Friday, March 17, 2017

Mongolia maintains rate, outlook favors rate change

    Mongolia's central bank left its policy rate unchanged at 14.0 percent, saying the monetary policy outlook favors future changes to interest rates.
     The Bank of Mongolia (BOM) lowered its rate by 100 basis points in December following a sharp 450 point hike in August to help stabilize the exchange rate of the tugrik and preserve international reserves and thus financial stability.
     The central bank noted Mongolia's inflation rate rose to 2.1 percent in February from 1.9 percent in January and is expected to rise further but still remain low and below its target due to slow economic activity, with the strength of China's economy the main factor.
     Mongolia's inflation rate tumbled to a negative minus 0.2 percent in August last year and remained negative  until November as meat prices fell by one-quarter and household incomes fell.
     But the central bank said recent changes, such as an extension of the US$2.2 billion swap line with the People's Bank of China, had eased the pressure on short-term foreign payments and had a positive impact on the economy although there is uncertainty regarding the external sector and the budget.
     Last month Mongolia reached staff-level agreement with the International Monetary Fund (IMF) on an three-year extended fund facility that includes a $440 million loan to help avert default on a $580 million bond repayment due this month by the state-run Development Bank of Mongolia (DBM).
    In addition, the Asian Development Bank, the World Bank and other countries, such as Japan and South Korea, are providing financial aid, boosting the total financing package to around $5.5 billion.
    As part of the agreement with the IMF, Mongolia has agreed that the DBM will operate in an independent, commercial manner and the central bank will not engage in quasi-fiscal activity.
     The IMF also said it expects the BOM to continue with an appropriately tight monetary policy, aiming for price stability and first cut rates if external factors and inflation permits. A new law governing the central bank will help strengthen its mandate, governance and independence.
      In its December inflation report, the central bank forecast inflation will remain low but relatively stable this year, with deflation continuing until the third quarter due to slow economic activity and low meat prices while exchange rate depreciation will help push up import prices.
    The central bank's inflation target for 2016 and 2015 was lowered to 7 percent from 8.0 percent in 2013 and 2014, and 10 percent in 2012.
    Mongolia's economy has been hard by the fall in its main export commodities, such as copper and coal, and a collapse in foreign investment.
    The central bank expects coal to remain soft as China begins to replace coal with natural gas over the next five years and focuses on solar and wind energy while copper prices are also expected to remain soft for several more years.
    The economy, which grew by an estimated 1.0 percent in 2016, was forecast by the central bank in December to expand by between 0.6 and 2.6 percent this year with inflation ranging from 1.9 to 3.9 percent.
    By 2019 the IMF expects growth to rise to around 8 percent as mining projects take off, with foreign exchange reserves rising to US$3.8 billion - more than 6 months of imports - to levels seen in 2012 before the country was hit by external shocks.
     In the fourth quarter of last year, Mongolia's Gross Domestic Product grew by an annual rate of 1.0 percent following contraction of 1.6 percent in the third quarter.
     The exchange rate of Mongolia's tugrik has been depreciating since 2011 and fell over 20 percent from mid-2016 until early January this year.
    Since then the tugrik has been slowly appreciating and was trading at 2,443 to the U.S. dollar today, up 1.6 percent since the beginning of this year and up 2 percent since a historic low on Jan. 9 of almost 2,493 to the dollar.



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