altai provinces. Damage of MNT

63.9 billion occurred to herders as a result of large quantities of livestock loss. Furthermore,

8711 herder families are left with no livestock or with a small number of cattle. Therefore,Government has issued a temporary regulation to re-stock herders with cattle and planned, within

the project, to provide each family with two horses, three cows and 40 sheep all under MNT 40

million. Herders included in the project are to pay back their loans within 5 years of time.

Decision to improve life guarantee of civil service officers was made

Out of 4000 housing quotas for general budget managers to distribute, 3825 quotas from

127 public institutions are granted as of first 3 months this year. 119 citizens have chosen their

housing and signed purchasing agreement out of 787 civil servants who provided applications.

Salary, pension and financial aid for public servants will be increased by 30 percent starting from

October 1st, 2010.


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2. ECONOMIC GROWTH

REAL ECONOMIC GROWTH /First half of 2010/

As of the first half of 2010, GDP reached MNT 1 650.65 billion which is 5.0 percenthigher than last year. When comparing GDP growth with that of the first quarter, it has dropped

by 2.6 units. While industrial sectors surplus value and that of services sector have gone up 8.3

percent and 12.5 percent respectively, agricultural sectors surplus value has gone down 30.7

percent. Decrease in agricultural sector is because surplus value of livestock sector sharply

dropped.

When looking at real economic growth of each sector as of the first half of 2010:

Agricultural sector

Surplus value of agricultural sector has reached MNT 248 billion in the first half of this

year in which it is 30.7 percent lower compared to last year. The most influential factor in this

result is the amount of unproductive lost livestock. 9.7 million heads of livestock have been lost

nationally as of the first half of 2010. Almost half of this, or 4.8 million heads lost, are goats.

Since unnatural loss of big cattle has been high, supplies of livestock products such as meat,

milk, wool and cashmere have dropped. Especially, high level of unnatural loss of goats has led

to sharp drop in supply of the main livestock product cashmere. These factors mainly affected

in the drop of surplus value in livestock-breeding.

Industrial sector

Growth of industrial sector has decelerated 4.2 units to reach down to 8.3 percent in the

second quarter compared to first quarter. However, amount of extracted products in mining

sector is less than the amount exported. For example, 1192.4 thousand tonnes of iron ore have

been exported as of the first half of the year which is 94.4 percent higher than that of last year.

However, extracted amount of iron ore is only 521 thousand tonnes or 26.5 percent less than last

years amount. Therefore, extracted amount is half as much as exported amount.

There has not been any growth observed in construction sector. For instance, amount of

construction building and large repairing works value is MNT 55.9 billion at current year cost as

of the first half of this year which is 16.4 percent less compared to this time of last year.

Services sector

Services sector has showed the highest economic growth and, in the first half of 2010, its

surplus value reached MNT 716 billion that is 12.5 percent more than this time of last year.

Growth in transborder pointation, wholesale and retail sales sectors has largely resulted in


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services sector growth. For exa

percent or 1736.2 thousand ton

MNT 891.3 billion at current ye

year.

In the following months, ecexcluding drop in livestock secto

PRODUCTION OF AGRICU

Food, agriculture and

accounting for about 30.2 perce

percent of labor force with wor

total economy is illustrated in th

Figure 1. Food, agric

Livestock

For Mongolia, pastoral c

with its advantages such as low

clean raw materials of livestoc

reaching 44 million heads. It, o

other side; global warming and

the quality of Mongolias past

livestock and further diminishin

tends to decline as well.

Other s

31,6

alf of 2010/

ple, value of freights transborder pointed has i

es. Total amount sold in whole and retail sale

ar cost and that is an increase of 87.1 percent

onomic growth is to accelerate in the 3rd

and 4t

r.

TURAL SECTOR

ight industry is an important sector for n

t of GDP, over 10 percent of export revenue

places. Food, agriculture and light industry se

following chart.

ulture and light industry (FALI) sectors share in

attle-breeding is quite unique from other coun

cost, energy saving, environment-friendliness

. In recent years, the number of livestock ha

n one side, leads to over capacity for pasture

orldwide desertifications are also bringing ne

ure land. Climate change is degrading quali

output of raw materials and quality of these r

FALI sector

30.2%

Mining

sector

28,2%

ctors

NDIC 6

ncreased by 17.9

s sectors reached

compared to last

h

quarter of 2010

tional economy

nd providing 36

tors standing in

GDP

ries in the world

and ecologically

sharply jumped

land and, on the

ative impacts on

y and health of

w materials also


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For example, health of pastoral cattle cannot meet requirement levels set by the World

Health Organization. Therefore, output and quality of meat fail to meet market demand fully in a

number of ways and because of this, export of meat and meat products are not increasing

significantly.

In 2010, it got severely cold in the winter and large part of homeland was covered withheavy snowfall. In addition, insufficient reserves of grass and supplementary fodder for cattle

made the dzud even more severe and, because of this; unnatural loss of livestock was

comparatively high in contrast to previous years. Nationally, 9.7 million heads of cattle were lost

as of first 6 months of 2010 which is 6.8 times (or 1437.9 thousand heads) more than last years

loss. Of which, 2.9 million losses occurred in western region, 4.2 million in khangai region, 2.1

million in central region and 0.5 million in eastern region.

Table 1. Head count of livestock lost /thous.heads/

Number of livestock lost Percentage in total livestockCattle type 2008.I-YI 2009.I-YI 2010.I-YI 2008.I-YI 2009.I-YI 2010.I-YI

Camel 1.9 1.6 12.8 0.7 0.6 4.6

Horse 101.5 49.3 338.2 4.5 2.3 15.2

Cow 115.9 89.0 550.1 4.8 3.6 21.2

Sheep 540.2 564.2 4053.4 3.2 3.1 21.0

Goat 656.6 733.7 4772.0 3.6 3.7 24.3

Total 1416.0 1437.9 9726.6 3.5 3.3 22.1

Source: NATIONAL STATISTICS OFFICE

A total of 8500 herder families were left with no cattle and over 32 thousand families lost

half of their cattle due to this disaster occurred in livestock sector and poverty in rural areas

increased to a large extent. Ministry of Food, Agriculture and Light Industry and other related

regional administration offices must take actions such as promptly re-stocking herders with

cattle, reassigning members of herder families who lost their livestock in other sectors in need of

work force and organizing implementation of Mongolian livestock program which was

approved by the State Great Khural in order to overcome damages caused in livestock sector,

main pillar of the countrys economy.

In market research of main goods of livestock sector in first 6 months of 2010, sheepskin

is sold cheapest in Bulgan province at MNT 4 thousand and the most expensive in Hentii

province at MNT 8 thousand. Cowhide that is longer than 2 meters is cheapest in Uvs province at

MNT 6 thousand while it is way more expensive in Ulaanbaatar city at MNT 22 thousand.

Orkhon province has the cheapest horse hide at MNT 8.5 thousand while it is MNT 18 thousand


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in Arkhangai province which is the highest in the nation. White cashmere is MNT 53.5 thousand

in Govi-Altai province at its cheapest, but MNT 40 thousand in both Sukhbaatar and

Govisumber province. On one hand, it is good that it supplements cash on hand for herders;

unfortunately, it is a heavy hit for cashmere processing industries which are strategically

important sector of national economy. It further reminds us that taking actions to protect

domestic market is unavoidable.

Agriculture

Under the framework of Atar-III campaign (Cultivation campaign) organized by the

Government of Mongolia, farming sector revived sufficiently to supply domestic flour, wheat

and potato needs fully and objectives set in the Government Action Plan is now possible to be

fulfilled. A total area of 312.2 thousand hectares is cultivated as of the first half of 2010 which is

11.3 percent larger than last year.

