## _cr1464

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### A. Recent failure of Savings Bank — context and triggers
- Mongolia’s economy expanded by "12½ percent" in 2012 and by "11½ percent" in the first half of 2013.
- The recent failure of Savings Bank highlighted financial sector risks and motivated renewed focus on banking sector soundness.
- Immediate concerns:
  - Declining FDI and slowdown in coal exports.
  - Highly expansionary fiscal and monetary policies boosting demand for non-mining imports.
  - BOP pressures absorbed by BOM foreign exchange sales financed from external borrowing and increased exchange rate flexibility.

### B. Macroeconomic stance and key fiscal/monetary developments
- Fiscal developments and public debt:
  - Government expenditure increased by "70 percent" in real terms between 2010 and 2012.
  - The overall fiscal deficit (including DBM operations) rose to "10.9 percent of GDP in 2012", "6 percent of GDP higher than in 2011".
  - The 2012 budget outturn recorded a deficit of "7.5 percent of GDP".
  - Off-budget spending by the DBM amounted to "3.4 percent of GDP in 2012".
  - DBM provided "US$200 million" to Erdenes Tavan Tolgoi.
  - Public debt is projected to reach "67 percent of GDP by end-2013", up from "39 percent" two years earlier.
- Monetary policy and programs:
  - Bank of Mongolia (BOM) cut the policy rate three times by a total of "275 basis points" to "10.5 percent".
  - BOM launched three large stimulus/quasi-fiscal programs with total planned allocation "MNT 3.4 trillion (20 percent of GDP)"; by end-August about "MNT 3 trillion" had been disbursed.
  - Program details:
    - Price Stabilization Program (PSP): by end-August about "MNT 0.6 trillion" channeled through banks; BOM charged "0.5-4 percent" and banks can charge corporate customers up to "7 percent".
    - Liquidity injection: through August BOM provided banks "MNT 900 billion" in one-year time deposits at "7 percent" interest.
    - Mortgage program: mid-June launch of a "MNT 1.1 trillion" mortgage program funded at "4 percent" on-lent via 20-year mortgages at "8 percent"; plus about "MNT 0.4 trillion" housing supply support.
  - Risks: BOM Net Domestic Assets rose by more than "100 percent of end-2012 reserve money" and reserve money growth rose to "34 percent (y/y)".

### C. Financial sector vulnerabilities and supervisory recommendations
- Key vulnerabilities and indicators:
  - Savings Bank accounted for "8 percent of total banking assets" (fifth-largest); related-party loans exceeded capital by more than "2 times" (against limits).
  - Reported NPLs low; higher CAR of "14 percent" for four largest banks by mid-2013; capital adequacy ratio reached "16 percent" at end-2012 and Tier 1 capital rose to more than "11 percent".
  - Provisioning for performing loans remains "zero".
  - High loan-to-deposit ratios and elevated dollarization; private sector credit growth accelerated to "47 percent" in August (y/y) and to "48 percent" (y/y) in September in other tables; deposit growth "20 percent" (y/y).
  - Loan-to-deposit series shown: "104.2", "77.0", "96.5", "100.7", "119.5", "106.7" (percent across years shown).
- Stress test findings (selected):
  - Severe credit shock assumptions: "15 percent" of performing loans → substandard; "15 percent" of substandard → doubtful; "25 percent" of doubtful → loss; "5 percent" of performing → loss.
  - Result: two of the 14 banks become insolvent; four other banks see CAR fall below "8 percent".
  - Liquidity severe scenario: daily deposit withdrawal rising to "20 percent" of total deposits → one small bank becomes illiquid.
  - Exchange rate shocks: "20 percent" depreciation → one small bank sees capital fall below minimum; "50 percent" depreciation → one small bank and one large bank would need recapitalization.
- Regulatory and supervisory recommendations:
  - Strictly enforce existing prudential regulations, including single-borrower limits.
  - Strengthen underwriting practices, loan classifications, and NPL recognition.
  - Phase in a forward-looking provisioning scheme for performing loans.
  - Recapitalize and plan privatization of the expanded State Bank (planned recapitalization "MNT 205 billion" provided by Deposit Insurance Corporation financed by a BOM loan to restore CAR to "18 percent").
  - Enhance supervisory and bank resolution regimes; develop a framework for prompt corrective actions.
  - Discourage lending dollarization; consider higher risk weights or caps on foreign currency lending.
- AML/CFT risk:
  - FATF designated Mongolia as not making sufficient progress in October 2013; risk of blacklisting if insufficient progress by February 2014.

### D. Outlook and core projections (Strong policy scenario — selected series)
- Growth and inflation:
  - Growth projected to remain in or near double digits in 2013 and 2014.
  - Mineral GDP growth projected to average about "16 percent" per annum during 2013–17 due to OT and TT developments; non-mineral GDP growth projected at "11 percent in 2013".
  - Inflation fell to "7 percent" in July (two-year low) but is projected to move above "10 percent" and remain there through late-2014.
- Reserves (Gross official reserves, US$ millions, selected years): "2,490 (2010)"; "2,630 (2011)"; "4,126 (2012)"; "2,214 (2013)"; "2,290 (2014)"; "2,178 (2015)"; "2,369 (2016)"; "2,592 (2017)"; "2,821 (2018)".
- Reserves (months of imports, selected): "3.9 (2010)"; "3.9 (2011)"; "6.5 (2012)"; "3.4 (2013)"; "3.3 (2014)"; "3.0 (2015)"; "3.0 (2016)"; "3.2 (2017)"; "3.2 (2018)".
- Fiscal balances (overall balance, percent of GDP, selected): "0.5 (2010)"; "-4.8 (2011)"; "-10.9 (2012)"; "-13.5 (2013)"; "-7.4 (2014)"; "-3.8 (2015)"; "-1.7 (2016)"; "-1.8 (2017)"; "-2.0 (2018)".
- Total public debt (percent of GDP, selected): "35.9 (2010)"; "38.8 (2011)"; "63.0 (2012)"; "67.3 (2013)"; "65.8 (2014)"; "60.4 (2015)"; "55.9 (2016)"; "52.4 (2017)"; "50.1 (2018)".
- Monetary aggregates and credit (percent change, selected):
  - Broad money change: "61.6 (2010)"; "37.1 (2011)"; "18.8 (2012)"; "17.1 (2013)"; "28.8 (2014)"; "29.5 (2015)"; "30.0 (2016)".
  - Reserve money change: "29.2 (2010)"; "75.5 (2011)"; "30.5 (2012)"; "12.2 (2013)"; "11.9 (2014)"; "44.7 (2015)"; "29.1 (2016)".
  - Credit to the private sector change: "21.5 (2010)"; "72.3 (2011)"; "24.1 (2012)"; "40.9 (2013)"; "16.1 (2014)"; "54.1 (2015)"; "33.6 (2016)".
- DSA judgments:
  - IMF/World Bank Debt Sustainability Analysis indicates Mongolia is at a moderate risk of debt distress under the strong policy scenario.
  - PV of public debt-to-GDP peaks at "58½ percent of GDP in 2013" in the public DSA baseline then falls; PV of external debt-to-GDP breaches indicative thresholds through 2014.

### E. Policy scenarios and implications
- Strong policy scenario (key measures):
  - Medium-term budget framework consistent with the Fiscal Stability Law (FSL); on-budget fiscal operations observe the FSL starting with a 2014 budget based on realistic revenues.
  - Off-budget public investment projects phased out by end-2015.
  - BOM’s stimulus programs phased out by mid-2014 to ease demand and BOP pressures.
- Weak policy scenario (risks of continuation):
  - Government takes two more years to align on-budget operations with FSL; continuation of off-budget projects and large international bond issuances; BOM stimulus phased out only gradually (by 2015).
  - Non-mining growth in 2014 would be higher than in the strong scenario but Mongolia would face progressively more serious risk of a BOP crisis.
  - In case of crisis, a cumulative non-mining output loss of about "20 percentage points" (compared to the strong policy scenario) over a 4 year horizon is projected.
  - Larger exchange rate depreciation would add to inflationary pressures; under the weak scenario reserves are drained in 2015 with a sharp depreciation of "30–40 percent" from end-2013.

### F. IMF staff recommendations and policy priorities
- Fiscal policy:
  - Scale back growth of total government spending in view of inflation and BOP pressures.
  - Take off-budget spending (notably DBM operations) into account in macro planning and include DBM in the budget starting 2014.
  - Draw up an ambitious, frontloaded fiscal consolidation plan to meet the FSL structural deficit ceiling of "2 percent of GDP" over the next "2-3 years", spearheaded by streamlining subsidies/transfers and reprioritizing capital spending.
  - Re-phase and re-prioritize DBM spending (DBM spending projected at "9 percent of GDP in 2013"); implement means-tested benefits under the Social Welfare Law and finalize technical work on a sovereign wealth fund (SWF).
- Monetary and exchange rate policy:
  - Unwind the BOM’s monetary stimulus programs; phase-out deposits placed with commercial banks and securitize mortgages to remove quasi-fiscal exposures.
  - Maintain floating exchange rate regime and auction system; limit intervention to smoothing excessive volatility.
  - Staff assessment: a Mongolia-specific Taylor-type rule implies an interest rate of about "11–12 percent in 2013Q3" while BOM program lending rates are around "1, 4, and 7 percent".
  - Exchange rate valuation: staff estimates real exchange rate moderately overvalued; macro balance approach suggests a "12 percent" real depreciation needed to close CA gap in one assessment.
- Financial sector and supervision:
  - Strict enforcement of prudential regulations, strengthened provisioning, discourage dollarization, strengthen resolution framework, recapitalize and privatize State Bank promptly, and address AML/CFT deficiencies.
- Structural reforms and statistics:
  - Continue reforms to improve business climate (new Investment Law adopted October 3).
  - Strengthen macroeconomic statistics and timely release of DBM spending data.

