Introduction

Despite the global pandemic, declining agricultural sector exacerbated by extreme

weather events, and geopolitical tensions caused by the Russian invasion of Ukraine,
Mongolia has still managed to sustain a robust economic growth for the last five years
to become one of the fastest growing economies in the world.
Whether this growth will be sustained in the future or not will depend on a successful
diversification of the economy that encourages greater involvement of the private
sector, sustaining current levels of foreign direct investments to the mining sector
while boosting it to other sectors, and effective management of revenue from natural
resources to increase public investment efficiency.
Inflation has stabilized in 2024, entering the target interval of ±6 percent, and the Bank
of Mongolia has cut the policy interest rate by three percentage points. Foreign
exchange reserves have revived from its historic lows reached in 2020, strengthening
the Mongolian tugrug against the US dollar. FDIs are expected to increase as
international credit rating agencies, such as Fitch, Moody’s, and S&P Global ratings,
have improved Mongolia’s credit rating to “B+”.
We have focused on 5 main topics in this outlook, capturing the economic state of
Mongolia and providing useful insights to investment opportunities:
• Recent developments of the Mongolian economy
• Macro-economic outlook and market implications
• Key themes
o FX reserve
o Coal market
o Inflation
• Monetary policy and fiscal policy implications
• Investment guide for 2025
The economy grew by 7.4 percent in 2023, increasing from an already
high growth of 5.0 percent in 2022.
The growth of real gross domestic product has been In 2023, the economy expanded by 7.4 percent, with
stellar since shrinking by 4.6 percent in 2020. In 2021, the mining sector and the transportation and storage
despite border restrictions due to the COVID-19 sector contributing 2.6 and 1.8 percent to this growth
pandemic and Chinese zero-COVID policy, the respectively. Following the growth in mining, related
economy has managed to grow by 1.6 percent. This sectors including the transportation and storage as
growth was driven by the financial and insurance
well as service sectors have been flourishing.
sector along with the information and
communication sector, expanding by 9.7 percent and However, the growth has been held back by the
20.7 percent respectively. Overall growth in the last agricultural sector suffering from dzud, a periodic
five years have been largely driven by the mining crisis of extreme cold in the winter, with a contraction
sector as commodity prices surged, commencement of 8.9 percent. This has impacted the gross domestic
of Oyu-Tolgoi’s underground mine, one of the largest product growth by 1.3 percent, as the agricultural
copper mines in the world, developments in sector is responsible for around 10 percent of the
Tavantolgoi coal mine along with growing coal GDP.
demand from China.

Figure 1. Growth rate of GDP, by sectors. Mining Figure 2. Contribution of sectors to the GDP growth
remains the main driver of growth, followed by the of 2023- Agriculture has set back the growth due to
wholesale sector the extreme cold wave.
Source: National Statistics Office

Inflation has decreased, hovering around the upper level of the target
interval. Bank of Mongolia has decreased the policy rate by 3 points in
2024, easing the tight monetary policy.

During the COVID-19 pandemic, global inflation levels consumption due to the permanent increase in
have soared, with developing countries taking the pensions and minimum wage along with public wages,
biggest hit. After reaching the highest level of 16.1 drove inflation started to increase slightly, reaching 7.0
percent in 2022, Mongolian inflation has diverged into percent by October 2024.
Bank of Mongolia’s target level of 6±2 percent by
November 2023. Inflation reached its lowest level at 5.1 From June 2022, food and beverage CPI has increased
percent just before the parliamentary elections held in by 20.1 percent while the general CPI has increased by
June 2024. After the election, increased private 17.3 percent. Price increase in education was the main
 driver of the general CPI growth last year, as CPI basket. The average household spends around 20
universities’ and private high school’s tuition fees have percent of their monthly income solely on one child’s
increased by almost 16 points at the beginning of 2023- university tuition.
2024 school year, higher than any other product in the

Annual changes, percentage

CPI

Figure 3. Annual inflation rate on the right-hand side, general and sectors’ CPI on the left-hand side. Core inflation
remains sticky; food and non-alcoholic beverages and education have been pushing the inflation to the upper level
of the target interval.
Source: Bank of Mongolia, Statistical bulletin 2024-09