Table 2. Cultivation /thous.ha/

Type of sown plants 2009 2010Ups and downs

/ %/

1 Total planted area 280,3 312,2 111,4

2 Grain 251,9 259,0 102,8

3 Of which: Wheat 248,8 249,6 100,3

4 Potato 13,5 13,6 100,8

5 Vegetable 6,4 6,9 107,3

6 Fodder plants, hay 2,8 11,4 399,0

However, bottom heat has sharply increased over normal level in June and July, thus

bringing negative blow on harvest. Especially, preliminary studies show that grain harvest in the

main region of farming, Tuv and Selenge provinces, might fail to give expected amount. Sowing

of fodder plants was increased by 3.9-11.8 times in Khangai, Eastern, Central and Ulaanbaatar

region in case harsh and severe condition of last years winter recurs. Thus, it is important to

consider that organizing efficient products trade is crucial because failing to do so will bring

costly harm for enterprises who will then have fodder reserves kept for over a year.

During the conference on strengthening budget planning process organized by the

Ministry of Food, Agriculture and Light Industry, it was suggested that a guideline with very

comprehensive standards for preparation for the upcoming winter should be formulated and

preparation works of all soums should be verified against reborder points. Such action should

promptly be implemented.


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INDUSTRIAL SECTOR PRODUCTION

As the Government of Mongolia announced year 2009 as the Industrialization

Supborder point Year, one of the many important actions taken is the formulation of

Industrialization Program of Mongolia and its implementation since it was approved by

Government Decree No.299 of September 30th

, 2009.

NDIC is working to improve inter-sector coordination and formulate systematic

development plan and strategy since industrialization of a country is a complex process that

relies on cooperation of all sectors, needs initiative and effort of all citizens as well as their desire

and aspiration.

Following important actions to improve environment for enterprises are implemented

Law on Concession was approvedThe purpose of this law is supborder point public private partnership and increase private

investment in social and economic sector of Mongolia through regulating relations concerning

the organization of tenders for granting investors the rights of possession, operation, creation and

renovation of state and locally-owned properties under concession agreements, conclusion,

modification and termination of concession agreements. Through the law on Concession, it

presents legal environment for private sector to be involved in public private partnership so that

they can provide services for the state through contract agreement, to take up some

responsibilities of the state as well as to construct certain buildings and transfer them to state

ownership after utilizing for a certain amount of time.

Law on legal environment for production and technological park was approvedThere was a major obstacle in establishing production and technological park due to the lack

of law or legal environment specifically regulating requirements, organization, land ownership,

tax breaks and financial assistance for production and technological park. Upon approval of this

law, many advantages are formed. Regional development goals are met, new workplaces are

created in rural areas, production of high technology based value-added products increased,

issues in transborder pointation and logistics sector are improved and competitiveness in

international market is advanced.

Program on South Gobi infrastructure development and the program action plan areformulated

Purpose of this program is to establish basic infrastructure in the South Gobi area and

supborder point infrastructure development that is needed for exploring, concentrating and

processing mining industries. It will also set up hard infrastructure for cities and towns that will

develop following these industries and establish social infrastructure and basic social services.

Within the objective to establish basic infrastructure in the South Gobi area, hard infrastructure


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facilities such as extracting and processing mining industries, power station, electricity grid,

railroad, and concrete auto road will be constructed.

Development Bank is to be establishedDevelopment Bank of Mongolia will be a legal entity with state participation with a right to

provide financial broking services for investment needed in implementing programs and projects

of development priorities set by the Government. Development Bank will supborder point

infrastructure and industrial development and provide financial assistance in introducing modern

technologies that are environment friendly and meeting international standards.

Direction to develop industrialization in rural region is approvedDirection to develop industrialization in rural region is approved and MNT 30 billion from

state budget dedicated for supborder pointing small and medium enterprises has started being

distributed.

State policy on high technology industrial sector was approvedThis document was formulated based upon competitiveness of our country, economic

structure and industrialization researches, studies for future development trend for industrial

sectors and capacity of science and technology sector and development inclination of worldwide

technology, innovation and industrialization. By developing high technology industrial sector,

current situation of raw products taking up large share of export goods will be eliminated and

condition for transitioning from raw materials-based economy to knowledge-based economy will

be created as production of value-added end products increases.

Investment corporation for high technology and innovation, a state-owned LLC isbeing established

Investment corporation for high technology and innovation LLC is responsible for

implementing state policy on high technology, developing infrastructure of the sector, financing

economically important technological and manufacturing projects as well as raising capital.

Draft of Sub-program on supborder pointing national champions was developedWhen looking at international experiences, globally competitive, national leading companies

play exceptional role in countries social and economic developments. Since these companies

become the face of business and production sector and provide noteworthy contributions while

being the leading tax payer, employer and guiding entity for business accomplishment, state

offers policy supborder point. Likewise, the purpose of the program is directed at forming

favorable legal environment for establishing globally competitive national champion.


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Mining and heavy industry

Legal ground for exploring Tavantolgoi deposit is setDraft of Parliament Decree on exploring Tavantolgoi coal deposit was approved upon State

Great Khural meeting and Erdenes Tavantolgoi subsidiary company under state-owned

Erdenes MGL is to be established in order to conduct exploration and export activities. Hence,Erdenes Tavantolgoi subsidiary company possesses the right to distribute 10 percent of

Tavantolgoi shares to Mongolian citizenry on equal terms.

Government decision to establish Sainshand industrial complex was madeConsidering the locations of mineral deposits and the shortest way to export market,

development of industrial complexes is planned to start from Sainshand and later to other

regions. After constructing Sainshand industrial complex, all options such as processing raw

materials coming from strategic mining deposits, developing heavy industry and producing

value-added, internationally competitive products will be possible.

Copper smelting factory is decided to be constructedDraft of parliament decree on constructing copper smelting and processing factory is

approved at State Great Khural meeting of April 29th, 2010. Heavy industrial development base

to add value on products and to increase export revenue will be formed after the construction of

the factory.

Regarding the objective to establish factories for enriching and producing end products

relying upon fluorspar region, a couple of factories have already put into operation. First one is

an enrichment factory by Kevin Invest LLC in Dalanjargalan soum, Dornogovi province withannual capacity to produce 80 thousand tonnes of solid fluorspar with 95-97 percent content and

18 thousand tonnes of concentrated fluorspar. Next one is also an enrichment facility by Yanitai

Uul LLC at Airag soum, Dornogovi province with annual capacity to produce and export 20

thousand tonnes of concentrated fluorspar with 92-97 percent content.

Total production of industrial sector

Total industrial sector production was MNT 754.7 billion at 2005 price as of the first half

of 2009 which was 6.5 percent less than the same time the previous year due to economic crisis

impact. However, in the first half of this year, it reached MNT 845.5 billion which is 12.4

percent higher than last years data.

Increased production of main industrial sector goods such as coal, petroleum,

molybdenum concentrate with 47 percent content, fluorspar concentrate, all types of cattle meat,

milk, flour, alcohol, wine, beer, flavored water, juice, copper cathode, metal cast affected total

industrial output growth.


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As of the first half of 20

statistics, there is growth in ever

Figure 2. Total production of indu

production by 35.8 percent, iron

each.

Figure 3. Total industrial sub-sec

billion /

442.7

484.7

207.1

2

104.9

0

100

200

300

400

500

2009 I-VI 2010

807.0

7

700

720

740

760

780

800

820

840

860

2008 I-VI 200

alf of 2010/

10, when comparing total industrial output wit

sub-sector.

strial sector as of first half of 2010 /a the price of 2

Miningindustrial secto

growth of 9.5 p

compared to th

year. Output o

reached MNT

2005 price. Wh

specific products

and fluorspa

increased by

percent respecti

cooper concent

slowed down by

ore mining by 26.5 percent and zinc concentrat

or outputs of the first half of 2010 /at the price o

The highseen in process

total output of th

MNT 252.7 billi

percent higher t

last year.