### G. Fiscal Stability Law (FSL) — framework and operational issues
- FSL rules (effective from 2013/2014):
  - Ceiling on structural deficit: "2 percent of GDP" (effective from 2013).
  - Ceiling on expenditure growth linked to non-mineral GDP growth.
  - Public debt ceiling (NPV): "40 percent of nominal GDP" (effective from 2014) with transitional ceilings "50 percent of GDP in 2011", "60 percent in 2012", and "50 percent in 2013".
- Fiscal Stabilization Fund (FSF):
  - FSF balance "MNT 360 billion at end-May 2013" (~"2 percent of GDP"); FSF denominated in domestic currency and held at BOM; no interest paid by BOM on the account.
  - FSL requires fund to be greater than "5 percent of GDP from FY 2018 onward".
- Recent deviations and concerns:
  - Development Bank of Mongolia (DBM) used as an off-budget vehicle; DBM bond issuances (e.g., "US$580 million" in March 2012) contributed to overall fiscal deficit of "10.9 percent of GDP".
  - Integrated Budget Law and institutional fragmentation (MED issuing sovereign bond and channeling proceeds through DBM) undermined FSL discipline.
- FSL scorecard (selected figures, Strong Policy Scenario):
  - Revenue (percent of GDP): "35.7 (2012)"; "34.4 (2013)"; "32.9 (2014)".
  - Spending incl. off-budget DBM/Chinggis bond (percent of GDP): "46.6 (2012)"; "47.9 (2013)"; "40.3 (2014)".
  - o/w DBM/Chinggis bond spending (percent of GDP): "3.4 (2012)"; "9.0 (2013)"; "5.5 (2014)".
  - Overall balance (percent of GDP): "-10.9 (2012)"; "-13.5 (2013)"; "-7.4 (2014)".
  - Structural balance (percent of GDP): "-11.5 (2012)"; "-13.7 (2013)"; "-7.5 (2014)".
  - Public and publicly guaranteed debt (percent of GDP): "63.0 (2012)"; "67.3 (2013)"; "65.8 (2014)".

### H. Debt Sustainability Analysis (DSA) — main findings
- Baseline uses the strong policy scenario (assumes substantial policy tightening).
- Face value of public external debt projected to "51.8 percent of GDP in 2013", up from "30 percent of GDP" in previous DSA.
- External DSA key results (strong policy scenario):
  - PV of debt-to-GDP decreases from "43 percent in 2013" to about "17½ percent in 2033" but breaches indicative threshold through 2014.
  - Debt service-to-revenue breaches indicative threshold in "2017 and 2022".
  - Standard stress tests show vulnerability to exchange rate and export shocks; a standard exchange rate shock causes prolonged breach of PV debt-to-GDP threshold.
- Public DSA (strong policy scenario):
  - PV of public debt-to-GDP peaks at "58½ percent of GDP in 2013", falls to "44¾ percent in 2018", and stabilizes around "39 percent" long-run.
  - Sensitivity: if primary balance remains at 2013 level, PV of debt-to-GDP would rise to "240 percent in 2033".
- Staff judgment: Mongolia faces a moderate risk of debt distress under the strong policy scenario; a weak-policy scenario would lead to high risk of debt distress.

### I. Risks and recommended policy responses (RAM summary)
- Domestic risks:
  - Continued fiscal expansion — likelihood: "M-HH"; response: substantial fiscal consolidation and reprioritization to meet FSL ceilings.
  - Highly accommodative monetary policy — likelihood: "M-HH"; response: phase out BOM programs and conduct open market operations; limit FX intervention to smoothing.
  - Financial stability risk — likelihood: "M-HM-H"; response: strengthen supervision, discourage dollarization, and strengthen provisioning.
  - Business environment and political risks — likelihood: "MH"; response: build on new Investment Law to stimulate FDI.
- External risks:
  - Sharp slowdown in China and/or sustained decline in commodity prices — likelihood: "MH"; response: build resilience and diversify.
  - Protracted global volatility — likelihood: "HM"; response: build policy buffers and prudent macro and financial policies.

*Source: IMF staff report excerpt (Recent Economic Developments and Outlook) — content unit _cr1464.*

### 1. The Recent Failure of Savings Bank ____________________________________________________________  17

### 1. The Recent Failure of Savings Bank ____________________________________________________________  17

### A. Context and recent developments
- Mongolia's economy expanded by 12½ percent in 2012 and by 11½ percent in the first half of 2013.
- Per capita income increased five-fold to more than US$3,000 over the past decade.
- Foreign investors raised a total of US$3 billion (30 percent of GDP) in 2012 through bond issuances by a private mining company, a private bank, the state-owned Development Bank (DBM), and the sovereign (the US$1.5 billion “Chinggis” bond).
- Poverty declined by more than 11 percentage points to 27 percent of the population in 2012.
- Capitalization and liquidity of the banking system have improved, but dollarization remains high and the provisioning regime for commercial banks lags Asian peers.
- The June 2012 parliamentary elections brought a new government; the June 2013 reelection of President Elbegdorj left the Democratic Party effectively in control for the next three years.

### B. Macroeconomic stance and policy actions
- Government expenditure increased by 70 percent in real terms between 2010 and 2012, with growing off-budget spending.
- The Bank of Mongolia (BOM) cut the policy rate three times by a total of 275 basis points to 10.5 percent.
- BOM lent substantial sums to banks at below-market rates, including through the price stabilization and mortgage programs.
- Private sector credit growth accelerated to 47 percent in August (y/y).
- The overall fiscal deficit (including DBM operations) rose to 10.9 percent of GDP in 2012, 6 percent of GDP higher than in 2011.
  - The 2012 budget outturn recorded a deficit of 7.5 percent of GDP.
  - Off-budget spending by the DBM amounted to 3.4 percent of GDP in 2012.
  - DBM provided US$200 million to Erdenes Tavan Tolgoi (a loss-making state-owned coal producer).
- Including more than MNT 1 trillion (6½ percent of GDP) spending by the DBM, total government spending in the first 8 months of 2013 rose by 30 percent compared to the same period last year.
- Public debt is projected to reach 67 percent of GDP by end-2013, up from 39 percent two years earlier.
- Gross international reserves currently amount to US$2.4 billion (about 3.7 months of prospective imports), about the same level as a year ago.
  - BOM Gross International Reserves (GIR) reached US$4.1 billion at end-2012 and subsequently fell to US$2.4 billion.
- Over the past year the exchange rate depreciated by 22 percent vis-à-vis the U.S. dollar, with most depreciation occurring in the last four months.
- Mongolia’s sovereign spread widened about 140 basis points more than the average for emerging markets since the late-2012 issuance; the “excess spread” narrowed again with postponement of “Fed tapering”.

### C. Immediate triggers and financial sector focus
- The recent failure of Savings Bank highlighted financial sector risks and motivated renewed focus on banking sector soundness.
- BOP pressures were absorbed by BOM foreign exchange sales financed from external borrowing and increased exchange rate flexibility.
- Concerns: declining FDI, slowdown in coal exports, highly expansionary fiscal and monetary policies boosting demand for non-mining imports.

### D. Outlook and projections
- Growth projections:
  - Growth is projected to remain in or near double digits in 2013 and 2014.
  - Mineral GDP growth projected to average about 16 percent per annum during 2013–17 due to Oyu Tolgoi (OT) and Tavan Tolgoi (TT) developments.
  - Non-mineral GDP growth is projected at 11 percent in 2013.
- Inflation:
  - Inflation fell to a two-year low of 7 percent in July (due to moderating food prices and the BOM’s price stabilization program).
  - Inflation is projected to move above 10 percent and remain there through late-2014.
- Reserves and external position (Strong policy scenario, selected years):
  - Gross official reserves (in millions of U.S. dollars): 2,490 (2010); 2,630 (2011); 4,126 (2012); 2,214 (2013); 2,290 (2014); 2,178 (2015); 2,369 (2016); 2,592 (2017); 2,821 (2018).
  - Reserves (in months of imports): 3.9 (2010); 3.9 (2011); 6.5 (2012); 3.4 (2013); 3.3 (2014); 3.0 (2015); 3.0 (2016); 3.2 (2017); 3.2 (2018).
- Fiscal and debt indicators (Strong policy scenario, selected years):
  - Overall balance (in percent of GDP): 0.5 (2010); -4.8 (2011); -10.9 (2012); -13.5 (2013); -7.4 (2014); -3.8 (2015); -1.7 (2016); -1.8 (2017); -2.0 (2018).
  - Structural balance (FSL, in percent of GDP): -6.9 (2011); -11.5 (2012); -13.7 (2013); -7.5 (2014); -4.2 (2015); -2.0 (2016); -2.0 (2017); -2.0 (2018).
  - Total public debt (in percent of GDP): 35.9 (2010); 38.8 (2011); 63.0 (2012); 67.3 (2013); 65.8 (2014); 60.4 (2015); 55.9 (2016); 52.4 (2017); 50.1 (2018).
  - External debt (in percent of GDP): 30.8 (2010); 27.9 (2011); 48.3 (2012); 51.8 (2013); 50.7 (2014); 44.9 (2015); 39.6 (2016); 36.2 (2017); 33.4 (2018).
  - NPV of public debt: 54.6 (2010); 58.6 (2011); 58.0 (2012); 53.3 (2013); 49.5 (2014); 46.4 (2015); 44.7 (2016).
- Monetary aggregates and credit (Strong policy scenario, selected years):
  - Broad money change: 61.6 (2010); 37.1 (2011); 18.8 (2012); 17.1 (2013); 28.8 (2014); 29.5 (2015); 30.0 (2016).
  - Reserve money change: 29.2 (2010); 75.5 (2011); 30.5 (2012); 12.2 (2013); 11.9 (2014); 44.7 (2015); 29.1 (2016).
  - Credit to the private sector change: 21.5 (2010); 72.3 (2011); 24.1 (2012); 40.9 (2013); 16.1 (2014); 54.1 (2015); 33.6 (2016).

### E. Policy scenarios and implications
- Strong policy scenario (summary of key measures):
  - Medium-term budget framework consistent with the Fiscal Stability Law (FSL).
  - On-budget fiscal operations observe the FSL starting with a 2014 budget based on realistic revenue projections.
  - Off-budget program of public investment projects phased out by end-2015.
  - BOM’s stimulus programs phased out by mid-2014 to ease demand and BOP pressures.
- Weak policy scenario (risks of continuation of current policies):
  - Government takes two more years to bring on-budget fiscal operations in line with the FSL.
  - Continuation of off-budget public investment projects and large international bond issuances.
  - BOM stimulus measures phased out only gradually (by 2015).
  - Non-mining growth in 2014 would be higher than in the strong policy scenario, but Mongolia would face progressively more serious risk of a BOP crisis.
  - In case of crisis, a cumulative non-mining output loss of about 20 percentage points (compared to the strong policy scenario) over a 4 year horizon is projected.
  - Larger exchange rate depreciation would add to inflationary pressures.
  - Implications for public external debt illustrated in the Debt-Sustainability Analysis.