Fiscal balance had a surplus of 785.9 billion tugrugs in 2023 after 5

years of deficit. Total government revenue has increased by 31.7
percent while expenditure has grown by 23.7 percent.
In the last four years, the fiscal balance was in deficit. points of the growth. Interest payments have also
In 2020, the deficit reached 4.5 trillion tugrugs, equal increased by approximately 42 percent.
to 12 percent of the GDP. Since then, the gap
between revenue and expenditure has been Social security expenditure has increased by 53
shrinking, reaching 2 percent of the GDP in 2022, and percent as pensions increased last year. In 2020,
there were 4 pensioners for 10 workers, but this
turned positive in 2023.
number is forecasted to reach 7 in 2030 as the mean
Mining led growth of the revenue has been caught age of the population has increased by 8.3 years from
up by the increased public spending due to the 2000. This along with large dividend payments of
increased social welfare and transfer before the Erdenes Tavantolgoi mine and minimum wage hikes
parliamentary elections. The budget for 2024 has has increased the public transfer by 12.7 percent.
been amended by the government in August, Domestic investment has also increased by 36
increasing the government expenditure. percent. Despite substantial increase in expenditure,
fiscal balance still managed to be in surplus.
In 2023, government expenditure has increased by
23.7 percent in year over year, with capital Government revenue has grown by 31.7 percent,
expenditure, goods and services, and subsidies and almost double the compound annual increase in the
transfers each contributing around 7 percentage last 5 years. Income tax has contributed 10.1
percentage point of the growth, and along with value
added tax, social security contributions, and other while reductions in the stabilization fund has held
taxes add up to 32.5 percentage point of growth, back the revenue growth by 3.9 percentage points.

Debt management strategy has been successfully implemented,

bringing the public debt to GDP ratio down to 47 percent in 2023.

Increased stimulus during the COVID-19 pandemic Khuraldai bonds and was set to mature in March
has led to macroeconomic instability, and has 2024, bringing the debt-to-GDP ratio down to
pushed public debt to the nominal GDP ratio above around 47 percent by the end of 2023. By the second
the ceiling level of 60% mentioned in the Fiscal quarter of 2024, government gross debt stands at
stability law. However, through successful 29.7 trillion tugrugs. Over 90 percent of the
implementation of debt management measures government debt is external, and the government
between 2022 and 2024, under the Century I, II and has managed to bring the build-transfer concession
III projects, the government has managed to secure down to 0 in the first two quarters of 2024, although
financing with relatively low interest rates. This was the debt guarantee has increased slightly.
used to refinance the overdue portion of the

Figure 4. Government debt by debt types.

Source: Ministry of Finance, Debt bulletin 2024

Exchange rate against USD has stabilized. By the end of the third quarter of
2024, MNT has strengthened by 0.8 percent against USD compared to the
beginning of the year.

The tugrug has lost around 20 percent of its value pandemic. After hitting the peak of 3,524.98 per dollar
against US dollar in 2022. Due to China’s zero- in March 2023, the tugrug has appreciated by 0.3
COVID-19 policy closing the border along with percent monthly on average against the US dollar for
increased import price of petroleum oil as a result of the last six quarters. This stabilization was mainly
the geopolitical tensions between Ukraine and driven by the dissipation of the geopolitical tensions,
Russia, tugrug has weakened drastically during the
opening of the border with China and softer import the account surplus from the previous year, effective
prices. debt management, and refinancing has encouraged
this growth in the foreign exchange reserves. In an
As of August 2024, Mongolian foreign exchange
effort to reduce interest payments, Bank of Mongolia
reserves sit at 4.7 billion USD, enough to cover
has repaid 6 billion Chinese yuan from the swap
around 5 months of imports. This is a 23.8 percent
agreement with China by the end of 2023. In the last
increase year over year though a slight drop from the
three years, the compound annual growth rate of the
5.2 billion USD high in March of the same year. With international reserves was 18.6 percent.

Figure 5. Exchange rate on the right-hand side, REER and NEER indices on the left-hand side
Source: Bank of Mongolia, Statistical bulletin 2024-09

Foreign trade balance was equal to 28.4 percent of GDP in 2023,

highest performance in the last decade.

By the end of the first half of 2024, Mongolia’s foreign solely on imported petrol and diesel which amounts
trade turnover has increased by 12.2 percent from last to around 20 percent of total imports and geopolitical
year, reaching 13.2 billion US dollars. Exports have tensions have increased the prices of these
exceeded imports by 2.5 billion dollars, mainly driven commodities, leading to an increased spending on
by the mining sector, which accounts for around 90 imports.
percent of the exports. Mineral products’ exports
Machinery, equipment, and electric appliances’
have increased by 6.6 percent last year, with copper
imports along with vehicle imports is responsible for
ores and concentrates, and coal exports increasing
21 percent of total imports each and has grown by
by 9.4 percent and 7.5 percent respectively.
45.8 and 36.3 percent respectively.
On the other hand, imports have increased by 25.8
percent compared to the same period last year,
amounting to 5.4 billion US dollars. Mongolia relies
Mining sector dominates the flow of foreign direct investments.