While

combed cashmer

gone up, manufa

garments and cadropped in light i

2.7

111.1

I-VI

Mining and

exploring industry

Processing

industry

Electricity and

thermal power

generation, water

supply

4.7

848.5

9 I-VI 2010 I-VI

NDIC 12

previous years

005, MNT billion/

and exploringr has seen a

ercent this year

same time last

the sector has

84.7 billion at

n looking at the

, coal, petroleum

r production

3, 80.2, 35.8

ely. However,

rate production

2.4 percent, gold

e by 10.6 percent

year 2005, MNT

est growth wasing industry as

e sector reached

on which is 22

an this time of

production of

and carpet has

turing of knitted

el wool blanketsdustry sector.


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Table 3. Production of main goods of mining and exploring industries /as of the first half of 2010/

Main types of goods Unit 2008 I-VI 2009 I-VI 2010 I-VI

Coal thous.tonne 4 163.4 5 163.1 9 447.9

Petroleum thous. barrel527.4 598.8 1 078.9

Copper concentrate /35%/ thous.tonne 181.0 180.0 175.6

Molybdenum concentrate

/47%/tonne

2 030.0 2 285.0 2 412.1

Gold kg 6 416.2 4 327.3 2 779.2

Iron ore thous.tonne 68.5 709.1 521.0

Fluorspar concentrate thous.tonne 69.7 53.3 72.4

Zinc concentrate thous.tonne 78.0 64.9 58.0


Table 4. Production of main goods of processing industry /As of the first half of 2010 /

Main types of goods Unit 2008 I-VI 2009 I-VI 2010 I-VI

Copper cathode /99%/ tonne 1 194.6 1 044.5 1 402.0

Knitted garment thous.uni 235.0 278.6 239.5

Combed cashmere tonne 482.8 411.5 551.3

Carpet thou.sq.m 406.1 273.4 311.7

Camel wool blanket thou.sq.m 14.4 29.0 6.8

Sawn wood cu.m

4 994.5 4 484.4 4 109.2Cement thous.tn 69.8 94.2 95.5

Food production

Cattle meat tonne 1 733.0 177.9 1 745.0

Liquid milk thous.l 3 297.2 5 528.0 9 857.3

Flour tonne 27 946.4 39 022.4 70 072.7

Bread tonne 11 050.9 11 807.6 10 438.2

Fine pastry tonne 6 234.3 6 191.0 6 107.0

Noodle tonne 959.6 1 734.1 1 259Flavored water, juice thous.l 21 395.7 21 064.2 22 540.9

Alcohol, wine thous.l 7 268.4 7 714.5 10172.5

Spirit thous.l 3 178.5 2 180.9 2 132.8



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67.7

22.6

9.7

Growth of food product

Total output of the sector reache

of last year and it takes up m

productions of all types of me

increased.

Table 5. Production of electricity, t

/as of the first half of 201

Product

ElectricityThermal power th

Fresh water distribution th

Source: NATIONAL STATISTICS OFF

Electricity, thermal pow

by 5.9 percent compared to last

and steam production increased

decreased by 3 percent.

Figure 4. Sales structure of indust

thermal power and water supply

to higher increase of mining exp

Shares of industrial secto

of explored petroleum, 92.9 pe

garments, 45.2 percent of proc

foreign markets.

alf of 2010/

Mining and

exploring industry

Processing

industry

Electricity, therma

l power generation

and water supply

ion mainly resulted in the expansion of proc

d MNT 124.5 billion which is 39.8 percent hig

re than half of total processing industrial o

at, milk, dairy products, flour, beer and flav

hermal power generation and water supply sector

/

Unit 2008 I-VI 2009 I-VI

il.kW-h 1 683.9 1 746.9ous.gCal 4 197.0 4 148.8

ous.sq.m 33 676.9 32 270.5

CE

r generation and water supply sectors product

year, reaching MNT 111.1 billion. Thereof, el

by 6.5 percent while water purification and w

ial output /percentage/

Total industria

reached MNT 1 914.3 b

half of this year and 66.31 270 billion is sold

markets. Share of mini

industry in total indus

gone up to 67.7 percent

higher than last year

processing industry fel

percent or 5.8 units low

sector went down to 9.7 percent or 3.2 units l

rt and its larger share in sales structure.

r products for export differ from product to pro

rcent of metal ore, 86 percent of coal, 71 p

ssed iron and 5.2 percent of food products

NDIC 14

ssing industries.

er than half-year

tput. Especially,

ored water have

2010 I-VI

1 831.04 620.5

31 287.1

on has increased

ectricity, heating

ter supply sector

l output sold

illion in the first

percent or MNTon international

g and exploring

trial output has

which is 9 units

while share of

l down to 22.6

r and electricity,

wer. This is due

uct. 100 percent

ercent of woven

re exported into


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The number of employed in the industrial sector is 51200 as of the first half of 2010 and

that is 4.7 percent increase or 2 347 more people compared to last year.

Productivity of industrial sector is constantly improving and it achieved MNT 1.4 million

or 8.7 percent increase from this time of last year, reaching MNT 17.1 million. Productivity has

increased MNT 0.5 million or 1.7 percent in industrial sector, MNT 1.9 million or 19.2 percentin processing industry, MNT 0.4 million or 5.2 percent in electricity, thermal power generation

and water supply sector.

Further trend

From looking at the total industrial output during the first half of this year, it is expected to

increase in the second half as well.

As growth occurs in industrial sector, it will then increase economic growth and, taking into

account of this, the year also looks to end with growth in GDP.

Following factors are to positively affect growth of industrial output. These are:

Mining sector growth: Production ofmain mining products such as coal and petroleumare trending upward.

Processing industry growth: Processing industrial sector, especially food production, isprojected to increase substantially.

The reason coal production is increasing is related to the fact that a total of 5 enterprises are

increasing their individual coal production. Tavantolgoi Shareholders Company and Energy

Resources LLC are exploring parts of Tavantolgoi coal deposit located in Tsogttsetsii soum,

Umnugovi province and Mongolin Alt (MAK), Chinhua-MAK-Nariin sukhait and

Southgobi Sands LLC are also exploiting at Nariin Sukhait coal deposit located in Gurvantes

soum.

Table 6. Coal production /thous.tonne/

Name of enterprisesOutput in

2009

Planned

amount in

2010

Increase

from the

previous

year

Output of first

5 months of

2010

1 Tavantolgoi SC 2600.0 2600.0 - 600.0

2 Energy Resources LLC 1400.0 3800.0 2400.0 800.0

3 Mongolin Alt LLC 1600.0 3000.0 1400.0 1400.0

4 Chinhua-MAK-Nariin sukhait 730.0 1100.0 370.0 330.0

5Southgobi Sand LLC 1327.0 2500.0 1173.0 700.0

Total 7657.0 13000.0 5343.0 3830.0


16/62


These companies increased their mined and exported coal this year by 69.8 percent or 5343

thousand tonnes more from the previous year and, Erdenes MGL and QGX companies are

working to export 1 million tonnes of coal each starting from this year.

Although mining sector is experiencing growth, declining production of main goods of this

sector such as 43.2 percent drop of gold and 26.5 percent drop of iron ore production are hurtingthe overall industrial growth.

When observing total industrial output so far till June this year, it is possible for total

output of this sector to grow in the remaining months, hence, increasing economic growth as

well.