### F. IMF staff recommendations (from prior consultations)
- Scale back the growth of total government spending in view of inflation and BOP pressures.
- Take off-budget spending into account when determining the macro-economically sustainable level of total government spending.
- Monetary easing should be contingent on demand pressures abating and prudent fiscal policy.
- BOP pressures should be reflected more in movements in the exchange rate.
- Continue efforts to strengthen the soundness and resilience of the banking system.

*Source: IMF staff report excerpt (Recent Economic Developments and Outlook).*

### 16.      The authorities expressed optimism about continued strong growth alongside a

### 16.      The authorities expressed optimism about continued strong growth alongside a strengthening of the BOP in the course of 2014 and over the medium term.

### Authorities' outlook and macroeconomic projections
- Centerpiece of development strategy: scaled-up public investment, including in transportation infrastructure, financed by foreign borrowing, to be sustained by continued rapid economic growth and a recovery of export earnings.
- Authorities projected the economy to grow by 15 percent per annum, on average, during 2013-2016.
- Expected average annual growth: mining output 32 percent; non-mining output 11 percent.
- Authorities noted recent achievements despite external shocks: continued double-digit economic growth, sharply rising domestic investments, and inflation kept at manageable levels.
- Authorities considered additional macroeconomic adjustments under the “strong policy scenario” unnecessary at this time, citing planned new foreign borrowing and an anticipated rebound in coal exports starting in the last quarter of this year to help hold immediate BOP pressures at bay.

### External outlook and balance of payments (BOP) pressures
- Authorities acknowledged downside risks to the external outlook and described steps to address prevailing BOP pressures:
  - Government spending being curtailed for the remainder of the year (¶22).
  - BOM discussing plans to unwind some of the monetary stimulus (¶30).
  - Recent exchange rate depreciation dampening import demand (¶31).
  - Parliament passed a new Investment Law aimed at boosting FDI and domestic investment (¶38).
- Staff view: macroeconomic policies are on an unsustainable path and need adjustment to rein in domestic demand growth, curtail BOP pressures, and contain inflation (¶18).

### Fiscal policy — recent measures and staff recommendations
Findings and recent steps (¶19, ¶22–23):
- Minister of Finance announced plans to reduce budgetary spending by almost MNT 1 trillion (6 percent of GDP) to keep the 2013 budget within the FSL’s 2 percent of GDP ceiling for the structural fiscal deficit.
- During the remainder of 2013, the DBM will not receive additional funding from the Chinggis-bond proceeds held by the government at the BOM; DBM would pay out MNT 0.4 trillion on ongoing public investment projects.
- Ministry of Finance initiated work on the 2014 budget based on a relatively conservative projection for government revenue.
- Authorities committed to observe the 2 percent of GDP ceiling for the structural deficit for on-budget operations in 2013 and 2014 and decided cuts of current and capital spending to be reflected in a supplementary 2013 budget to be discussed by Parliament in November.
- Authorities viewed DBM spending as a key policy instrument to boost growth and considered issuing another international bond to finance additional DBM spending until an expected pick up in exports and growth.

Staff concerns and recommendations (¶20–21):
- Even with measures listed, the fiscal deficit including DBM operations in 2013 would top last year’s level (10.9 percent of GDP) and public debt (including BOM external borrowing) would reach about 67 percent of GDP.
- DBM operations should be included in the budget starting with the 2014 budget; off-budget DBM activities should be reflected in all FSL requirements given the FSL’s purpose of “ensuring fiscal stability” (Article 1) and comprehensive coverage of public debt (Article 4.1.8).
- An ambitious and credible fiscal consolidation plan should be drawn up, consistent with the FSL; budget operations and DBM operations together should meet the 2 percent of GDP ceiling for the structural deficit in due course.
- Planned adjustment needs to be adequately frontloaded, spearheaded by streamlining subsidies and transfers and reprioritizing capital spending.
- DBM spending projected at 9 percent of GDP in 2013; DBM spending should be re-phased and re-prioritized, with a prioritized list of capital expenditure items and implementation only of projects with the highest payoff to medium-term growth.
- Implement the Social Welfare Law (SWL) to replace costly universal cash transfers with means-tested benefits to increase fiscal flexibility and reduce inequality.
- Set up a sovereign wealth fund (SWF); technical work should be finalized, building on World Bank and IMF technical assistance.

### Monetary and exchange rate policy
Policy framework and recent measures (¶24–26, ¶30–31):
- BOM introduced a policy interest rate corridor; auctioning of treasury bills was modernized; adoption of the new Securities Law should facilitate secondary market trading of treasury bills.
- Three new BOM programs provided large monetary and quasi-fiscal stimulus; these programs loosen the monetary policy stance, creating inflationary and BOP pressures, heightening banking sector vulnerabilities, and could give rise to contingent liabilities for the public sector (¶25).
- Exchange rate flexibility has increased; the floating exchange rate regime and auction system should be maintained; intervention should be limited to smoothing excessive exchange rate volatility.
- The intention is to phase out the monetary stimulus programs over time: BOM deposits placed with commercial banks would be pulled back in the coming months; new mortgages sold by banks would be taken off their books through securitization operations; banks would be obliged to repay the freed-up funds to the BOM.
- Authorities committed to the floating exchange rate regime and agreed broadly with staff’s assessment of exchange rate and reserve adequacy; exchange rate depreciation in July and August dampened import demand (¶31).

Staff assessments and recommendations (¶27–28):
- The real exchange rate is assessed to be moderately overvalued, even in the “strong policy scenario” which assumes tightening of monetary and fiscal policy.
- Overvaluation and the risk of a further large nominal exchange rate adjustment would be more pronounced if loose fiscal and monetary policy continued.
- Current account projected to continue to show a large deficit over the five-year projection period but expected to gradually move to a surplus in the long term.
- International reserves on a downward trajectory but still adequate for precautionary purposes by traditional criteria; a risk-based metric (see SM/11/31) suggests Mongolia may need to hold more reserves than it currently does.
- Declining net international reserves, taking into account deposits taken from commercial banks and the BOM’s increasing foreign liabilities, is not sustainable and underscores the need for policy adjustment.

### Financial sector issues and policy recommendations
Recent strengths and vulnerabilities (¶32–33):
- Reported non-performing loans are low; higher CAR of 14 percent for the four largest systemically important banks achieved by mid-2013.
- Higher minimum paid-in capital requirement MNT 16 billion and higher Tier 1 capital ratio 9 percent help vulnerable small- and medium-size banks.
- Banking sector vulnerabilities remain significant (e.g., failure of Savings Bank); need to strengthen corporate governance and enforcement of regulations, including single borrower limits.
- High loan-to-deposit ratio and level of dollarization; surging credit growth may have strained underwriting practices and supervision.
- Currency depreciation over the past four months could adversely affect credit quality of foreign currency-denominated loans.
- Banking system vulnerable to a downturn in the mining sector and deceleration of government spending.

Regulatory and supervisory recommendations (¶34):
- BOM should strictly enforce existing prudential regulations and continue to improve prudential indicators; rigorously enforce lending limits on a single borrower and bank-related party; strengthen underwriting practices and address deficiencies in loan classifications and NPL recognition.
- Consider phasing in a more forward-looking provisioning scheme that takes into account risks of losses on performing loans.
- Newly expanded State Bank should be recapitalized promptly and plans developed toward its privatization.
- Enhance supervisory and bank resolution regimes; develop a strategic plan to implement a robust supervisory regime and strengthen the bank resolution framework; develop a legal framework for prompt corrective actions mandating progressively stronger supervisory actions as a bank’s capital declines.
- Deposit Insurance Corporation and BOM should develop a comprehensive framework to address standalone resolution requirements and systemic financial crises.
- Lending dollarization should be discouraged; follow up the 2010 FSAP recommendation to establish guidelines for foreign exchange lending. Ideally banks should lend in foreign currency only to hedged borrowers; alternatively, consider higher risk weights on foreign currency-denominated loans and caps on individual banks’ foreign currency loan-to-deposit ratio.

AML/CFT concerns (¶35):
- In October 2013, FATF designated Mongolia as a jurisdiction not making sufficient progress in implementing the agreed action plan to enhance its AML/CFT framework.
- Risk that, absent sufficient progress by February 2014, Mongolia will be placed on the FATF blacklist, leading to heightened due diligence from foreign financial institutions regarding transactions with Mongolia.

Authorities’ views on financial sector (¶36):
- Authorities expressed broad satisfaction with management of financial sector risks; after the failure of Savings Bank there were no more banks under a Supervisory Action Plan.
- Adequate safeguards built into the mortgage program (minimum down-payment requirements and maximum loan-to-value ratios).
- Authorities considered the bulk of unhedged foreign-currency loans to be to larger, more-diversified corporations able to internalize foreign currency risk.
- Authorities noted timing was not right to adjust the provisioning regime.

### Structural reforms and statistics
- Continue efforts to improve business climate and trade integration; Mongolia ranks relatively high in the World Bank’s Doing Business Survey but trading across borders, getting electricity, and dealing with construction permits remain relatively cumbersome (¶37).
- Adoption of a new Investment Law on October 3 is a major milestone; recent extraordinary session of Parliament discussed a package of 5 laws aimed at boosting investment and gold exports; adoption of the new Investment Law and the Investment Fund Law realized these discussions (¶38).
- Continue strengthening macroeconomic statistics: good progress upgrading national accounts and balance of payments statistics; timely release of data on DBM spending needed to facilitate comprehensive fiscal assessments (¶39).

### Staff appraisal — risks and policy priorities (¶40–43)
Findings:
- Mongolia remains one of the fastest growing economies in Asia; growth in 2012 and first half of 2013 buoyed by new large mining projects, a mild winter boosting agriculture, and highly expansionary fiscal and monetary policies.
- Inflation fell to a two-year low in July due to moderating food prices and BOM’s price stabilization program; poverty continued to decline in 2012.
- BOP pressures have been intensifying and inflation is bound to rise again due to prior loosening of monetary and fiscal policy and recent exchange rate depreciation.
- IMF/World Bank Debt Sustainability Analysis (DSA) indicates Mongolia is at a moderate risk of debt distress.

Policy priorities and risks:
- A continuation of current policies could lead to a highly vulnerable situation: continued elevated fiscal spending (including off-budget public investment projects) and failure to rein in credit growth could heighten economic and financial sector risks.
- Exposure to external demand shocks for commodities could negatively impact Mongolia via trade and FDI channels and could expose banking system vulnerabilities, exacerbating shocks to growth and financial stability.
- Putting the economy on a sustainable path requires implementation of a package of fiscal and monetary adjustment in the context of a flexible exchange rate regime, as outlined in the “strong policy scenario”.
- Encouraging steps have been taken in fiscal policy and exchange rate policy, signaling a good start provided monetary expansion and off-budget fiscal operations are reined in.