In the last five years, the compound annual growth indicating a successful economic recovery from the
rate for total foreign direct investments was 5.3 pandemic.
percent. Around 70 percent of the FDI flow is
By the end of 2023, FDIs to the non-mining sector is
directed into the mining sector. After falling slightly
equal to only around 6.9 percent of the GDP. In order
during the COVID-19 pandemic due to increased
public debt, the inflow has picked up in the last to attract more foreign investors, Mongolia has been
quarter of 2022. imposing investor friendly policies, including minimal
restrictions in market entry, same tax rules for both
In 2022, the total FDI inflow was 3.4 billion US dollars, domestic and foreign investors. Foreign investors
26.0 percent increase year over year. FDIs fell slightly enjoy the same rights as Mongolians to establish,
at the beginning of 2023, as can be explained by transfer, and securitize legal entities except for real
reduced financing needs in Oyu-Tolgoi mine once estate properties. Foreign investors are barred from
the underground portion was fully operational. land ownership, though they can obtain the right-to-
However, in 2023, Mongolia has successfully issued use licenses
650 million and 350 million US dollars worth of bonds,
GDP growth driver assumptions.

Forecasting the GDP for countries like Mongolia, rich with natural resources, is highly dependent on
output and revenue of natural resources as well as its usage effectiveness. Out of the 14 indicators
that have been used to predict the growth of the economy, the most significant ones include natural
resources production, namely copper, coal, and gold production which constitute most of the
mineral exports, public investment, transfer, and consumption levels as well as tax rate assumptions.
Effective use of the revenue from natural resources determines whether the growth will be
sustained as it is common to see the ‘resource curse’- quick and marked downfall after short term of
sudden growth.
To manage mining revenue more efficiently the Mongolian government has inaugurated the
Sovereign Wealth fund as the corresponding law was implemented at the beginning of 2024. The
fund is comprised of three accounts - Future Heritage fund, Development fund, and Savings fund.
Several major mining corporations will contribute a share of their revenues to the fund. Successfully
diversifying the economy to hedge the risk of vulnerability to commodity market fluctuations,
translating the revenue from natural resources and foreign direct investments into projects aimed
at reducing poverty, creation of well-paying jobs, as well as developments of the high value-added
sectors will assure sustained growth in the long term.

Natural resources production assumptions: have projected that the compound annual growth
Copper production to increase by around 6 percent rate of public consumption will be around 8.2 percent
annually, with slight decline in 2025, modeled using and reaching around 15.8 billion US dollars by the end
ARIMA. Oyu-Tolgoi mine’s underground production of 2027, constituting about 14.6 percent of the GDP.
is predicted to drive the copper output growth. Globally, 16.5 percent of the GDP is public
Copper price is forecasted to reach a little above 10 consumption, 15.3 for East Asian and Pacific
thousand US dollars per ton by the end of 2027. As countries and 14.6 percent for middle income
for coal, the production level is predicted to hover countries.
around same level of 2024, which has increased by 14
Public transfers assumptions: Public transfers have
percent from 2023. Coal price has also seemed to
reach a plateau state. Aside from the slight decline in doubled in value since 2020, as stimulus increased
2025, the price is assumed to be quite stable. during the COVID-19 pandemic followed by dzud in
the winter. During the pandemic, public transfers
Public investment level assumptions: Public increased sharply. In addition to the onetime 300
investment growth is projected to peak in 2024 and thousand tugriks to every Mongolian in an effort to
stabilize at around 4 percent annual growth. keep the economy from shrinking further, country-
wide mandatory testing along with other
Tax rate assumptions: As in the government preventative measures have increased public
expenditure budget for 2025, we have assumed that transfers. With the assumption that such extreme
labor tax rate along with the consumption tax rate
events won’t happen in the near future, we have
would be constant in the next three years. forecasted that percentage of public transfers to the
Public consumption assumptions: Percentage of GDP will decrease slightly through the next 3 years
public consumption to GDP has been converging to to reach 12.7 percent in 2027.
the average of upper middle-income countries. We

GDP growth to slightly drop in 2025, then flatline through 2027.

Mining sector will be a key in keeping the growth stable.
Commodity market outlook is positive in the next three years, keeping the mining sector growth stable in Mongolia.
However, the outlook shows stable growth, unlike the boom in 2022-2023. We have forecasted GDP growth to be
around 6.8 percent in 2024, a little less than the year before. From 2025 to 2027, GDP growth is predicted to hover
around 5.2-5.3 percent with little deviation.