BALANCE OF PAYMENTS

Due to financial and economic crisis occurred in 2008, the nations balance of payments

came negative. Increase of foreign trade imbalance deepened as values of mining products

including gold, copper and zinc sharply dropped in the global market and import goods such as

petroleum and food products increased in price.

While first quarter performance of balance of payments in 2009 was negative US$ 28.4

million, it performed positive US$ 10.2 million in the first quarter of this year.

Current account1

According to the 1st quarter performance of this year, both price and volume of the nations

export products had increased 2.4 times more than last year.

Current account imbalance of balance of payments in the 1st quarter of 2010 is 40 percentmore than last years and following factors are mainly responsible.

Value of imported goods has increased by 50 percent. This is due to the increasing amount ofimport including mining production equipments and machineries as well as fuel and gasoline

as the economy is recovering.

The nations services expenses boosted due to enlarged volume of import goods, thusbringing US$ 54.5 million worth of negative services balance in the first half of 2010. That is

12 percent increase in contrast to last year.

Capital account imbalance is also mounting. This is because foreign-invested enterprisestransferred their return of investments out of the country more than they did last year.

1 1st quarter performance is taken into account as mid-year performance of balance of payments is not due untilAugust.


17/62


Fig

Capital and financial account2

In relation to the starting

financial accounts of balance of

investment and long-term loan

payments are positive with US$

it was in 2009. It is mainly th

financial account when compare

the mining sector of the country

However, the fact that

negative US$ 84.3 million is m

monetary tools in the internation

for loan instruments in foreign

,when compared to last year, it

to deepen.

2 1st quarter performance is taken intoAugust.

-61.5

-35.8

-160.0

-140.0

-120.0

-100.0

-80.0

-60.0

-40.0

-20.0

0.0

1-

2008

I. Current acc

1st quarter

alf of 2010/

re 5. Current account / US$ million /

of large project to accelerate economic develop

payments are trending upward in 2010 as inw

se are expanding. Capital and financial accou

36.6 million in the 1st quarter of 2010 which is

e result of 2.5 times increase of foreign dire

d to previous years. Investment value of Oy

lays a major part in such addition.

olume of financial investment in financial ac

ainly because national private enterprises had

al markets more than they did the previous yea

markets by domestic commercial banks has i

ainly affected financial account deficit of bal

account as mid-year performance of balance of paym

-97.0

-135.9

-99.7

-120.1

1- 1-

2009 2010

A. ount Goods and services balance

1st quarter1st quarter

NDIC 17

ment, capital and

rd foreign direct

ts of balance of

twice as much as

ct investment in

tolgoi deposit in

count performed

purchased more

r. Payment value

creased because

nce of payments

nts is not due until


18/62


Figure 6.

Future trend

Current account deficit of bala

As a result of Oyutolgoimachineries as well as fuel a

Due to the increased amount As a result of economic rec

up. Thus, transfer of return

that gross income of current

Capital and financial account i

Since investment on miningto increase significantly.

Loan and grants from intesupposed to increase. Within

dedicated for Mongolias in

from the Government of the

265.0

187.0

0.0

50.0

100.0

150.0

200.0

250.0

300.0

1-

2008

II. Capital and fin

1st quarter

alf of 2010/

apital and financial account /million US$ /

ce of payments is looking to deepen.

investment agreement, imported value of

d gasoline heightened.

of import, services expense is also on an upwar

very, income amount of foreign invested ente

of investment into their home countries is goi

ccount of balance of payments is on an upward

comes are on an upward trajectory.

sector is enlarging, inward foreign direct invest

national banks, financial institutions and do

this year, loan of US$ 110 million out of total

rastructure development will be provided acco

eoples Republic of China.

18.4

36.660.5

153.2

1- 1-

2009 2010

1. ancial account Direct Investment

1st quarter1st quarter

NDIC 18

equipment and

d trajectory.

rprises are going

g to increase in

momentum.

ent is projected

or countries are

US$ 300 million

ding to schedule


19/62


3. EMPLOYMENT AND UNEMPLOYMENT

LEVEL OF UNEMPLOYMENT

Number of unemployed citizens registered at the Labor and Social Welfare Services Office

currently in June stands at 39.9 thousand, a rise of 1.1% compared with the same period lastyear. Of the total unemployed workforce, percentage of unemployed women fell by 3.8% in June

from the same period last year

The number of new registrants at the Labor and Social Welfare Services Office has

increased to over 42.1 thousand in June, 2009. World economic crisis is said to be the biggest

contributor to this increased number of registrants. However, as the Mongolian economy is well

underway of rapid recovery, level of unemployed plummeted by 23.9% as of June, 2010 in

comparison to the same period last year. Number of jobless citizens stands at 32 thousand in

June this year.

Of the total number of registered unemployed, 64.1% of citizens were able to find jobs

through the Labor and Social Welfare Services Offices in June last year whereas this figure

stands at 51.1% in the same period this year. The latest figure of 13% drop in citizens finding

jobs through the Labor and Social Welfare Services Office is explained by hike in the banks

interest rate, resulting in decreased level of lending to the service industry.

Table 7.Level of unemployment

Indicators Unit June, 2009 June, 2010

Number of registered unemployed citizens at thelabour and social welfare services offices

Persons 39495 39941

Number of registered unemployed women Persons 21910 20647

New registrants Persons 42100 32024

Registered unemployed who found jobs through

the labour and social welfare services offices

Person 25329 20388

Source: National Statistics Office


20/62


Figure 7. Registered unemploye

level of education.

In the Figure 7, it illustrnot changing in line with change

Fugure 8.

Of the total registeredyears of age bracket. Therefore,of Mongolian workforce and lab

35-44, 25.

45-5

Highereducatio

16,4

Uppersecondary

44.2

Lowersecondary

23.6

Primary;

3,5

2009.06

alf of 2010/

d citizens at the Labor and Social Welfare Ser

tes the fact that the education level of Mongos in the demand and supply of labour market.

Registered, unemployed by age category

nemployed, around 60% of jobless citizensit is seen as an indication of mismatch betwee

or market skill demand.

16-24, 21.2%

25-34, 33.6%

%

9; 19,4%

College;

5,8

Vocationaltraining

6.0

No

ducation0.6

HiEduc

17

Uppersecondary

44.9

Lower

secondary

22.2

Primary;

3,6

2010.06

NDIC 20

ices Offices, by

lian workforce is

all within 25-44education level

heration,4 College,

5.4

Vocational

training

6.0

No

education,

0.5


21/62


Future trend

There are more vacant positions to be created due to seasonal job opborder pointunietiesin mining, construction, infrastructure, manufacturing, agriculture and tourism sectors.

As the Government of Mongolia announced 2010 as the year of Business enablingenvironment reform, a number of important initiatives is being taken by the Government ofMongolia directed towards supborder pointing and increasing investment inflows into small andmedium enterprises. The present intend of Government is to create opborder pointunities for theunemployed to be included in various vocational training programs as well as to implementpolicies on creating both seasonal and permanent positions for the unemployed.


22/62


4. INFLATION

INFLATION

The price levels of consumer goods and services continued to rise since the beginning of2010. However, the latest data on CPI in June revealed a drop of 1.5 percentage points in

comparison to figure in the month of May. Consumer price index stands at 11.4% in the first half

of 2010.

Following are the main factors that contributed to high inflation rate in the first half of the

year.

Distribution of Human Development Fund. Government of Mongolia approvedits first ever sovereign wealth fund, Human Development Fund, to pool all

revenues generated from mining sector and distribute social transfers to each

eligible citizens. Therefore, cash transfer of MNT 70,000 had been handed out toeach eligible citizen since February this year. As a result, herders disposable

income had increased after receiving the MNT 70,000 from Human Development

Fund. This increase in herders disposable income projected adverse impact on the

meat market as herders were reluctant to supply a few remaining livestock to the

meat market after harsh winter.