*Source: IMF Staff Report content unit _cr1464 - 16.*

### 44.      An ambitious and credible fiscal consolidation plan should be drawn up. Recently

### _cr1464 - 44. An ambitious and credible fiscal consolidation plan should be drawn up. Recently

### Fiscal consolidation: scale, urgency, and frontloading
- This year’s fiscal deficit (including DBM operations) will still be very large.
- Public debt, including external borrowing by the Bank of Mongolia, will reach about 67 percent of GDP this year, up from 39 percent of GDP in 2011.
- Budget operations and the operations of the DBM taken together should meet the 2 percent of GDP ceiling for the structural deficit over the next 2-3 years.
- Given sustained BOP pressures, the planned adjustment needs to be adequately frontloaded, spearheaded by:
  - streamlining subsidies and transfers, and
  - reprioritizing capital spending.
- Recently announced steps would moderate spending growth during the remainder of 2013 and provide a solid foundation for the preparation of the 2014 budget; however, further measures are urgently needed.

### Fiscal policy framework reforms
- Implementation of the SWL would enhance fiscal flexibility and efficiency and reduce inequality.
- Establishment of a SWF would be an important complement to the FSL’s countercyclical fiscal policy framework.
- Continued efforts to strengthen macroeconomic statistics are recommended.

### Monetary policy stance and BOM stimulus programs
- The large monetary stimulus provided by the BOM should be unwound.
- The three BOM programs launched over the past year have unduly loosened monetary policy, creating inflationary and BOP pressures, distortions, heightened banking sector vulnerabilities, and potential contingent public liabilities.
- Aggregate scale of programs:
  - Total planned allocation under the three programs: MNT 3.4 trillion (20 percent of GDP).
  - By end-August, about MNT 3 trillion had been disbursed.
  - BOM’s Net Domestic Assets rose by more than 100 percent of end-2012 reserve money and reserve money growth rose to 34 percent (y/y).
- Program details and associated terms:
  - Price Stabilization Program (PSP): by end-August about MNT 0.6 trillion channeled through banks; BOM charged 0.5-4 percent and banks can charge corporate customers up to 7 percent.
  - Liquidity injection: through August the BOM provided banks MNT 900 billion in one-year time deposits at 7 percent interest.
  - Mortgage program and housing supply loans: mid-June launch of a MNT 1.1 trillion mortgage program; funding to banks at 4 percent interest, on-lent via 20-year mortgages at 8 percent interest; plus about MNT 0.4 trillion housing supply support to construction companies and real estate developers.
- Risks and distortions from these programs:
  - Lending rate caps prevent banks from adequately pricing credit risk.
  - Mortgage lending and liquidity injection programs create refinancing risk for banks if BOM withdraws from programs.
  - Loans issued under the programs are exempt from prudential ratios (including single-large-exposure and related-lending limits), worsening moral hazard and adverse selection.
  - Mortgage-backed security (MBS) strategy could leave MBSs in the public sector, creating contingent liabilities given low yields on subsidized mortgages.
- Policy recommendation: social objectives (e.g., affordable housing) and supply-side measures are best pursued through structural reforms and the government budget; loans should be transparently priced at market interest with subsidies provided from the budget.

### Exchange rate flexibility and valuation
- Increased exchange rate flexibility over recent months has helped absorb some BOP pressures; the floating exchange rate regime and auction system should be maintained with intervention limited to smoothing excessive volatility.
- While gross reserves remain adequate for precautionary purposes, net international reserves are on a downward trajectory that is not sustainable.
- Staff assessment: the real exchange rate is moderately overvalued even in a strong policy scenario that assumes tightening of monetary and fiscal policy.
- EMP and empirical findings:
  - During the first 9 months of 2013, the nominal exchange rate of the togrog depreciated by 19 percent, and gross international reserves declined by 35 percent.
  - A one standard deviation increase in reserve money is associated with an increase in the EMP index by 3½ standard deviations after about 5 months.
  - A one standard deviation increase in credit growth is associated with an increase in the EMP index by 2 standard deviations after 6 months.
- Taylor-rule assessment:
  - Mongolia-specific Taylor-type rule implies an interest rate of about 11–12 percent in 2013Q3.
  - BOM lending rates for programs are around 1, 4, and 7 percent, deviating substantially from the Taylor-rule implied rate.
- Exchange rate overvaluation estimates (Staff/IMF approaches):
  - Macro balance approach: a 12 percent real depreciation would be needed to close the gap between a medium-term CA deficit of 15 percent of GDP (strong policy scenario) and a medium-term norm deficit of 7 percent of GDP.
  - Equilibrium exchange rate approach: the real exchange rate is 12 percent more appreciated than the equilibrium exchange rate from panel regression fundamentals.
  - External sustainability approach: BOM estimates Mongolia’s IIP became a net liability position of 126 percent of GDP in 2012; only a 1 percent real depreciation would be needed to stabilize the IIP at this level.

### Financial sector vulnerabilities and supervision
- Recent progress: capital adequacy ratio reached 16 percent of risk-weighted assets at end-2012; Tier 1 capital rose to more than 11 percent; NPLs (including past due loans) declined to 3.8 percent of total loans.
- Remaining vulnerabilities:
  - Provisioning requirements for performing loans remain zero.
  - Loan-to-deposit ratio has surged beyond levels seen in Mongolia’s Asian peers.
  - Dollarization remains higher than in most other Asian countries, risking foreign currency mismatches outside the banking sector.
- Supervisory and regulatory recommendations:
  - BOM should strictly enforce existing prudential regulations, including single-borrower limits.
  - Strengthen underwriting practices, loan classifications, and NPL recognition.
  - Consider phasing in a more forward-looking provisioning scheme accounting for risks of losses on performing loans.
  - Discourage lending dollarization.
  - Enhance the bank resolution regime and develop a legal framework for prompt corrective actions mandating progressively stronger supervisory actions as a bank’s capital declines.
  - Step up efforts to strengthen the AML/CFT framework to avoid blacklisting by the FATF.
- Savings Bank failure (Box 1 summary):
  - Savings Bank accounted for 8 percent of total banking assets (fifth-largest).
  - Related-party loans exceeded capital by more than 2 times (against limits of 20 percent of capital and 5 percent to related parties of the bank).
  - Intervention: receiver appointed; most assets and liabilities transferred to State Bank.
  - Planned recapitalization of State Bank: MNT 205 billion (provided by Deposit Insurance Corporation financed by a BOM loan) to restore CAR to 18 percent.
  - Authorities expressed commitment to privatize State Bank as soon as possible.
- Stress test findings (Box 5):
  - Severe credit shock scenario assumptions: 15 percent of performing loans → substandard; 15 percent of substandard → doubtful; 25 percent of doubtful → loss; 5 percent of performing → loss.
  - Result: two of the 14 banks become insolvent; four other banks see CAR fall below 8 percent, implying substantial recapitalization needs.
  - Liquidity scenarios:
    - Deposits withdrawn for five consecutive days rising to 10 percent of deposits on the fifth day: all banks maintain the 25 percent minimum liquidity ratio.
    - Severe scenario with daily deposit withdrawal rising to 20 percent of total deposits: one small bank becomes illiquid.
  - Exchange rate shock scenarios:
    - 20 percent depreciation of the togrog vis-à-vis the U.S. dollar: one small bank sees capital fall below the minimum requirement.
    - 50 percent depreciation: one small bank and one large bank would need recapitalization.
- Additional financial soundness indicators:
  - Loan-to-deposit and other comparative measures presented for regional peers; NPLs and capital figures noted above.

### Real economy and medium-term prospects
- Growth:
  - Economy expanded by 11½ percent during the first half of 2013.
  - Growth reaccelerated to 14.3 percent (y/y) in Q2 2013 from 7.2 percent (y/y) in Q1 2013.
- External flows and activity:
  - FDI inflows are down 46 percent so far this year.
  - Coal export volumes are down 20 percent so far this year but appear to be bottoming out.
- Inflation and exchange rate:
  - Nominal exchange rate depreciated 22 percent over the past 12 months (as of the report).
  - Inflation stood at 8.4 percent in September (y/y), aided by deceleration of food prices.
- Medium-term outlook:
  - Mongolia’s medium-term prospects remain promising driven by large natural resource endowment and proximity to fast-growing economies.
  - Mining GDP is projected to expand rapidly during the next five years thanks to large mining projects coming on stream.
  - Sustained growth outside mining needs continued reforms to strengthen the business climate, building on the government’s recent success in passing a new investment law.

### Institutional recommendation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

*Source: IMF staff report (extract as provided).*

### 10.9 percent of GDP in 2012.

### _cr1464 - 10.9 percent of GDP in 2012.

### Fiscal Developments
- Overall on-budget balance: deficit reached "10.9 percent of GDP in 2012."
- The nonmineral fiscal deficit exceeded the 2008 high.
- Spending exceeded "57 percent of non-mineral GDP in 2012."
- Off-budget bond financing raised public debt:
  - Chinggis bond (US$1.5bn)
  - DBM bond (US$0.6bn)
- DBM/Chinggis bond usage:
  - DBM provided loans of "US$ 190 million" in 2012 for nonrevenue-generating public investment projects ("social benefit projects"); the budget will need to repay these loans.
  - Table indicators (selected):
    - Total revenue and grants: "30.3", "37.1", "40.3", "35.7", "34.4", "32.9" (percent of GDP across years shown).
    - Total expenditure and net lending: "35.5", "36.6", "45.1", "46.6", "47.9", "40.3" (percent of GDP across years shown).
    - Non-mineral overall balance (in percent of non-mineral GDP): "-16.2", "-13.6", "-17.8", "-11.1", "-20.7", "-9.4", "-22.8", "-15.9" (series shown).