Figure 6. GDP growth rate forecast scenarios Source: Analyst’s estimation

With every driver held constant, except commodity 90 percent of exports, and Mongolia’s dependence
net export price index, we have simulated three on imported petrol and diesel fuel. If the net export
scenarios where the commodity net export price price flatlines, the growth outlook is projected to
index is held at the value of second quarter of 2024, reach 9.7 percent by the end of 2027, compared to
one where it increases by 5 percent annually, and the 5.3 percent in the baseline forecast.
another where it decreases by 5 percent annually.
If the commodity net export price decreases
The net export price staying constant has a positive annually, which is an unlikely case in the near future
effect on GDP growth than when it increases in consideration of the outlook on the commodity
annually, despite mineral products comprising prices, GDP growth is forecasted to shrink to 3.8
around quarter of total imports, compared to the 80- percent.

Figure 7. GDP growth rate based on commodity net export index

Exports are projected to grow by 5.2 percent annually on average,
reaching around 19 billion US dollars by the end of 2027.

While the commodity price outlook looks stable, By 2027, the copper production is projected to reach
ranging from 5 percent decrease to 8 percent around 1.9 million tons and copper price is projected
increase on average annually, Mongolian exports to reach around 10 thousand US dollars per ton by
outlook still shows growth potential. Coal production around that time.
growth is forecasted to increase modestly after
As for iron, the production is forecasted to increase
almost tripling in the last three years. The coalition
by around 20 percent but it is offset by the decrease
government has proposed 14 mega projects focused
on development and infrastructure in the budget in its price, leaving total revenue largely unaffected.
proposal for the next four years. In order to further From the peak of 307 dollar in the second quarter of
2021, iron price has been halved by the end of the
develop the mining sector to capitalize the
commodity market rally more efficiently, the 14 third quarter of 2024. In the upcoming three years,
projects include: the price of iron is predicted to fall slightly by around
4 percent annually.
• Completion of Gashuunsukhait-
Mongolian mining sector is an integral driver of the
Gantsmod cross-border connection,
economic growth. With an ample supply of copper,
increasing coal transportation from
coal, iron, and gold reserves, the mining sector made
Tavantolgoi mine by 40 million tons
up about 25 percent of GDP, 78 percent of FDIs and
• Construction of 450 MW thermal power
87 percent of exports. Mongolia’s economic
plant connected to Tavantolgoi coal mine
dependence on the mining sector has been growing
Out of the 14 proposed projects, five are planned to in the recent years. Despite the commodity market
commence in 2025. With an improved port access, boom, commencement of the underground portion
exports revenue is anticipated to reach around 18.3 of Oyu-Tolgoi mine and increased coal demand from
billion US dollars by the end of 2027. China has driven the exceptional growth last year,
the economy remains vulnerable to any price shock.
By the third quarter of 2024, with the
commencement of underground mine of Oyu-Tolgoi In the last five years, the compound annual growth
mine copper production has increased by 45 percent rate for total trade turnover was 15.1 percent. For the
compared to the same period of 2022. However, the 2023-2027 period, this growth rate is forecasted to
peak production of the mine is expected to happen be around 14.3 percent.
between 2028-2032, accelerating the mine’s
production and sustaining a growth rate of around 5
percent in the next three years.

Figure 8. Exports forecast Source: Analyst’s estimation Figure 9. Imports forecast

Source: Analyst’s estimation
Figure 10: Foreign trade forecast Source: Analyst’s estimation
Copper, coal, and iron ore are main mineral
Approximately quarter of the Mongolian
export products of Mongolia. For the upcoming
workforce is employed in the agricultural sector,
three years, commodity prices outlook is positive
which makes up roughly 10 percent of the GDP.
with:
With limited technological and industrial
• Copper price to reach 10 thousand per developments in the sector, the well-being of the
ton US dollars by 2027. sector is highly vulnerable to weather events. An
• Coal price will increase to reach 150 US extreme cold winter in 2023 has hindered GDP
dollars in 2026, then flatline. growth by 1.3 percent. However, the frequency of
• Iron price will fall slightly by 3.6 percent dzud - an extreme cold wave - tends to be around
quarterly. once in a decade.