Harsh winter. Months of freezing temperatures and heavy snowfalls in the winterof 2009 claimed lives of 9.7 million livestock. Severe loss of livestock throughout

Mongolia depressed the supply of meat, left the country with over inflated meat

price in the first 5 months of the year. This hike in the meat price is estimated tocontribute over 90 percent of increased prices of consumer goods and services.

Fuel Price. Price of fuel has been somewhat fluctuant throughout the first half ofthe year. Whilst, only in a month of May, the fuel was costing more than it was at

the end of 2009, fuel price remained lower than the end of last year for the

remaining months. However, frequent fluctuation was observed on monthly basis

throughout the first half of the year. This unstable fuel price creates uncertainty

amongst consumers and undermined consumer confidence. A long term fuel price

policy would be required to prevent further uncertainty amongst consumers.

Price of Electricity and heating. Energy Regulatory Authority announced itsdecision to increase the price of electricity by 17.35% and the price of heating

price by 14.5% from the 15th of January, 2010. However, the price of household

electricity was on hold until the 1st of June and increased by MNT 11, to MNT 79

per kilowatts. This price climb makes up around 0.5% of total increased price

levels of consumer goods and services.


23/62


Price of cashmere. Price of cashmere is almost doubled compared to the same period last year. This price acceleration was seen as a favorable market

adjustment to the herders as Mongolia had just experienced severe weather

conditions, resulting in loss of millions of livestock.

Price imported goods. As the Chinese economy is showing strong signs ofrecovery after global economic downturn, housing and real estate market isbooming in China, causing massive increase in the price levels of consumer goods

and services in the first half of the year. Chinese consumer price index increased

by 2.9% in June. This has a direct effect on Mongolian economy where the price

of such imported goods as clothing, gourmets, shoes, furniture went up in line

with China.

INFLATION EXPECTATIONS

After evaluating the factors causing inflation, Government of Mongolia put forward

following set of initiatives in order to prevent further acceleration of inflation rate.

A Cabinet meeting was held to discuss some measures to be taken on staple foodsand passed official government resolution to address supply side issues of stable

food. Ministry of Foodm Agriculture and Light Industry was ordered to organize

regular meat exhibitions in Ulaanbaatar, twice a month in spring, and once in all

the other seasons, to bring buyers and sellers together directly from June 2010.

The quantity of meat to be kept in reserve has also been adjusted to reflex the

previous years shortage of meat. Beginning from the next year, the quota

for Ulaanbaatar will be 12,000 tonnes, for Darkhan and Erdenet 1,000 tonnes

each, and for all other provinces 100 tonnes. This meat in reserves will be sold inthe spring. Also, the relevant government agencies were instructed to take the

count of such staple food as meat, flour, sugar, rice, oil in reserves and to reborder

point it the Government meeting on monthly basis. They were also ordered to take

all the necessary actions to ensure sufficient level of staple food is stored in all

reserves.

Of the MNT 120,000 to be handed out to each eligible citizen through Humandevelopment fund, MNT 70,000 has already been distributed to citizens. From

August 2010, remaining MNT 50000 will be distributed in MNT 10,000 pieces on

monthly basis in order to prevent price levels of consumer goods and services torise as well as increasing household disposable income.

With the purpose of decreasing consumption of imported fuel and increasing thelocal fuel production, Government of Mongolia had just approved Mongolian

Socio-Economic guidelines for 2011, which includes setting up of an oil refinery

in Dornogovi province as well as one in Darkhan city with the capacity of


24/62


producing 2 million tonnes of oil. Overall, these actions are set to be implemented

in order to stabilize the supply of meat and other staple food products, which, in

turn, have a positive effect on price stability and to decrease dependency on

imported fuel from overseas. Heat waves and soaring temperatures across many

parts of the world is likely to have a negative impact on the supply of such food

products as wheat, sugar and rice.


25/62


5. EXTERNAL SEC

FOREIGN TRADE

As the world economy

showing strong sign of recoverprices and increased level of copCommodity circulation in the fi period last year. Countrys exphighest export revenue ever. Trmillion in the first half of the yefrom previous 2 years.

Figure 9. Trade

Source: Customs office of Mongolia, s

Export revenue is up by 71.5%

The continued strength i

has been the main driving force

rose from $4045 in the first hal

zinc was $1322 and price of ba

These commodities price surge

383

612

500

61

-104

-400

-200

0

200

400

600

800

1000

1200

1400

1600

2005.1-6 2006

Export

alf of 2010/

OR

is rebounding from recession, Mongolias

, which is being fueled by the upward momenper and coal export to China, Mongolias largest half of 2010 is much more exuberant comprts revenue reached over $1.309 trillion, mar

ade deficit has stabilized in recent months, narr. This figure is relatively lower than figures i

eficit in thousand US USD /first half of 2005-201

tatistical information of foreign trade

from previous year to $1.309 billion.

the prices of Mongolian main exporting com

behind record high export revenue. The averag

f of 2009 to $7130 in the same period this ye

rrel of crude oil was $52 on average in the fi

in the first half of 2010, reaching $2157 and $

836

1271

763

1309

7

868

1472

893

-5 -32-201

-130

.1-6 2007.1-6 2008.1-6 2009.1-6

Import Trade deficit

NDIC 25

foreign trade is

tum in the metalt trading partner.ared to the sameking Mongoliasowing to US$48the same period

/

odities this year

e price of copper

r. Also, price of

rst half of 2009.

8 respectively.

1356

-48

2010.1-6


26/62


27/62


Rapid economic recovery, inflated household disposable income and increased consumer

confidence have all contributed to the rising consumer commodity and import of household

goods. For example, in the first half of 2009, staple food products import is down by 28%

whereas, 37% increase is recorded in the same period this year. Similarly, the number of motor

vehicles imported in 2009 was down by 70%, but in 2010, it was up by 86%.

The Government of Mongolia announced 2009 as the year of support ing

industrialization. Within the scope of this year, 46 food manufacturing factories have been set

up with the purpose of replacing the goods that are being imported from overseas. As a result,

flour import has dropped by 12 million tonnes this year alone, thanks to newly established

flourmill with the capacity of producing 170 tonnes of flour each year and expansion of other

flourmills around the country.

Due to the introduction of export quota on rice by China (to tackle domestic shortages),

rice import is down in the first half of the year, pushing the price of rise up by over MNT 200 in

the local food market. In addition, sugar price surged in the world market, peaking at 28 cents a

pound in January. This adversely impacted the price of imported sugar.

Future trend

Development of mining sector, in particular, coal exploration is likely to continueimpacting the export revenue favorably. Consequently, import of fuel and petroleum

products is expected to rise.

As the consumer confidence strengthens, import of household commodities is likely tocontinue increasing.

As the investment inflow to the mining sector increases, import of mining equipments isexpected to surge.

Import of raw materials is likely to rise due to rising number of manufacturers.


28/62


COMMODITY PRICE

Figure 10. Price of Gold, Copper, Oil, Coking coal /as of first half of 2010/

Copper

The world price of 1 tonne of copper in the first half of 2010 fluctuated between $6091and $7950. /Figure 10 illustrates the fluctuation of copper price between January and July in

green/

International experts are claiming that the drop in copper price is a direct result of

decreased demand for copper by Chinese manufacturers. However, this phenomenon is said to be

a temporary one. The price of copper is likely to increase again in the near future. The

management of worlds one of the largest copper producer Sonami, Chilean mining company, is

confident that the price of copper will rise by approximately 19% this year alone. On the other

hand, Mr. Bret Clayton, the chief executive officer of Rio Tinto Copper said that higher copper

prices have not necessarily been supported by the matching demand this year. Therefore, itwill further slide downward toward the end of the year. Eventually, insufficient level of demand

will pick up in the next year, forcing the hike again.