### Banking, Credit, and Monetary Developments
- Growth of private sector credit accelerated to "48 percent" (y/y) in September.
- Deposit growth stood at "20 percent" (y/y).
- Banks’ loan-to-deposit ratio has risen substantially above the longer-term average.
- Monetary aggregates and indicators (selected):
  - Annual broad money growth: "26.9", "61.6", "37.1", "18.8", "17.1", "28.8" (percent change across years shown).
  - Claims on non-banks growth: "0.4", "21.5", "72.3", "24.1", "40.9", "16.1" (percent change across years shown).
  - Total loans/deposits: "104.2", "77.0", "96.5", "100.7", "119.5", "106.7" (percent across years shown).
- Financial Soundness Indicators (selected):
  - Regulatory capital to risk-weighted assets: "14.0", "11.6", "5.5", "16.2", "15.0", "16.1" (series shown).
  - Non-performing loans (NPL) to gross loans: "3.2", "7.1", "20.0", "6.7", "3.1", "2.2" (series shown).
  - Return on assets (before tax): "2.5", "-1.5", "-5.6", "1.8", "2.9", "2.3" (series shown).
  - Liquid assets to total assets: "28.1", "21.8", "36.9", "44.1", "32.1", "29.2" (series shown).

### External Sector Developments
- The 12-month trade deficit remained over "US$2 billion."
- Expansionary policies have kept the trade deficit over "US$2 billion."
- Imports have contracted in line with the decline in FDI; export growth turned positive with the start of operations of the OT open pit mine.
- International bond proceeds raised reserves in late-2012; since then there was a rapid loss of reserves.
- Gross international reserves (selected values):
  - End-period reserves: "1,145", "2,490", "2,630", "4,126", "2,214", "2,290" (millions of U.S. dollars across years shown).
- Mongolia’s sovereign spread is about "140 basis points" wider than the average for emerging market economies.
- Stock price returns since Jan.1, 2011 (in percent):
  - MMC (coal): "-86"
  - TRQ (copper): "-77"
  - South Gobi (coal): "-91"
  - Rio Tinto (diverse): "-27"
  - Copper price: "-26"
- Balance of payments and trade (selected):
  - Current account balance (including official transfers): "-2,759", "-3,362", "-3,470", "-2,319" (US$ millions, series shown).
  - Trade balance (12-month rolling sums): negative peaks shown; trade balance series—exports and imports data present in tables.

### Inclusive Growth Indicators and Social Outcomes
- Nominal GDP (2012): "US$10,258 million."
- Per capita GDP (2012): "US$3,651."
- Population, end-year (2011): "2.8 million."
- Poverty incidence (2012): "27.4 percent" (based on the 2012 Household Socio-Economic Survey).
- Poverty continued to decline in 2012 owing to rapid growth; unemployment rate also declined with high growth.
- However, inequality has been on the rise despite relatively high social spending.
- Human Development and social spending indicators (selected):
  - Mongolia shows relatively high human capital indicators in the comparative figures provided.
  - Public expenditure on health care and education shown as percent of GDP (values presented in figure table).

### Key Economic Projections (Strong Policy Scenario)
- Real GDP growth projections (selected):
  - 2012: "11.8" (percent)
  - 2013: "9.6" (percent)
  - 2014: "7.0" (percent)
  - Medium-term values present to 2018 in tables.
- Current account balance (in percent of GDP) projections: "-31.7", "-32.8", "-31.6", "-20.3", "-18.3", "-21.5", "-15.3", "-14.6" (series shown).
- Gross official reserves (end-period, US$ millions) projections: "2,630", "4,126", "2,214", "2,290", "2,178", "2,369", "2,592", "2,821" (series shown).
- Total public debt (percent of GDP): "48.5", "35.9", "38.8", "63.0", "67.3", "65.8" (series shown).
- Key commodity price assumptions (selected):
  - Copper price (US$ per ton): "8,823", "7,959", "7,185", "6,855" (series shown).
  - Oil price (US$ per barrel) and gold price (US$ per troy oz.) series provided.

*Source: _cr1464 - 10.9 percent of GDP in 2012.*

### Appendix I. Risk Assessment Matrix */

### Appendix I. Risk Assessment Matrix

### Domestic risks
- Continued fiscal expansion
  - Likelihood: M-HH.
  - Impacts: Continued fiscal expansion could intensify overheating pressures, undermine debt sustainability, and lead to macroeconomic instability.
  - Recommended Policy Response:
    - Substantial fiscal consolidation is needed to bring fiscal policy back on track.
    - Over time, expenditures should be reprioritized and reduced, consistent with the FSL ceilings.

- Highly accommodative monetary policy
  - Likelihood: M-HH.
  - Impacts: Loose monetary policy conducted through non-market based quantitative easing and quasi-fiscal activity risks ratcheting up inflation expectation, distorting financial markets, and delaying structural reforms required to address supply-side bottlenecks. Persistent official foreign exchange sales during the first half of 2013 caused a rapid decline in foreign exchange reserves.
  - Recommended Policy Response:
    - The BOM’s programs of monetary easing (price stabilization program, placement of 12-month term deposits at commercial banks and mortgage lending program) should be phased out.
    - Monetary operations should be conducted mainly through open market operations.
    - The BOM should continue to limit foreign exchange interventions to smoothing operations.

- Financial stability risk
  - Likelihood: M-HM-H.
  - Impacts: The banking sector harbors significant vulnerabilities arising from highly concentrated loan portfolios, inadequate provisioning, substantial dollarization and high loan-to-deposit ratios.
  - Recommended Policy Response:
    - Banking supervision and regulation need to be strengthened in line with FSAP recommendations.
    - Dollarization needs to be discouraged and the provisioning regime strengthened.

- Business environment and political risks
  - Likelihood: MH.
  - Impacts: Foreign investors' uncertainty about the business climate could impede FDI inflows.
  - Recommended Policy Response:
    - Build on the recent adoption of the new Investment Law to strengthen the business climate and stimulate FDI inflows.

### External risks
- Sharp slowdown in growth in China and/or sustained decline in commodity prices
  - Likelihood: MH.
  - Impacts: Slumping coal prices could cause closures of some mines. The uncertain outlook for commodity prices could hold back FDI inflows in the mining sector.
  - Recommended Policy Response:
    - Policies should be geared toward building resilience against external shocks and realizing inclusive growth via diversification of the economy.

- Protracted economic and financial volatility, especially for emerging markets
  - Likelihood: HM.
  - Impacts: Uncertainty in the global financing environment could stall foreign financing to Mongolia, causing delays to major mining projects and negatively impacting growth.
  - Recommended Policy Response:
    - Building policy buffers, including prudent macroeconomic and financial policies, would help reduce economic volatility caused by fluctuations of capital flows.

- Protracted period of slower European growth
  - Likelihood: HM.
  - Impacts: Weakening global demand could adversely affect current and capital flows.
  - Recommended Policy Response:
    - Policies should be geared toward building policy buffers and resilience against external shocks.

### Notes on the RAM framework
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).
- The relative likelihood of risks listed is the staff's subjective assessment of the risks surrounding the baseline ("low" is meant to indicate a probability below 10 percent, "medium" a probability between 10 and 30 percent, and "high" a probability of 30 percent or more).
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities.

*Appendix I. Risk Assessment Matrix — MONGOLIA 34 INTERNATIONAL MONETARY FUND*

### Appendix II. Mongolia’s New Fiscal Framework

### Appendix II. Mongolia’s New Fiscal Framework Anchored by the Fiscal Stability Law

### A. Background to the Adoption of the Fiscal Stability Law (FSL)
- Mining sector share of Mongolia’s export earnings rose from about 55 percent in the early 2000s to 84 percent in 2008.
- Mining contributed about 31 percent of total government revenues in 2008.
- Copper price declined by 70 percent from its July 2008 peak, contributing to large fiscal and external deficits.
- Non-mineral deficit reached nearly 10 percent of GDP in 2007.
- A Fiscal Stability Law (FSL) setting new fiscal rules and a stabilization (and savings) fund was approved by Parliament in 2010; technical assistance was provided by various partners including the Fund, though some final provisions deviated from advice.

### B. Objectives of the FSL
- Main objective: improve fiscal discipline and stability.
- Aims:
  - Dampen macroeconomic effects of mineral price fluctuations by smoothing spending.
  - Insulate fiscal spending path from fluctuations in mineral revenue to improve management of macroeconomic demand.
  - Avoid immediate spending of mineral revenue and support a stability-oriented fiscal policy.
  - Address potential large increases in revenue when large mining projects mature.

- Procedural and transparency reforms:
  - Fiscal policy decisions must be taken first within a medium-term fiscal framework; the budget is then decided within that framework.
  - Amendments to the FSL require a two-thirds parliamentary majority.

### C. Fiscal Rules in the FSL
- Three complementary fiscal rules (to function together):
  - A ceiling on the structural deficit of 2 percent of GDP (effective from 2013).
  - A ceiling on expenditure growth linked to the rate of growth of non-mineral GDP (effective from 2013).
  - A public debt ceiling of 40 percent of nominal GDP (in net present value (NPV) terms, effective from 2014).

- Structural balance definition and mechanics:
  - Structural balance = structural revenues minus overall expenditures.
  - Structural revenues are revenues that would be received if prices of major minerals were at a particular level defined as a 16-year moving average of mineral prices.
  - The 16-year moving average comprised actual prices of the past 12 years and projected prices for the current year and the next 3 years.
  - Original recommendation: zero or positive target to build buffers; political process approved a 2 percent of GDP deficit target.
  - The 2 percent target was deemed appropriate under assumptions that future borrowing would rely mostly on concessional borrowing.

- Expenditure growth rule:
  - Constrains total expenditure growth to a rate consistent with economy’s capacity to absorb spending without triggering inflation or real exchange rate overshooting.
  - In the FSL, the expenditure growth ceiling is the greater of the current year’s nominal non-mineral GDP growth rate, and the 12-year moving average of nominal non-mineral GDP growth.
  - The rule does not distinguish between current and capital expenditures.

- Gross debt rule:
  - NPV of public debt should be no greater than 40 percent of nominal GDP.
  - Coverage includes all types of financial obligations (including government guarantees) of fully and partly state-owned legal entities.
  - Transitional ceilings: 50 percent of GDP in 2011, 60 percent in 2012, and 50 percent in 2013 (to account for expected debt dynamics).

- Flexibility and escape:
  - Structural balance target to be recalibrated every four years at beginning of a new government term.
  - Escape clause for national emergencies or economic crises.

- Simulation (2000–10) findings:
  - Structural balance rule implied substantive smoothing for both mineral revenue and expenditure.
  - Expenditure rule was binding only occasionally because price smoothing in the structural rule was effective.

### D. Fiscal Stability Fund (FSF)
- Mechanism:
  - When actual mineral revenue exceeds structural mineral revenue, the difference must be placed in the stabilization fund, even if overall fiscal deficit occurs (government must borrow to make transfers).
  - When structural mineral revenue exceeds actual mineral revenue and there is an overall fiscal deficit, the fund can be used to finance that deficit.