Mining establishments take up the

majority of the energy consumption in
Mongolia. Mongolia generates around 80
percent of the country’s energy consumption As of the second quarter of 2024, coal represents
domestically; the rest is imported mainly from roughly 60 percent of total exports. With China
the two bordering countries - China and Russia. receiving around 90 percent of the total coal
In the last ten years, the compound annual exports, the impact of Chinese coal demand from
growth rate of the energy consumption was 6.2 Mongolia is significant for the economic growth.
percent, and 5.4 percent for the gross
generation. The difference is made up from the
imported energy sources, exposing the country
to dependency to other countries.
Mongolian macroeconomic indicators’ forecast (TDB Securities)
Macroeconomic indicators 2024 2025 2026 2027

1 GDP growth 6.8% 5.2% 5.2% 5.3%

2 Public investment, trillion MNT 3.8 4.0 4.3 4.5

Public investment/GDP 4.9% 4.6% 4.4% 4.2%

3 Public consumption, trillion MNT 10.8 12.5 14.2 15.8

Public consumption/GDP 13.8% 14.2% 14.5% 14.6%

4 Public transfer, trillion MNT 11.8 12.5 13.2 13.8

Public transfer/ GDP 15.0% 14.2% 13.5% 12.7%

6 Export, billion USD 16.7 20.2 21.7 23.3

7 Import, billion USD 12.4 16.1 17.2 18.2

8 Foreign trade balance, billion USD 4.3 4.0 4.4 5.1

Foreign trade balance/GDP 18.5% 14.5% 14.2% 14.3%

9 Labor participation rate 61.9% 63.2% 64.1% 64.8%

Mineral products output indicators

Commodity indicators 2024 2025 2026 2027

1 Coal output, kilotons 84,014.8 80,517.1 80,601.3 82,318.2

Coal price, US dollars* 250.0 228.0 206.5 212.0

2 Copper output, kilotons 1,618.9 1,656.8 1,779.1 1,918.2

Copper price, US dollars* 9,331.4 9,856.0 10,034.1 10,109.0

3 Iron output, kilotons 5,951.7 5,563.9 6,800.3 8,311.3

Iron price, US dollars* 109.6 102.4 96.9 92.9

4 Gold output 13.5 16.1 16.0 16.0

Gold price, US dollars* 2,423.9 2,821.8 2,941.3 3,059.9

*Bloomberg analysts’ estimation

Mongolian economic outlook is positive with stable economic growth prospects in sight but nonetheless risks
persist. Investors should closely follow three key forces that move the economy: foreign exchange reserves,
inflation, and the coal market. We hold a moderately optimistic outlook for each factor, foreign exchange reserve
levels should be maintained with little hindrance, inflation should hover in the upper level of the target interval set
by the Bank of Mongolia, and demand in the coal market from China would remain at the same level as last year.
Maintaining a comprehensive understanding of developments in each area is essential for making informed
investment decisions in Mongolia.

Coal market price Foreign exchange reserve Inflation

During the Australian coal ban, Bank of Mongolia has increased By the end of 2024, annual
Mongolia has risen as a the minimum foreign exchange inflation rose to 8.1 percent, a
prospective main supplier of coal reserve levels by one little above the target level set by
for China. Since then, two percentage point to 16 percent. the Bank of Mongolia, mainly
governments have been With the new requirement, due to 30 percent increase in
working on improving the foreign exchange reserves electricity price. Driven by
transportation links. Coal should be able to cover around 6 increased government spending
production is predicted to reach months of imports. Even with the inflation is expected to be
80.5 million tons in 2025, around increased foreign exchange around 9-10 percent, little above
the same level as 2024. levels, due to the significantly the upper level of target interval.
However, coal prices are higher level of import With steady inflation in sight, we
predicted to decrease by around expectations, keeping the believe that fixed income
8-9 percent annually for the next strength of the domestic investments should be an
two years, then increase slightly currency proves to be a investment priority in 2025.
by 3 percent in 2027. challenge - making an
investment in foreign currencies
a more viable option.

Coal market price

Mineral products make up around 80 percent of Only coal was traded in the exchange for the first 8
Mongolia’s exports, with coal being the dominant months, which was then followed by iron ore, copper
contributor. The share of coal within the mineral concentrate, and fluorite products. Still coal trade
exports has been steadily growing, especially in the dominates the trade amount making up around 95.5
last two years to an average of 65 percent. This percent, with iron contributing 4.1 percent, copper
growth is driven largely by increasing demand from 0.3 percent, and fluorite making up the last 0.1
China, as the country largely relies on coal for energy. percent.
The bottleneck transport point problems have been
remedied by the simplification of the customs The shift to exchange trading has brought up
possibilities of selling at fair international market
clearance process and additional truck lanes,
increasing the coal export to China by almost 40 prices. Commencement of the mining exchange has
percent from 2022. coincided with the rally of commodity prices and has
brought up the coal prices to 160-180 US dollars per
Law on Mining Products Exchange was approved in ton compared to 70-90 US dollars before. By the
December 2022, with the first successful trade second quarter of 2024, around 20 percent of the
happening in 2023. Establishing the mining product coal export was traded through the exchange
exchange enabled foreign buyers to purchase mining market. There are 143 more auction calls for trades
products directly from the companies. By the third scheduled for the last quarter of 2024 on the mining
quarter of 2024, the exchange has 21 supplier products exchange. Around half of the calls are for
companies, 11 registered commodity brokers, and has coal with an average call price of 450-1050 Chinese
made over 450 deals for a total of 19.6 tons of mining yuan depending on the category, around third for iron
products.
ore with average call price of 56-87 US dollars, and
the rest was for copper and fluorite.