29/62


Gold

London metal exchange report pointed that the price of gold peaked at $1058 and

plunged at $1291 in the first quarter of 2010, indicating constant growth in the gold price.

/Figure 10 illustrates the fluctuation of an ounce of gold price in red/

Despite gold prices touching record highs again in recent months, the gold price

instability is driven by investor concerns about financial stability about the European Union

sovereign debt crisis, and by the metals continuing appeal as a currency and inflation hedge.

The gold price remains depressed not only in the Asian markets, but gold was exchanged as low

as $1198 an ounce in European and US markets. The rationale behind this is that purchasing an

ounce of gold between $1200 and $1210 is seen as too risky investment by a lot of investors.

Some economists are expecting that some European Union countries economies will worsen

towards the end of June while others argue otherwise. This uncertainty puts downward pressure

on the price of gold.As a result of downgrading of Portuguese credit classification, price of gold surged to

$1264 an ounce in June. Furthermore, some of the US giant corporations recorded strong

performance in the second quarter of this year which, in turn, had a positive impact on their

shares. Consequently, increase in such commodities as euro and crude oil also dragged the price

of gold upwards.

Standard Chartered Banks metal analyst Daniel Smith speculates that there is an

opportunity for gold price to further increase in the medium and long term. This speculation is

explained by the increasing level of gold purchases by European investors in order to hedge

against currency exchange risk. In Asia too, investors are keen on purchasing gold to avoidinflation risk.

Oil

According to New York commodity exchange, oil is exchanged at an average price of$78.39 a barrel in the first half year, up by 52.6%, from $27.04 in the same period last year./Figure 10 illustrates the fluctuation of oil price in blue/

May was the most fluctuated month for oil price in the first half year, recording thehighest price of $86.2 on the 3rd of May, 2010 and reaching its lowest price of $66.88 on the 24 thof May, 2010.

European Union sovereign debt crisis is feared to slow down the world economic growthby many investors, causing slip off of the world demand for oil. Also, strengthening value of USdollar against euro contributed to increased oil price.


30/62


6. BANKING & FINANCE

BANKING SYSTEM

Monetary Policy

The Bank of Mongolia started implementing tight monetary policy in order to restraincountrys economic instability and to reduce the risk of further overheating of the inflation in theeconomy.

Figure 11. Supply of money /in MNT million/

Despite the tight monetary

policy that is likely to restrict

the growth of domestic

production of goods and

services, it is implemented to

address the issues of rising

price level of consumer goods

and services. Half year CPI

inflation reached 16.5% for the

city of Ulaanbaatar and 11.4%

for rest of the country.

Although it would seem that

Bank of Mongolia should

introduce loose monetary policy at the time of rapid

economic growth in order to

restore consumer confidence, ,

of those who were affected by the economic crises the most in particular, introducing loose

monetary policy would run the risk of economic over-heating, leading to increased inflation rate.

Therefore, it would be incongruous move if the Bank of Mongolia loosens its monetary policy as

it would push the rate of inflation even higher, hurting near term economic growth and

employment. Also, this would lead to possibility of returning to the macroeconomic vulnerability

of the boom-and-bust cycle of the recent past. As a heavily weather dependent country, the

inflation rate fluctuation is highly observed when given sector goes through the boom-and-bustcycle. Therefore, it is highly unlikely for Bank of Mongolia to loosen its monetary policy for the

rest of the year. The lending in the first half of the year reached MNT 2.882 trillion, up by 13.4%

from the same period last year and up by 9.6% from the end of the year figure.

0.0

500,000.0

1,000,000.0

1,500,000.0

2,000,000.0

2,500,000.0

3,000,000.0

3,500,000.0

4,000,000.0

2007

01

04 07 10 2008

01

04 07 10 2009

01

04 07 10 2010

01

04

Source: Bank of Mongolia

(1)Quasi money Money /M1/


31/62


Lending

Lending activities are always in the center of publics attention because of Mongolian

banking system. Despite commercial banks preference in general to, purchase Central banks

bills or to place its available fund in overseas investments in relative to providing lending

services in the most of months of 2009 and some months of first half of 2010 due tomacroeconomic instability, lending activities this year have increased in comparison to last year.

As of the first half of 2010, outstanding loan is almost doubled, reaching MNT 882 billion,

13.4% up from previous year or 9.6% up from the beginning of the year.

The first half of 2010 record indicates an increase in the lending. However, producers are

concerned of its sustainability for the second half of the year. Bank of Mongolia announced its

intention to keep the policy rate at 11% by employing tight monetary policy as the high rate of

inflation threatens to robust the economic growth.

Consequently, purchases of Central banks bill is back up again in May, after continued

drop in the first half of the year. As the commercial banks use up their lending money forpurchasing Central bank bills, the amount of lending available for public goes down. However, it

is important to note that not all banks are the same in terms of making the remaining cash

available for lending. Some bank may limit the funds available for lending while others may not

follow their trend. Even though Bank of Mongolia is implementing tight monetary policy, some

0.0

500,000.0

1,000,000.0

1,500,000.0

2,000,000.0

2,500,000.0

3,000,000.0

3,500,000.0

200701

03 05 07 09 11 200801

03 05 07 09 11 200901

03 05 07 09 11 201001

03 05

Source: Bank of Mongolia

Figure 12. Total outstanding loans /MNT million /

Non-performing loan Overtime loan Loan


32/62


of larger banks may not necessarily limit the fund available for lending. Lending in the first half

of 2010 went up gradually and this steady growth is expected to be kept for the rest of the year.

State Bank of Mongolia

Mongolian financial sector had been through substantial stress last year, leaving a few

commercial banks non-operational, namely, Zoos Bank and Anod Bank. As the Zoos bank wasno longer fit to operate on its own, Government of Mongolia announced its decision to establish

a new state-owned bank based on the activities of collapsed Zoos Bank in order to protect the

rights of public from the 27th of November, 2009. Since then, the State banks total assets

reached to MNT 116.129 billion, its own capital reached to MNT 27.958 billion and number of

customers reached well over 110,000 as of June, 2010.

Although there were some controversies whether or not to establish state-owned State bank

during the time of its establishment last year, public is currently no longer concerned over its

existence anymore. However the issue has now focusedon how the operations of State bank and

the Development bank, which is soon to be established, would correlate to each other. It is clearthat both banks have different purposes and functions, as State bank is a commercial bank

whereas the Development bank will be established with the purpose of financing large, strategic

projects. However, both banks are either wholly or in part owned by the state. Therefore, when

both banks are in existence, Government of Mongolia would have to run operational and control

risk on both banks. Publics attention is now onthe Government of Mongolias ability to cope

with these increased risks.

From the time of establishing the State bank, it was rumored that State bank would be

switched to Development Bank. However, latest decisions by the Government of Mongolia in

relation to financial market are seen to be quite inconsistent with this rumor. Furthermore,making abrupt decision about the State bank in close approximation would undermine the public

confidence in the bank. Thus, it is unlikely for Government of Mongolia to privatize the State

bank for the rest of the year.

FOREIGN CURRENCY EXCHANGE

Mongolian currency exchange is regulated by the market demand and supply for foreign

currency. The value of Mongolian currency is determined by the market activities.

As the world economy is rapidly rebounding from recession, the price of our main export

products is rapidly growing on the global market. Investment inflows into the country ares up

this year mainly due to signing of large investment contracts by foreign investors in the miningsector. Furthermore, Bank of Mongolia reportedreported that Mongolian official foreign

currency in reserves increased, reaching $1.23 billion as of June, 2010.