- Operational features:
  - FSF is maintained at an account in the Bank of Mongolia (BOM) under the Law on Government Special Funds.
  - FSF balance denominated in domestic currency and does not contribute to international reserves.
  - FSF amounted to MNT 360 billion at end-May 2013, equivalent to about 2 percent of GDP.
  - BOM to manage FSF to ensure liquidity, mitigate risks, and invest balances efficiently on international financial market.
  - FSL stipulates no active management of FSF balances until balance reaches 10 percent of GDP.
  - BOM has paid no interest on this account.

- Procedures and remaining issues:
  - Under a Minister’s Order, share of mineral revenues distributed to FSF is calculated twice a month to promote efficient and timely transfers.
  - No specific arrangement on withdrawal rules; no withdrawals made to date (withdrawals might be made in 2013 because actual price of some minerals, especially coal, has fallen below structural price by some measures).
  - FSL requires fund to be greater than 5 percent of GDP from FY 2018 onward, with excesses invested with a longer-term perspective.
  - Potential inconsistency: if gap between actual and structural revenues is not high enough to meet 5 percent of GDP floor, rules could conflict.

### E. Recent Developments
- Use of off-budget vehicle:
  - Development Bank of Mongolia (DBM), established in 2011, used as off-budget vehicle for spending outside FSL constraints.
  - In March 2012 DBM raised US$580 million (5.5 percent of GDP) by issuing 5-year government-guaranteed bonds.
  - Total government spending, including DBM, increased by 73 percent in real terms between 2010 and 2012.
  - Overall fiscal deficit (including DBM operations) worsened to 10.9 percent of GDP.
  - Approved 2013 budget targets a structural deficit of 2 percent of GDP (in line with FSL), but revenue projections are described as overly ambitious and DBM spending (which could reach 9 percent of GDP in 2013) is not included in the budget.

- Setbacks in structural underpinnings:
  - Integrated Budget Law (IBL) passed December 2011 aimed to mandate budget meet FSL requirements and strengthen capital budgeting; Ministry of Finance (MOF) to be single point of control for financing decisions.
  - September 2012: Ministry of Economic Development (MED) created and put in charge of planning the capital budget; MED launched December 2012 sovereign bond issuance, drew up off-budget public investment projects, and channeled bond proceeds through DBM to implement projects outside the budget.
  - Social Welfare Law (January 2012) mandated means-tested benefit to replace universal cash transfers; in September 2012 universal child benefits were reintroduced.

### F. The Way Forward (policy recommendations and priorities)
- Political commitment to macroeconomic stability and to the FSL is key to resist expenditure pressures.
- The FSL framework is comprehensive and tailored for producers of nonrenewable resources, combining a price-based rule and an expenditure growth limit.
- Short-term priority: return fiscal balance to the path prescribed by the FSL.
- Medium- to long-term priority: establishment of a sovereign wealth fund (SWF) as an important complement to the FSL, enabling accumulation of net financial assets when mining revenue rises.
- If mining revenue increases, the FSL’s structural deficit ceiling may need tightening to allow significant accumulation of net financial assets in the SWF.

### Mongolia: Fiscal Stability Law Scorecard (Strong Policy Scenario) — Key Figures and Projections
- Years referenced: 2012, 2013, 2014 Est.
- Units: in billions of togrogs; percentages of GDP; year-on-year growth in percent.

- Ceiling on Structural Deficit (in billions of togrogs):
  - Revenue: 4,976; 5,746; 6,706
  - Spending, incl. off-budget DBM/Chinggis bond spending: 6,494; 8,000; 8,205
  - o/w DBM/Chinggis bond spending: 476; 1,500; 1,123

- Ceiling on Structural Deficit (in percent of GDP):
  - Revenue: 35.7; 34.4; 32.9
  - Spending, incl. off-budget DBM/Chinggis bond spending: 46.6; 47.9; 40.3
  - o/w DBM/Chinggis bond spending: 3.4; 9.0; 5.5

- Balances (in percent of GDP):
  - Overall balance: -10.9; -13.5; -7.4
  - Structural balance: -11.5; -13.7; -7.5
  - Structural balance excl. DBM/Chinggis bond spending: -8.1; -4.7; -2.0
  - FSL limit 1/: -2.0; -2.0

- Ceiling on Expenditure Growth:
  - Spending (year-on-year growth, in percent): 30; 23; 3
  - FSL limit 1/ (year-on-year growth, in percent): 22; 22; 2

- Ceiling on Public Debt (in percent of GDP):
  - Public and publicly guaranteed debt: 63.0; 67.3; 65.8
  - o/w DBM bonds 2/: 5.8; 6.0; 10.6
  - o/w Sovereign bonds: 15.0; 15.6; 13.5
  - Net present value of public debt: 54.6; 58.6; 58.0
  - FSL limit 1/: 60.0; 50.0; 40.0

- Memorandum items (in percent of GDP):
  - SOEs' debt (not included in FSL and DSA public debt): 11.6; 9.6; 7.6
  - Government financial assets: 19.6; 10.7; 9.8
  - Fiscal Stabilization Fund deposit held at the BOM: 2.8; 2.5; 2.2
  - DBM/Chinggis bond deposit held at the BOM 2/: 16.9; 8.2; 7.6

- Notes:
  - Source: Mongolian authorities; and IMF staff estimates and projections.
  - 2/ Assumes DBM will raise US$600 million in early 2014 and these funds will not be spent in 2014, in context of overall government policy to contain growth of domestic demand (strong policy scenario).
  - 1/ Three complementary FSL limits:
    - (1) A ceiling on the ‘structural deficit’ of 2 percent of GDP (effective from 2013);
    - (2) A ceiling on expenditure growth (the greater between the average of the previous 11 year non-mineral growth rate and the present year non-mineral GDP growth rate, effective from 2013);
    - (3) A public debt ceiling of 40 percent of nominal GDP (effective from 2014, but for the transitional period (2012−2013) 60 percent in 2012 and 50 percent in 2013).

*Source: Appendix II. Mongolia’s New Fiscal Framework — Anchored by the Fiscal Stability Law (IMF Staff).*

### 1.      The Bank and the Fund country teams maintain a close working relationship. The teams,

### 1.      The Bank and the Fund country teams maintain a close working relationship. The teams,

### Country team leadership and collaboration
- The teams are led by Ms. Chorching Goh (Lead Economist, EASPR) and Mr. Gerard Almekinders (Mission Chief) and collaborate on a range of macroeconomic and structural issues.

### Cooperation and coordination (exemplary)
- IMF surveillance. World Bank staff participates in Policy Consultation Meetings ahead of Article IV consultation missions and comments on staff reports. World Bank staff also participates in selected meetings of the Article IV mission team with the authorities. This facilitates the discussions, especially as regards policies in areas of mutual interest such as bank restructuring, social welfare reform, and fiscal policy.
- Development Policy Credits (DPC) and Country Partnership Strategy (CPS). In turn, Fund staff participated in the design and review of the Bank’s DPCs and was kept informed about the development of the Bank’s new CPS for FY13−17.
- Banking system issues. Both country teams have been active in this area, including by fielding technical assistance missions. The teams coordinate closely to provide the authorities with consistent advice while avoiding unnecessary duplication of efforts. The two teams also continue to educate the public and parliamentarians on banking sector issues in an effort to build support for reforms.
- Structural reforms. Staffs of the Fund and the World Bank have worked together successfully to provide technical assistance in expenditure management, the Fiscal Stability Law, the Integrated Budget Law, the Social Welfare Law, the Investment Law , and taxation of the mineral sector and on-going work on the Sovereign Wealth Fund Law.

### Shared view on Mongolia’s macroeconomic and structural reform priorities
- Promoting long-term growth.
  - Managing the mineral wealth to ensure strong, sustainable, and equitable growth with low inflation.
  - Includes the importance of avoiding the “resource curse” and the productive use of mineral wealth management.
- Macro-economic stability.
  - Ensuring that the boom-bust policies of the past are not repeated.
  - The Fiscal Stability Law adopted in 2010 with the support of the Fund and the Bank is a key step, and it is critical that it be strictly adhered to from 2013, the first year the law is effective.
  - Fiscal policy also has to be mindful of the macroeconomic policy mix and medium and long-term fiscal sustainability.
- Monetary policy.
  - The Bank of Mongolia (BOM)’s large monetary stimulus, through its so-called “price stabilization program,” mortgage program, and liquidity injection, distorts markets and is bound to ratchet up inflation.
  - The stimulus program should be phased out and the BOM should focus on further strengthening the monetary policy framework.
  - The flexible exchange rate regime should be maintained.
- Protecting the poor.
  - The 2012 Social Welfare Law envisages replacing existing costly universal cash transfers with means-tested benefits that would reach the poorest households.
  - Full implementation of the law would represent a big step forward in strengthening the social safety net and increasing fiscal flexibility.
  - Concrete action following the adoption of the law is important from a socio-economic perspective as well as a fiscal perspective.
- Strengthening the banking system.
  - Key steps include continued improvement in bank regulation and supervision, ramping up risk disclosure and management—especially given elevated systemic risks in the sector illustrated by the recent failure of Saving Bank—and strengthening the newly established Mongolian Deposit Insurance Corporation.

*Source: _cr1464 - 1.      The Bank and the Fund country teams maintain a close working relationship. The teams,*

### 4.  The teams agreed to continue the close cooperation going forward. Table 1 details

### 1.      This DSA is built on baseline medium-term macroeconomic projections which assume

### _cr1464 - 1.      This DSA is built on baseline medium-term macroeconomic projections which assume

### Overview
- The DSA is built on baseline medium-term macroeconomic projections that assume the authorities tighten policies substantially from the current policy stance.
- Medium-term prospects are described as promising given Mongolia’s large natural resource endowment, but current macroeconomic policies are on an unsustainable path.
- Negative shocks to FDI and coal exports are compounding balance of payments (BOP) pressures caused by expansionary fiscal and monetary policies.
- Central bank reserves have been declining and the exchange rate depreciated by about 22 percent over the past year.
- A “strong policy scenario” is used as the baseline in this DSA given recent policy steps; a “weak policy scenario” illustrates risks of continued current policies.

### Recent and planned policy actions (cited as rationale for the baseline)
- Authorities announced plans to reduce spending from the 2013 budget by almost MNT 1 trillion (about 6 percent of GDP) to stay within the FSL’s 2 percent of GDP ceiling for the structural fiscal deficit for on-budget fiscal operations.
- Pace of spending by the Development Bank of Mongolia (DBM) will be slowed during the last quarter of 2013.
- Bank of Mongolia (BOM) is discussing plans to unwind some of the monetary stimulus provided during the first half of 2013.