Coal consumption demand from China is still high but cement and coal-to-chemical processes are also
is expected to flatline in 2025. With the hydropower increasing. Lower gas prices and increased
decline due to the drought and post-COVID production after COVID-19 has caused the coal price
economic bounce back, China’s coal demand has to fall by about one-third in 2024 from its peak in
increased by 7 percent in 2023. China’s effort to 2022. There might be further decline as renewables
implement renewables as a new energy source will start to meet the electricity demand but the price
put the demand growth into a slight decline, but coal seems to be reaching its plateau state, averaging
still remains the main source of the country’s energy around 5 percent change interval
system. Demand from non-energy sectors such as

Coal production is predicted to be around 80.5 million tons in 2025.

Figure 11. GDP growth forecast based on mineral products’ production Source: Analyst’s estimation

Mongolian coal production is expected to slightly decline in 2025 while still hovering above the 2018-2023
average, and then become stable. In October 2024, Mongolia and China have agreed upon the long-awaited joint
construction of the cross-border infrastructure, which promises to increase bilateral trade to 20 billion US dollars
annually in the near future. With China receiving around 90 percent of the coal output and the successful
completion of this project, coal export is expected to increase significantly in the next couple years.

Foreign exchange reserves

As of the third quarter of 2024, Mongolia’s foreign In December 2024, the Bank of Mongolia has
exchange reserves have reached almost 5 billion US increased both the domestic and foreign currency
dollars, 15 percent increase from the same period last reserve requirement level by one percent - 11 and 16
year. Despite increasing three-fold since 2016, the percent for domestic and foreign currency
coverage remains the same as in the past, at 5 respectively in order to hedge the risk of sudden
months of the country’s imports. Mongolia’s foreign weakening of the domestic currency against US
exchange reserves have dipped to 2.6 billion dollars dollar. In 2025, the central bank expects a higher level
in August 2022, due to the slowing of the foreign of revenue from exports, increased demand for the
direct investments and decreased exports revenue global interest in the Mongolian mining sector, and
due to the border restrictions. Since then, the the reserves to continue to grow steadily. Currency
reserves have been steadily recovering, and has swap agreements which has amounted to 7.25 trillion
exceeded 5 billion US dollars in the first quarter of tugrug, or 15 billion yuan between China and
2024.
Mongolia has been renewed for another three years agreements mentioned above would help investors
in 2023. make effective decisions. Despite the required level
of foreign exchange reserves being maintained, the
Making sure to keep themselves informed on any
Mongolian tugrug is expected to weaken slightly
bond repayments in the future as well as the swap
against the US dollar throughout the next year.

Figure 12. Gross international reserve and months of import cover

Source: National statistics’ office of Mongolia

Inflation
Due to the lack of diversification in the economic import prices as a result – inflation has abated
sectors, Mongolian economy follows the commodity significantly in 2024, leading to policy rate cuts.
boom and bust cycle closely. As the government However, with the electricity and education CPI
revenue increases, backed by the revenue from increasing the general inflation to the upper level of
natural resources, fiscal spending increases, and the target, it’s unlikely for the central bank to cut the
shrinks when the market falls. rate any lower.

Bank of Mongolia has set the target interval for With the ease of use of non-banking financial
inflation to 5±2 percent, and then lowered it to 5 institutions, household debt has been stacking up
percent in 2027. However, the effect of a significant significantly, pushing the average loan to income
increase in the electricity prices will likely spill into the ratio to around 70 percent for an average lender.
first half of 2025, keeping the inflation at around 7 Domestic demand increase will likely continue in the
percent, in a positive scenario. next year, with credit growing faster than ever before.