Mongolian tugrug is stronger against American greenback by 6%, against euro by 17.7%,

against Korean won by 10.4, against Chinese RMB by 5.5%, against Russian ruble by 8.5% in

the first half of the year.


33/62


34/62


Top 20 index

Basket of top 20 index basket had been renewed effective from the 1st of January, 2010.

Of the top 20 companies, the stock value of 19 companies appreciated in the first quarter of the

year. However, stock value of top 20 indexes started sliding down from the second quarter.

Top 20 index stands at 10,367.47 points in the first quarter of this year, up by 4358.74 points or89.2% from the same period previous year.

Figure 14 illustrates that the stock trading between February and April has increased

constantly whereas, in the last months, stock trading was down. Of the 20 index, stock price of

APU company, Shariin Gol company, Material Impex company, Gobi company, Bayangol Hotel

company and Mon.Tsahilgaan company hiked by 15% in the first quarter, which projected a

positive influence on the top 20 index.

Figure 14. Top 20 index

Market Capitalization

Total market capitalization stands at MNT 768.4 billion up by MNT 297 billion or by

63% since the beginning of the year.

Companies with the highest capitalization are Tavan Toilgoi company /121.1 billion/,

APU LLC /118.9 billion/, MTSH LLC /75 billion/, Baganuur company /67.1 billion/ and Shivee

Ovoo company /65.8 billion/.

Total of top 30 companys stock valuation constitutes 89.25% of the total market. A

company with the highest capitalization is Tavan Tolgoi company whose market capitalization

stands at MNT 121.1 billion.

0.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

2010.

01

.04

2010.

01

.11

2010.

01

.18

2010.

01

.25

2010.

02

.01

2010.

02

.08

2010.

02

.17

2010.

02

.24

2010.

03

.03

2010.

03

.11

2010.

03

.18

2010.

03

.25

2010.

04

.01

2010.

04

.08

2010.

04

.15

2010.

04

.22

2010.

04

.29

2010.

05

.06

2010.

05

.13

2010.

05

.20

2010.

05

.27

2010.

06

.04

2010.

06

.11

2010.

06

.18

2010.

06

.25


35/62


Table 15. Top 30 com

Summary

In general, the stock pr

surged in the first quarter of the

data became publicly availabl

example, APU Company record

and announced its decision to d

emerged stronger by 136.51% s

dividends.

Since the second quarter

This is mainly because increas

stock being injected back to thstocks. Other factors that contr

department store company who

interest rates of commercial ban

An increased level of i

market is being observed since

took place on Mongolian stock e

surging stock price of mining

investors are increasingly interes

Government of Mongol

through better management. The

now in the process of being

exchanges /UK, Germany and

exchange management. Selectio

0

2000040000

60000

80000

100000

120000

140000

alf of 2010/

anies with highest capitalization /as of 25th June,

ices of listed companies on Mongolian Stoc

year. This is mainly due to the fact that the end

and dividends were distributed by some

ed MNT 8.06 billion in profit at the end of 20

stribute MNT 1.4 billion as dividends. The st

ince the beginning of the year partly due to t

of 2010, share prices of top 20 companies sta

d stock price in recent months have led to la

e stock market, causing decreased level of dibuted to lower stock prices include Gobi co

e distributed dividends were relatively lower

s.

terest from overseas investors on Mongolian

the beginning of 2010. Over 60% of the total

xchange market were made by foreign entities.

companies demonstrates the fact that both l

ted in the mining sector.

ia has initiated steps towards developing f

management and the structure of Mongolian s

replaced. Currently, many applications fro

Korea/ had been received for the bid for

process would be completed by mid-Septemb

NDIC 35

010/

exchange have

of financial year

ompanies. For

09 financial year

ck price of APU

e distribution of

rted to plummet.

rge quantities of

emand for these pany and State

in comparison to

stock exchange

transactions that

In particular, the

cal and foreign

inancial markets

tock exchange is

overseas stock

ongolian stock

r this year. If the


36/62


management of Mongolian stock exchange is outsourced to a foreign company, it is expected

that Mongolian financial market would be developed in a more efficient and productive manner.

Conclusion

In the first quarter of 2010, companies on the Mongolian Stock Exchange saw

considerable rise in their stock prices. This was both thanks to the year-end financial report

having come out and announcements for meetings on dividend payments being made. APU

Company, for example, has made profit amounting to MNT 8.06 billion, 1.4 billion of which is

to be distributed as dividend payments. This has led APUs stock prices to skyrocket by over

136.51% since the beginning of the year.

In the second half of the second quarter, however, market demand started decreasing and

stock prices followed. After the stock prices went up in the previous months, investors started

selling out their stocks actively which inevitably led to greater stock supply and falling prices.The fact that the dividend payments of some companies like Gobi and the State Department

Store were far lower than bank interest rates impacted the stock prices to a certain level too.

Overall though, the newly active attention from foreign investors made sure Mongolian

stock market grew since the beginning of this year. As of H1 2010, trading done by foreign

entities made up at least 60% of the total trading . The companies in the mining sector have

performed especially well which points to the growing attention from both the domestic and

foreign investors focused on our mining sector.

The Government of Mongolia is paying extra attention on efforts to develop the stock

market. In this light, they have started an administration and structural reform in the MSE. Many

foreign stock exchanges /London, Germany, Korea, etc. / have already expressed their interest in

participating in the tender. Decisions will be finalized by the middle of September this year.

Expectations have already risen that the long-awaited stock market in its classic form might

finally come into life with the directions of an experienced foreign management team.


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THE WORLD FINANCIAL MARKET

Asia, Pacific region

That most countries in the region are on the path to recovery from the recent economic

crisis can be seen from the economic indicators. According to a recent estimate by the WorldBank, in 2010, the world economy will grow at best at a rate of 2.9 - 3.3.

Key financial and economic events that took place in the Asia Pacific region in the first

half of 2010 are:

In February, the Central Bank of China increased the reserve ratio for banks by0.5%. In March, China reportedreported a negative trade balance for the first time

since 2004.

ADB addressed the central banks in Asia encouraging higher interest rates. According to a research carried out from the Japanese Government, Japans

Consumer Confidence Index for the first quarter reached 41%, a record high since

March 2007.

The Central Bank of China started implementing contractionary monetary policytargeting inflation. The inflation level was recorded at 1.9% in January 2010,

2.7% in February and 2.4% in March.

In April, Japans private sector machinery orders, the main component of thecountrys corporate spending, showed 5.4% increase from the previous month.

This proves that the Japanese car industry has survived the recession.

In April, China reported positive trade balance worth USD 1.68 billion. However,this also meant 87% fall YOY.

In April, Indias inflation rate decreased down to 9.6% as a result of thegovernments steps against inflation. The industrial sector has been growing at a

fast rate in recent years industrial production index reaching 17.6% in April, the

highest rate in 20 years.

Naoto Kan replaced Yukio Hatoyama as the new PM of Japan, becoming the 6thPM since 2006.

As Europe struggled with budget deficits, Asias major stock exchanges suffered volatility in the

first half of the year. The biggest falls in Asian stock exchange indexes came about in January

and April. But starting at the end of the first half of the year, indexes are finally going up. Thegraph below illustrates the movements of the MSCI Asia Pacific Index in the period of June

2009 June 2010.


38/62


Europe

Key events of the first ha

The EU member countriGreece.