### Debt developments since previous DSA
- Face value of public external debt is now projected to amount to 51.8 percent of GDP in 2013, up from 30 percent of GDP in the previous DSA.
- The higher public external debt ratio is mostly accounted for by:
  - sovereign borrowing (15 percent of GDP in 2012),
  - foreign borrowing by the BOM (7 percent of GDP over the past 2 years),
  - and the US$-value of GDP being 7 percent lower than projected in the previous DSA.
- The projected decline in the face value of public external debt over the next five years is 18 percentage points of GDP (substantially larger than the 5½ percentage points decline projected in the previous DSA), reflecting the strong policy scenario assumption of considerably reduced foreign borrowing.
- The DSA assumes the 5-year bond and 10-year bond are rolled over.
- The authorities announced work on issuing a US$600 million (5½ percent of GDP) Samurai bond; the DSA assumes this issuance will be completed in 2014.

### Macroeconomic projections (main features compared to previous DSA)
- GDP growth:
  - Projected to average 8 percent per annum over the medium term (2013−18), compared to 12 percent in the previous DSA.
  - Mining sector growth projected to average 12 percent per annum during 2013–18 (previous DSA: 20 percent per annum), and expected to slow gradually over the long run to an annual average of 3.5 percent.
  - Nonmining growth projected to decline to 5 percent in 2014 (reflecting tightening in the strong policy scenario) and recover gradually to 7 percent over the medium term, averaging about 7.3 percent per annum in 2013–18.
- Inflation:
  - Projected to rise above 10 percent by end-2013 and remain there until late 2014, then decelerate to about 5 percent over the medium and long term with monetary tightening and fiscal consolidation.
- Current account:
  - Expected to remain weak despite Oyu Tolgoi production and increased Tavan Tolgoi exports.
  - Current account deficit expected to narrow to about 15 percent of GDP in 2018 from 33 percent in 2012 (contrast with previous DSA which projected a current account surplus in 2018).
- Commodity price assumptions:
  - Copper and coal price projections through 2018 are based on WEO projections as of August 2013 and are assumed to remain constant in real terms beyond 2018.
- Fiscal policy:
  - On-budget fiscal operations assumed tightened considerably to observe the FSL starting with the 2014 budget.
  - Off-budget program of public investment projects assumed phased out by the end of 2015 (represents tightening from current policies but loosening versus previous DSA which assumed FSL compliance from 2013).

### Institutional and market aspects of debt management
- A joint IMF-World Bank mission (April 2013) assisted authorities on Medium-Term Debt Management Strategy (MTDS) and delivered training on MTDS analytical tools.
- Current institutional setup for debt management has weaknesses:
  - The large international bond issuance in late 2012 (maiden sovereign bond) was undertaken under the leadership of the Ministry of Economic Development with limited reference to the MTDS and insufficient involvement of the Ministry of Finance.
- Post-issuance profile changes:
  - Share of FX-denominated debt increased to 77 percent.
  - Substantial refinancing risks emerged in 2017 and 2022 (about US$ 1 billion repayment due in both years).
- Domestic debt market developments:
  - Auctioning of treasury bills modernized in late-2012.
  - Outstanding stock of T-bills has risen by 4 percent of GDP.
  - Demand in primary market still limited to a few domestic banks; appetite for longer-dated government debt uncertain.

### Debt Sustainability — External DSA (key findings)
- Mongolia’s present value (PV) of public and publicly-guaranteed external debt to GDP ratio breaches the relevant policy-dependent indicative threshold through 2014.
- Debt service-to-revenue ratio exceeds the indicative threshold in 2017 and 2022.
- Main results in the strong policy scenario:
  - PV of debt-to-GDP decreases from 43 percent in 2013 to about 17½ percent in 2033 but remains above the 40 percent indicative threshold through 2014.
  - PV of debt-to-exports ratio decreases from around 96¼ percent in 2013 to 38 percent in 2033 (indicative threshold: 150 percent).
  - PV of debt-to-revenue ratio declines from 125¼ percent in 2013 to 56¾ percent in 2033 (indicative threshold: 250 percent).
  - Debt service-to-export ratio remains mostly below 10 percent over next two decades but reaches 17¾ percent in 2017 and 13½ percent in 2022.
  - Debt service-to-revenue ratio stays around 10–15 percent but breaches the 20 percent indicative threshold in 2017 and 2022.
- Standard stress tests:
  - Important vulnerability to exchange rate and export shocks.
  - Standard exchange rate shock causes a prolonged breach of the PV debt-to-GDP threshold.
  - Standard export shock keeps PV of debt-to-exports and debt service indicators above relevant thresholds.
- Standard “historical scenario” in template is not a relevant comparator because it replaces relatively low projected FDI (13 percent of GDP average next 6 years) with past-ten-year average FDI (21.8 percent of GDP), reducing need for new debt and driving external debt-to-GDP rapidly to zero.

### Debt Sustainability — Public DSA (key findings)
- In the strong policy scenario (baseline):
  - PV of public debt-to-GDP ratio peaks at 58½ percent of GDP in 2013, falls to 44¾ percent in 2018, and stabilizes at about 39 percent of GDP over the long run.
- Sensitivity:
  - If the primary balance is fixed at the level projected for 2013, PV of debt-to-GDP would rise from 58½ percent in 2013 to 240 percent in 2033 (illustrating unsustainability of current fiscal policy).
- The strong policy scenario produces broadly similar outcomes to the historical scenario in the public DSA, indicating the scenario is broadly in line with average fiscal outcomes over the past 10 years.

### Strong vs. Weak Policy Scenarios (Box 1 summary)
- Strong policy scenario (baseline):
  - Monetary stimulus phased out by mid-2014.
  - Budget framework brought in line with the FSL over the medium term; on-budget operations observe the FSL starting in 2014.
  - Off-budget public investment program phased out by end-2015.
  - Mining sector growth assumed not materially affected by macro policies; nonmining growth declines to 5 percent in 2014 then recovers to 7 percent over medium term.
  - Inflation rises and stays in low double-digits through late-2014 then declines to 5 percent.
  - Current account deficit narrows to 15 percent of GDP by 2018.
- Weak policy scenario (continuation of current expansionary policies):
  - Government takes two more years to bring on-budget operations in line with FSL and continues off-budget public investment projects; BOM stimulus phased out only gradually.
  - Nonmining growth projected at 8 percent in 2014 but slumps to -5 percent in 2015 as large absorption adjustment unfolds; recovers to 1 percent by 2018.
  - Cumulative nonmining output loss about 20 percentage points compared to strong policy scenario over a 4-year horizon.
  - Inflation around 3–4 percentage points higher than in strong policy scenario; converges to 5½ percent over medium term.
  - Current account deficit narrows to 9 percent of GDP by 2018 (compared to 15 percent in strong policy scenario).
  - Under the weak policy scenario, reserves are drained in 2015 with a sharp depreciation of 30–40 percent from end-2013; a large absorption adjustment leads to an output loss of 15–20 percent over the medium term compared to the strong policy scenario.
  - Mongolia would need to be reclassified to “high risk of debt distress”; PV of debt-to-GDP would generally remain above the 40 percent indicative threshold throughout the 20-year projection period and debt service-to-revenue would breach thresholds in 2017 and from 2021 onwards.

### Authorities' view
- Authorities broadly concurred with the DSA assessment but noted:
  - They did not rule out another international bond issuance in the next couple of years in addition to the planned Samurai bond.
  - Current medium-term fiscal framework envisages additional international bond issuances of up to US$3.5 billion (32 percent of GDP) by 2015.
  - They expect the approval of the new Investment Law to create favorable conditions for FDI inflows and thereby reduce the need for government borrowing to support growth, lowering the risk of debt distress over the medium term.

### Conclusion and staff judgment
- Staff view: Mongolia faces a moderate risk of debt distress provided the strong policy scenario is implemented.
- If a weak-policy scenario materializes (continuation of current policies), vulnerabilities would increase and Mongolia would be reclassified to “high risk of debt distress.”
- Even under the strong policy scenario:
  - PV of external debt-to-GDP breaches the policy-dependent indicative threshold through 2014.
  - Debt service-to-revenue ratio breaches the indicative threshold in 2017 and 2022.
  - Some other debt-burden indicators breach thresholds under standard stress tests.

*Source: IMF staff calculations and Mongolian authorities as summarized in the DSA content unit.*

### Box 2. The Structure of Public Debt

### Box 2. The Structure of Public Debt

### Overview
- Mongolia’s stock of public and publicly-guaranteed external debt had a face value of US$4.8 billion (48.3 percent of GDP) at end-2012.
- External debt more than doubled from US$2.2 billion at end-2011 to US$4.8 billion at end-2012, owing to large borrowing by the sovereign, the DBM, and the BOM.
- The share of Mongolia’s external public debt owed to multilateral creditors on concessional terms declined from 56 percent in 2011 to 25 percent of total external debt in 2012.
- Private external debt is significant and mainly reflects intercompany lending for mining projects, including by the Rio Tinto/Ivanhoe mining conglomerate, to finance the development of the OT copper and gold mine.

### Domestic public debt (end-2012)
- Domestic public debt amounted to 14.7 percent of GDP at end-2012, up from 10.9 percent in 2011.
- MNT 849 billion increase in domestic public debt in 2012 mainly reflects issuance of government paper to finance the large government deficit in 2012.
- The sovereign bond issued in late-2012 was not used to finance the deficit in 2012.
- To preserve consistency between debt stocks and flows of deficit financing, some government paper issued during Q1 2013 is included in the end-2012 stock of government bonds (MNT 1,280 billion):
  - Treasury bills were issued to settle government spending carried over from the 2012 budget (MNT 191 billion).
  - Treasury bills were issued to settle the end-2012 overdraft of the Treasury Single Account (MNT 79 billion).

### Excluded items and contingent arrangements
- This DSA does not include government borrowing from the OT company to finance its 34 percent equity share in the mine. Reasons stated:
  - The amount of this debt is under discussion and no officially confirmed estimate is available.
  - The government’s investment share in the OT mining project will be repaid from expected dividends and the government will not be liable for the loan if dividends are insufficient.