Increased government spending as well as strong Government spending is also predicted to increase
domestic demand will keep inflation a little above the significantly, mainly to finance the mega projects
target level for at least the first half of 2025. proposed by the new coalition government.
Supported by steady exchange rate and lower
Section 4. Policy implications- Monetary policy rate and fiscal policy

As with other natural resource rich countries, However, mainly due to political convenience, public
Mongolia’s economy tends to follow the commodity transfer has increased significantly in the years
market cycle. It is evident from the historical data, following the growth peak. Around 1 percent of the
especially during the mid-2008’s commodity price natural resources’ revenue was being saved, while
boom when commodity prices rose by average of 75 the majority of the revenue was spent on social
percent in real terms. Mongolia’s economy growth transfer, wages, and salaries. Despite increased
has reached a historical high in the following years, social welfare spending, labor participation rate and
nearing almost 18 percent in 2011 and was hailed as human capital index has not improved, implying
the Saudi-Arabia of Asia. Unfortunately, a study inefficiency in the spending. In order to finance the
conducted by International Monetary Fund shows increased social transfer and public spending,
that around one third of the booms are followed by government debt has increased.
busts, usually with the same deviation- the sharper
the price increase, the larger the subsequent bust. Mongolia has missed the beginning of the boom due
to the border restrictions and bottleneck problems in
This was evident in 2015-2016, when Mongolia’s GDP
growth has fallen to 1.5 percent from 17.3 in 2011. With the transport points but has benefitted from it
the country’s economy highly dependent on nevertheless. Developments in the railway
connecting the Tavantolgoi coal mine to the border,
commodity market, which is known to be quite
starting of the underground mining of Oyu Tolgoi
volatile, long-term stable fiscal policy along with
efficient public spending is crucial. mine along with the commencement of mining
products exchange in the beginning of 2023, the
In 2017, Mongolia has secured an economic macroeconomic conditions of Mongolia have
stabilization package worth of 5.5 billion US dollars, improved substantially in just one year.
after the commodity prices have fallen sharply,
As exports have increased by 64 percent in the last
exports slowed down and public debt has become
unsustainable. Mongolian authorities have promised three years resulting in the gross international
reserve to reach around 5 billion US dollars, ensuring
an implementation of a program to maintain
macroeconomic stability, fiscal consolidation being that reckless public transfer and inefficient social
welfare system doesn’t catch up to the mining
the critical pillar.
revenue is vital with the inevitable of fall commodity
2017-2019 were transformative years in the fiscal prices.
policy. In order to reduce the debt pressure, the
government has aggressively reduced debts with In an effort to manage mining revenue more
higher interest rates, and principal payments for the efficiently, the Mongolian government has
inaugurated the Sovereign Wealth fund as the
total debt almost doubled in 2017 compared to year
before. Debt service has reduced significantly since corresponding law was ratified in the beginning of
2024. The fund is comprised of three account- Future
then, and by the second quarter of 2024, debt-to-
heritage fund, Development fund and Savings fund,
GDP ratio stands at 77.6 percent, almost tripled down
from 2016. and several major mining corporations’ share of
revenue will be transferred into it.
The commodity market boom, increased FDIs to the
The outlook looks much more promising with
country, and the current fiscal surplus after a long
period of deficit reminds economists of the 2010- government efficiently spending the mining revenue
2015 cycle of boom. Even though the commodity more on infrastructure developments and the
price increase is not as steep as in 2008, the global significantly decreasing inefficient public transfers.
economy bouncing back after COVID-19, coupled
with geopolitical tensions have increased the price
by almost 200 percent in 2022.
By the third quarter of 2024, the Mongolian capital markets has experienced exceptional growth and
diversification. Market capitalization has exceeded 12 trillion tugrugs, equal to 17.2 percent of the GDP, marking a
3.5-fold increase over the last five years. Trading volumes have quadrupled in the same period, with the most
recent figure at 1,058.7 billion tugrug, a 61.7 percent increase compared to the same period last year.

The market’s development has been bolstered by the introduction of new securities, including asset backed
securities (introduced in 2021) and exchange traded funds (introduced in 2024), expanding investment options for
both retail and institutional investors. Company bonds dominate the trading landscape, contributing over half of
the total volume, followed by equities (23%), asset-backed securities (12.4%) and funds (6.1%). Currently, 10 active
company bonds are available on the Mongolian Stock Exchange, showcasing the growing demand for these
instruments.

This growth has been accompanied by a significant increase in interest in the capital markets, driven by regulatory
improvements and market performance. The need for investment instruments was vital, with the tugrug
depreciating by almost 30 percent in the last 5 years, and by around 20 percent in just 2022 due to the pandemic.
The exchange rate has stabilized since then but the need for the alternative investments remain. Considering the
vulnerability of the Mongolian tugrug’s strength against US dollars, diversifying the investment portfolio to include
foreign currency instruments would be a more attractive option.