As UK anticipated electiIndex fell drastically as s

The Central Bank of EU In April, the general me

975 billion for easing E

billion euro, equivalent

recovery from debt. IMF

billion, for the same purp

The debt problem of some o

whole region brought about the

were Spain, Portugal, Italy, Fra

Consequently, these countries

Economic Sentiment Indicator r

The EU Central Bank conti

banks of its member countries in

They will continue to carry on

market.

alf of 2010/

lf of 2010 in the financial and economic market

es agreed upon 45 billion euro, or USD 61 b

on that took place in May, the countrys Cons

ome economic indicators started showing volati

continues to keep the historically lowest interes

eting of EU decided upon 750 billion euro, eq

ropes economic crisis and a bailout for Gre

of USD 136 billion, is going to be spent so

is to give additional 250 billion euro,equivale

ose.

the EU members in addition to the uncertainty

iggest ever depreciation of euro against USD.

ce and England going down with debt budget

tarted cutting down government spending. I

ached 100.6, 23 month record high. In March, i

nues to buy government bonds and give mon

order to ease the debt and budget deficit proble

these steps with the hope of stabilizing the

NDIC 38

s of Europe:

illion bailout for

mer Confidence

lity.

rate of 1%.

uivalent of USD

ce. Of this, 110

ely on Greeces

t of USD 308.34

reigning over the

ollowing Greece

deficit problems.

addition, April

t was 97.9.

ey supply to the

ms of the region.

regions money


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The growing uncertainty

led to 15% in Euros value in

improves heavily depends on th

started to cut down the budget

been planned accordingly to be

Europe continue to damage the

Europe Index performance for th

The Americas

Key economic and finan

Except Chile andfinancial and eco

The economies ocatastrophe that

price hike in the

markets, is takin

American regio

expansionary mo

only one in the re

The Federal Resemarket stabilizati

alf of 2010/

in Europe after investors pulled out their mone

H1 2010. Whether Europes financial and ec

e regions exports. As Britains budget deficit

pending drastically. The budget spending for

lower than those of the previous years. Debt

regions financial market. Graphic below illu

e period of June 2009 June 2010.

ial events of the region in the first half of 2010:

Argentina, most countries in the region have

omic indicators in the first half of the year.

f Chile and Argentina were heavily damaged b

appened in the area in February of this year

orld raw materials markets, especially gold, c

g a toll on the economic and financial gro

. Most central banks in the region ar

etary policy by lowering interest rates. Right

gion implementing the opposite, contractionary

rve Bank of the US announced their plan of en

on strategy they have been implementing since

NDIC 39

from the region

onomic situation

ises fast, Britain

he next year has

problems across

strates the MSCI

hown improving

y the earthquake

. The continuing

pper, oil and gas

th of the South

e implementing

ow, Brazil is the

policy.

ing the financial

2008.


40/62


The US economexpected rate of

monetary policy.

As euro is volatidemand is growi

Some of the deveand June. In May

drastically raised

Also in May, CaThe economic statistics

years economic crisis. The exp

agricultural products have helpe

than previously expected by the

lot of damage to the country.

possible high inflation rates. Th

was Perus. The below graphic

from June 2009 June 2010.

THE DEVELOPED ECONO

THE UNITED STATES

The US economic indic

level showed a considerable Y

industries. More expansion ex

inflation rates, theyre still at a

2.7%, 0.3% lower YOY. The p

alf of 2010/

ic growth in the first quarter of 2010 was

.2% enabling the Federal Reserve Bank to carr

le and weak USD is appreciating against oth

g.

loped South American countries had high infla

, the economic leaders of the region, like Brazil

their interest rates.

ada raised interest rates.

or the first quarter indicate Argentinas recov

rts say high prices and the rising export levels

d the economy. Its neighbor Chile seems to be

experts. The earthquake that took place in Feb

n May, the Chilean central bank raised inte

highest economic growth rate for the first qua

illustrates the MSCI America Index performan

IES

tors for the first quarter of 2010 were favorab

OY improvement and there was growth in li

ected in the industrial sector. Although ther

tolerable level. GDP growth of the first qua

evious quarter, the last quarter of 2009, real

NDIC 40

measured at the

on their current

er currencies, its

ion rates in May

, Peru and Chile,

ery from the last

of the countrys

recovering faster

ruary has done a

est rates against

rter in the region

ce for the period

le. Consumption

ght and medium

s some rise in

ter of 2010 was

DP growth had


41/62


reached 5.6%. US domestic price level increased by 1.7%, with considerable increases in the

energy and food prices. According to GDP price indexes, civil and military spending of the

federal Government went up by 0.15% in the first quarter.

However, not everything was good news. Judging from the public sentiments, job market

is still not in a very good condition. Unemployment rate for the first half of the year reached9.7%. The number of new job openings for the first quarter was 162000, which was less than the

expected number of 184000, but that was also the highest in 2 years. Experts expect the inflation

to hit hardest on the poorer households, but in general, the economy seems to be recovering.

According to most economists and politicians, the real GDP growth rate for this year is expected

to be around 3-3.5%. Compared to Europes expected real GDP growth rate of 1-1.5%, this is a

rather good rate. However, there are some worrisome parts in this forecast including gigantic

budget deficit threatening to lead to higher interest rates and inflation.

Indicators January February March April May June

Unemployment rate 9.7 9.7 9.7 9.9 9.7 9.5

Average hourly wage 22.45 22.48 22.48 22.50 22.55 22.53

CPI 0.2 0.0 0.1 -0.1 -0.2 -0.1

PPI 1.3 -0.5 0.8 -0.1 -0.3 -0.5

US price level 1.2 -0.1 0.4 1.1 -0.5 -1.3

Source: http://www.bls.gov

According to this forecast, 2010 might end up being a good year for the US, bringing a

new economic beginning. This is largely thanks to the tax discounts for new first-time home

buyers, the more favorable loan regulations for new car buyers and reforms from the Federal

Government on loan regulations for finance and real estate markets. As of the end of March

2010, about USD 1.25 billion have been spent on this program, and the Federal Government

leaders plan for a long-term interest rate decrease.

Table 8. US Real GDP growth projection 2010 /monthly/

Months May June July August September October November December

GDP 14,632.3 14,632 14,684 14,684 14,684 14,743 14,743 14,743

Source: http://www.forecasts.org/gdp.html

After his meeting with the president Barack Obama, Ben Bernanke, the Federal Reserve

Bank chairman, told journalists that external factors have significant impacts on the US


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economy, and that Europes financial crisis is dangerous for the whole of the global economy,

especially the US.

Inflation

By the end of June 2010, inflation in the US has increased by 1.1% YOY. But comparedto the individual sectors price increase of health services by 3.5% and gas and oil increase

of3.9%, - 1.1% is a rather good number. This favorable inflation estimates are the result of price

decrease in products and labor after the economic crisis. Therefore, the inflation rate is expected

to continue at the same level in this and the coming year.

2010 events

In 2010, US budget deficit reached USD 1.6 billion, and total debt is 360% of GDP, ofwhich, government debt taking up 90%.

About 40% of all the employed in the US work at low-salary service jobs. Although therewere 500.000 job openings since the beginning of the year, the number of unemployed is

not decreasing. To improve this situation, President Barack Obama is planning on a new

program that will give financial help for small and medium business owners that offer

employment.

The US Congress announced that in order to eliminate budget deficit, it will be necessaryto increase every type of tax to at least 2.4 times the original amount. Meaning 10% tax

will be 24%, 15% will be 36% and 35% will be 85%.

According to President Barack Obama, the economic growth was positive and constant inH1 2010. This is a sign of recovery whereas when he took his position, the economy had

fallen to its lowest point. He has been taking many steps towards recovering theeconomy, giving special attention to the unemployment problems. He has given a

promise to increase aid to the state governments to help keep the government jobs like in

police, health services and firefighters.

President Barack Obama is to implement a USD 2-3 trillion program for the economicrecovery. Experts estimate that theres a possibility that the budget deficit mi

2010 1st half mongolia economic review

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