Coping with Global market commodity Price Fluctuations: Impact on Fiscal and Debt Management in case of Mongolia World Bank s Annual Stakeholders Forum of the Debt Management Facility Manila, Philippines June 3-4, 2015 Ts.Gerelchimeg National Consultant, Revenue division Ministry of Finance
Contents 1. Country Profile 2. Role of commodity on economy 3. Effect of commodity prices on the fiscal 4. Fiscal policy and improvement on legal environment 5. Medium term policy for Debt sustainability 2
1. Country Profile Geography Area: 1,564,116 sq. km Capital City: Ulaanbaatar Geographic Areas: Gobi, Steppes, Mountains Population and Culture 1. Country Profile Population: 3 million Language(s): Mongolian (90%), Kazakh, Russian Religion(s): Buddhist Lamaism, Muslim, Shaman, Christian Nomadic Culture Economics Currency: Tugrug (MNT), US$1=1900 Major Industry: Mining Copper, coal and gold, Cashmere, agriculture Major Trading partners: China, Russia, USA, Japan. GDP per capita: ~3600 USD 3
2. Role of commodity on economy Billion MNT 25 20 Tax revenue and Nominal GDP Phase 1: Transition period Phase 2: Mining boom 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Tax revenue Nominal GDP 30 25 20 15 10 5 0 Real GDP growth (in percent) Mining Non-mining GDP 2011 2012 2013 2014 Mongolia has transitioned into free market economy in 1990. The transition period from 1990-2008 had experienced steady growth averaging about 3% in real terms. With the discovery of two major copper and coal deposits (Oyu Tolgoi and Tavan Tolgoi), Mongolia has experienced a very rapid GDP growth during the Mining Boom, the average real GDP growth is 10%. While the highest growth was 17% in 2011. 4
2. Role of commodity on economy Million USD 8000. 7000. 6000. 5000. 4000. 3000. 2000. 1000. 0. Foreign and domestic investment Phase 1: Transition period Phase 2: Mining boom 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Foreign investment Domestic investment p) 2012 2013 Construction 1% Transportation 1% Banking Sector 1% FDI breakdown (1990-2013) Trade 17% Оthers 9% Mining Sector 71% Mongolia has experienced a drastic increase in FDI from 2009 to 2012 due to construction phase Oyu Tolgoi project (One of the biggest Copper project in the world). The mining sector is the main sector for FDI making about 71% of the total FDI since 1990. 5
2. Role of commodity on economy Million USD 7000 Mongolia export structure Million USD / $/t 10,000.0 Foreign trade $/t 350 6000 8,000.0 300 5000 6,000.0 250 4000 4,000.0 200 3000 2000 1000 0 60% 81% 66% 2008 2009 2010 2011 2012 2013 2014* - 2. Economy, FDI and Tax system 89% 89% 82% 83% 2,000.0-2,000.0-4,000.0 2008 2009 2010 2011 2012 2013 2014* 150 100 50 - Total export Mining product export Import Export Trade balance Copper price, $/t Coal price, $/t Mining has become the biggest sector in Mongolia, accounting for 20 percent of GDP, 60 percent of industrial value added, and ~90 percent of export earnings. Major export-related minerals include copper, molybdenum, gold, coal, and fluorspar concentrates. The country also produces limited amounts of tungsten, salt, clay, lime and aggregates. 6
3. Fiscal policy and commodity price effect thousand USD 4,500.0 4,000.0 3,500.0 3,000.0 2,500.0 2,000.0 1,500.0 1,000.0 500.0 - Mining sector revenue share 31% 29% 28% 21% 18% 18% 14% 2008 2009 2010 2011 2012 2013 2014* Mining sector revenue Fiscal revenue Capital tax 0.5% PIT 8.1% Mining Royalty 11.8% Tax revenue breakdown by taxes (as of 2014) Other 22.0% CIT 12.7% Customs 7.6% VAT 30.0% Excise Tax 7.3% Revenue from mining sector consists of Mining royalties, CIT, VAT, PIT, air pollution and customs fee. At its peak, revenue from mining sector made about 30% of the total revenue, but since 2011 with the decline of commodity prices it has been steadily decreasing. Mining companies make about 20% of the corporate income tax revenue. 7
3. Fiscal policy and commodity price effect Mining revenue share by commodities 5% Other Copper Coal 20% 22% 25% 27% 26% 39% 80% 70% Share of main commodity export in total export 78% 58% 49% 61% 53% 60% 47% 22% 26% 16% 17% 21% 14% 14% 2008 2009 2010 2011 2012 2013 2014* 60% 20.1% 19.1% 50% 30.7% 26.5% 33.0% 40% 41.2% 41.7% 26.6% 22.2% 44.6% 30% 7.3% 20% 9.8% 30.3% 47.2% 43.4% 26.3% 31.2% 14.7% 10% 23.7% 17.5% 16.4% 12.1% 7.3% 7.0% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Copper concentrate Coal Gold, unwrought or in semi-manufactured forms Main commodities for export are coal and copper concentrates. Copper and coal generates ~20% of total fiscal revenue, setting the trend for revenue growth. 8
3. Fiscal policy and commodity price effect Growth rates of commodity export prices and fiscal revenue 160% 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Copper price growth Coal price growth Revenue growth Total revenue rises in response to increases in commodity export prices. Total revenue changes are closely correlated with the copper commodity prices (0.78), and therefore its safe to say that Mongolian economy is copper driven economy. 9
$ Export Capital expenditure Current expenditure Welfare 1990-2009 2010-2011 2012-2014 Government Tax Revenue Firms Financial Sector Household FDI Import Central Bank Import External Sector Commodity price Commodity price
4. Fiscal policy and improvement on legal environment 1. Fiscal Stability Law (FSL), which was enacted in 2010. Structural revenue rule Expenditure rule Deficit ceiling rule Debt ceiling rule 2. Debt Management Law, Government debt management strategy Debt management law was approved by Parliament in this year. 11
5. Medium term policy for Debt sustainability Government debt ratio to GDP 60% 55% 50% 48% 58% 55% 50% 45% 40% 35% 44% 43.5% 40% 30% 2012 2013 2014 2015* 2016* 2017* 2018* In the medium-term government debt will be stabilized and its ratio to GDP will be reduced. 12
5. Medium term policy for Debt sustainability The Government of Mongolia shall pursue the following policy objectives within the Medium-Term Government Debt Management Strategy for 2016-2018 and shall align all borrowing decisions with the set policy objectives: Level off government debt services in long-term, gradually reduce a ratio of debt services to total budget revenues, and lengthen the average maturity of the government debt portfolio through new borrowing with longer term maturity in 2016-2018; Improve Mongolia s sovereign rating, actively engage with investors, gain their confidence, raise the profile of Mongolia, reduce foreign debt services and develop a yield curve of the domestic government debt securities; Create optimal government debt portfolio by appropriately planning and implementing comprehensive debt management actions in medium term. 13
Questions and Answers THANK YOU FOR YOUR KIND ATTENTION 14