We anticipate a lower deposit rate, considering the lagged effect of

policy rate cuts.

In the last five years, the growth rate for the deposit monetary policy rate by 3 percentage points from 13
in commercial banks have been steadily decreasing, percent, the average deposit rate has not followed
implying the interest of the investors in the accordingly. Inflation rate has hiked to 8.1 percent in
alternative savings methods. Due to the uncertainty December 2024, mainly due to the electricity price
in the macroeconomic fluctuations and vulnerability increase. In the monetary policy for 2025, the central
of the financial sector of Mongolia to the external bank has declared that in order to keep the
impacts, investors have been exploring other sustainable growth and prevent another boom-and-
opportunities than deposits. Average deposit rate for bust cycle, it will implement tighter monetary policy.
the US dollar is approximately 4 percent. Deposit rate We anticipate lowered weighted average deposit
for domestic currency is approximately 12.8 percent. rate, considering the lag effect of the monetary
Since the Bank of Mongolia has lowered the policy.

USD Bonds should be the investment priority in 2025.

Over the counter market in Mongolia has been the foreign exchange reserves in the required level
rapidly expanding. In the first half of 2024, 62 bonds will not be an easy task, more so with the recent
worth of 714.7 billion tugrugs, almost double the policy to keep it at 16 percent. Thus, keeping the
amount of bonds issued in Mongolian stock domestic currency’s strength against US dollar might
exchange, has been issued in the OTC market. prove to be a problem. Overall, we believe that
Average coupon rate and yield of the Mongolian including US dollar bonds is vital for the investors to
corporate bonds denominated in US dollars exceed get the advantage of higher than average yields
10 percent, and government bonds average around 7 while protecting the portfolio from devaluation.
percent yield, higher than average for US dollar Commercial banks in Mongolia have been enjoying
investment instrument. Despite the significant uptick better credit ratings – couple of the strategic banks
of the fiscal spending, we cautiously anticipate that have issued USD bonds in 2024, with a high
the fiscal balance will be in surplus for next year, possibility of the remaining three to follow the trend
supported by the substantial fiscal revenue due to in the next year.
the natural resources’ revenue. However, keeping
Figure 13. Interest and coupon rates of alternative investment instruments in US dollar

In the last couple years, in addition to the government bonds, companies in the private sector have successfully
issued bonds in US dollar, promising higher than average coupon rates of around 10 percent in the open exchange,
and 10.3 percent on average for over-the-counter exchange.

Including MNT bonds in the portfolio will guarantee investors a higher

return as well as better liquidity.
Starting from 2014, in order to develop the capital coupon rate. At the same time there are 8 active
market, the government has started issuing bonds corporate bonds in Mongolian Stock Exchange, with
through Mongolian Stock Exchange. Since then, an average of 17.4 percent coupon rate and maturity
government bonds were one of the most actively date of 12-36 months.
traded instruments in the market, mainly because
In 2024, International Finance Corporation has issued
government bonds are exempt from tax. This
increased interest in the debt instrument has allowed its first MNT bonds for a supranational, which
the corporate to start offering their own bonds in the demonstrates an increased interest in Mongolia.
Significant commodity boom in 2023, which has
market. At the start, the majority of the investors were
proven to be sustainable in 2024 and will likely
retail investors, forcing the privately placed debt
continue in at least the near future has attracted the
instruments’ maturity date to be especially short.
Developments of the over-the-counter market and interest of the potential investors, and these bonds
eased legislations for issuance and has allowed will allow them to get the exposure of investing in
country’s currency.
institutional investors to easily invest in the market,
leading to corporate bonds the most popular With relatively higher rates and liquidity than any
investment instrument. By the end of 2024, there are deposit in the country and significantly less risky than
more than 60 active corporate bonds traded in the equities, MNT bonds are considered one of the most
OTC market, promising around 16-20 percent attractive securities in the country.
Figure 14. Trade volume by securities’ type in Mongolian Stock Exchange

Improvements in the regulatory environment as well as increased investor appetite have allowed the bond market
to develop rapidly in the last decade. With an effort from both the issuers and investors to address the challenges
in the bond market, the market is expected to grow even further in the next years.

We see opportunities in the bond market and promising developments in the near future. Fixed-income investment
instruments such as USD and MNT bonds are attractive options to build a portfolio with substantial return and
lower risk.

Investors should carefully consider risks, charges, and expenses associated with the investment before investing.
Historical performance doesn’t guarantee future results. This publication has been prepared on the basis of
historical performance as well as likely economic developments in the future, which should be taken as a general
information, not as a recommendation on any specific security.