### Key indicators and historical snapshots (selected exact figures)
- External debt (nominal) series (percent of GDP): 2010: 92.7; 2011: 113.0; 2012: 133.1; 2013: 137.1; 2014: 143.9; 2015: 135.1; 2016: 131.6; 2017: 120.9; 2018: 116.1; 2023: 84.5; 2033: 47.4.
- Of which: public and publicly guaranteed (PPG) external (percent of GDP): 2010: 30.8; 2011: 27.9; 2012: 48.3; 2013: 51.8; 2014: 50.7; 2015: 44.9; 2016: 39.6; 2017: 36.2; 2018: 33.4; 2023: 26.4; 2033: 20.5.
- Change in external debt (percent of GDP): 2010: 27.4; 2011: 20.3; 2012: 20.1; 2013: 4.0; 2014: 6.8; 2015: -8.8; 2016: -3.5; 2017: -10.7; 2018: -4.9; 2023: -5.1; 2033: -2.8.
- Identified net debt-creating flows (percent of GDP): 2010: -27.8; 2011: -45.8; 2012: -27.2; 2013: -1.5; 2014: -2.6; 2015: -2.4; 2016: 2.4; 2017: -7.2; 2018: -4.5; 2023: -9.7; 2033: -10.7.
- Non-interest current account deficit (percent of GDP): 2012: 29.7; 2013: 10.3; 2014: 14.9; 2015: 26.9; 2016: 15.2; 2017: 12.6; 2018: 15.3; 2023: 9.1; 2033: 8.8.
- Net FDI (negative = inflow, percent of GDP): 2010: -25.2; 2011: -53.1; 2012: -43.0; 2013: -21.8; 2014: 17.3; 2015: -18.5; 2016: -10.5; 2017: -11.5; 2018: -12.5; 2023: -12.5; 2033: -11.4.
- Endogenous debt dynamics (percent of GDP): 2010: -16.6; 2011: -24.6; 2012: -14.0; 2013: -9.9; 2014: -7.4; 2015: -3.6; 2016: -0.4; 2017: -3.9; 2018: -0.8; 2023: 0.4; 2033: -0.3.

### Present-value and debt-service measures (selected)
- PV of external debt (index numbers shown; selected values): 2013: 124.7; 2014: 128.4; 2015: 136.1; 2016: 128.0; 2017: 125.2; 2018: 115.0; 2023: 80.7; 2033: 44.3.
- PV of PPG external debt (in millions of US dollars, memorandum): 2010: 3,997; 2011: 4,153; 2012: 4,768; 2013: 4,605; 2014: 4,310; 2015: 4,343; 2016: 4,397; 2017: 5,219; 2018: 7,578.
- PV of PPG external debt (percent of exports): 2013: 76.6; 2014: 96.2; 2015: 76.8; 2016: 65.4; 2017: 62.4; 2018: 53.6; 2023: 38.6; 2033: 38.1.
- PV of PPG external debt (percent of government revenues): 2013: 112.4; 2014: 125.2; 2015: 130.3; 2016: 115.0; 2017: 97.6; 2018: 88.2; 2023: 69.3; 2033: 56.8.
- Debt service-to-exports ratio (percent): 2010: 5.0; 2011: 4.0; 2012: 15.1; 2013: 30.7; 2014: 25.6; 2015: 37.3; 2016: 31.1; 2017: 44.0; 2018: 23.5; 2023: 19.0; 2033: 15.6.
- PPG debt service-to-exports ratio (percent): 2010: 4.4; 2011: 1.7; 2012: 2.2; 2013: 12.8; 2014: 4.9; 2015: 7.0; 2016: 8.4; 2017: 17.7; 2018: 4.2; 2023: 6.5; 2033: 9.8.
- PPG debt service-to-revenue ratio (percent): 2010: 6.5; 2011: 2.7; 2012: 3.2; 2013: 16.7; 2014: 8.2; 2015: 12.3; 2016: 13.1; 2017: 29.0; 2018: 6.9; 2023: 11.7; 2033: 14.7.

### Financing needs and grant-equivalent financing
- Total gross financing need (millions of U.S. dollars): 2010: -274; 2011: -1,265; 2012: 35; 2013: 3,539; 2014: 3,069; 2015: 3,784; 2016: 3,564; 2017: 4,144; 2018: 2,451; 2023: 1,281; 2033: -339.
- Grant-equivalent financing (in percent of GDP, selected years): 2018: 8.3; 2019: 9.0; 2020: 31.7; 2021: 34.4; 2022: 3.8; 2023: 12.1; 2024: 16.5; 2025: 4.9; 2026: 3.2; 2027: 4.1.
- Aid flows (in millions of US dollars, selected): 2014: 15.1; 2015: 44.0; 2016: 23.7; 2017: 44.6; 2018: 44.7; 2019: 36.3; 2020: 31.3; 2021: 30.1; 2022: 30.1; 2023: 30.1.

### Debt sustainability and public sector aggregates
- Public sector debt (percent of GDP): 2010: 35.9; 2011: 38.8; 2012: 63.0; 2013: 67.3; 2014: 65.8; 2015: 60.4; 2016: 55.9; 2017: 52.4; 2018: 50.1; 2023: 44.6; 2033: 41.7.
- Of which: foreign-currency denominated (percent of GDP): 2010: 33.5; 2011: 34.2; 2012: 53.9; 2013: 56.9; 2014: 53.9; 2015: 46.3; 2016: 39.5; 2017: 36.0; 2018: 33.4; 2023: 26.4; 2033: 20.5.
- Change in public sector debt (percent of GDP): 2010: -12.6; 2011: 2.9; 2012: 24.2; 2013: 4.3; 2014: -1.5; 2015: -5.4; 2016: -4.5; 2017: -3.6; 2018: -2.3; 2023: -0.8; 2033: -0.4.
- Identified debt-creating flows (percent of GDP): 2010: -15.8; 2011: -0.7; 2012: 3.0; 2013: 15.1; 2014: -1.7; 2015: -2.3; 2016: -2.6; 2017: -4.2; 2018: -2.7; 2023: -1.4; 2033: -1.2.
- Primary deficit (percent of GDP): 2012: 10.0; 2013: 1.0; 2014: 5.8; 2015: 11.1; 2016: 4.6; 2017: 0.9; 2018: -1.2; 2023: -1.1; 2033: -0.6.
- Revenue and grants (percent of GDP): 2010: 37.1; 2011: 40.3; 2012: 35.7; 2013: 34.4; 2014: 32.9; 2015: 32.9; 2016: 34.0; 2017: 34.2; 2018: 33.5; 2023: 32.6; 2033: 30.6.
- Gross financing need (percent of GDP, Table 3): 2010: 1.6; 2011: 6.2; 2012: 15.3; 2013: 23.8; 2014: 12.5; 2015: 10.3; 2016: 9.0; 2017: 13.3; 2018: 6.2; 2023: 8.1; 2033: 10.2.
- PV of public sector debt (percent of GDP): 2013: 54.6; 2014: 58.6; 2015: 58.0; 2016: 53.3; 2017: 49.5; 2018: 46.4; 2023: 44.7; 2033: 40.7; 2033 (alternate line) 38.5.

### Stress tests and sensitivity analysis (Strong Policy Scenario, 2013–2033)
- The DSA includes alternative scenarios and bound tests. Selected scenario labels include:
  - A1. Key variables at their historical averages in 2013-2033.
  - A2. New public sector loans on less favorable terms in 2013-2033.
  - A3. Weak policy scenario.
  - B1–B6. Bound tests including shocks to real GDP growth, export value growth, US dollar GDP deflator, net non-debt creating flows, combination shocks, and a one-time 30 percent nominal depreciation in 2014.
- Table 2 sensitivity outputs (selected):
  - PV of debt-to-GDP ratio (baseline and scenarios) reported in Table 2 (various numeric entries shown in source tables).
  - Debt service-to-exports and debt service-to-revenue ratios subject to scenario variations and bound tests (full numeric arrays are in the source tables).

### Key macroeconomic assumptions (selected exact figures)
- Real GDP growth (percent, selected years): 2010: 6.4; 2011: 17.5; 2012: 12.3; 2013: 8.9; 2014: 5.7; 2015: 11.8; 2016: 9.6; 2017: 7.0; 2018: 5.2; 2023: 8.5; 2033: 6.0.
- GDP deflator in US dollar terms (change in percent, selected years): 2010: 28.3; 2011: 18.7; 2012: 4.9; 2013: 13.3; 2014: 15.6; 2015: -4.2; 2016: -5.2; 2017: 2.2; 2018: 1.1; 2023: 2.0; 2033: 2.2.
- Effective interest rate (percent, selected years): 2010: 1.7; 2011: 2.5; 2012: 3.2; 2013: 132.8; 2014: 346.6; 2015: 3.8; 2016: 4.0; 2017: 4.3; 2018: 4.9; 2023: 5.2; 2033: 3.7.
- Growth of exports of G&S (US dollar terms, percent, selected): 2010: 48.4; 2011: 60.5; 2012: -1.7; 2013: 23.3; 2014: 29.0; 2015: -7.9; 2016: 29.6; 2017: 13.3; 2018: -2.3; 2023: 17.0; 2033: 5.1.
- Growth of imports of G&S (US dollar terms, percent, selected): 2010: 49.3; 2011: 92.4; 2012: 5.4; 2013: 31.7; 2014: 39.5; 2015: -5.2; 2016: 2.0; 2017: 8.4; 2018: 4.2; 2023: 7.0; 2033: 5.2.
- Government revenues (excluding grants, percent of GDP, selected): 2010: 36.7; 2011: 40.3; 2012: 35.5; 2013: 34.4; 2014: 32.9; 2015: 32.9; 2016: 34.0; 2017: 34.2; 2018: 33.5; 2023: 32.6; 2033: 30.6.
- Nominal GDP (millions of US dollars, selected): 2010: 6,244; 2011: 8,709; 2012: 10,258; 2013: 10,982; 2014: 11,417; 2015: 12,494; 2016: 13,286; 2017: 14,701; 2018: 15,918; 2023: 23,437; 2033: 44,190.
- Gross workers' remittances (millions of US dollars, selected): 2010: 101.9; 2011: 58.5; 2012: 41.0; 2013: 103.9; 2018: 106.6; 2023: 156.9; 2033: 265.8.

*Sources: Country authorities; and staff estimates and projections.*

### 1. Real GDP growth is at historical average minus one standard deviations in 2014-201559646564646576100

### 1. Real GDP growth is at historical average minus one standard deviations in 2014-2015

### Sensitivity analysis for key indicators of public debt (Strong Policy Scenario)
- Scenarios and bound tests entries (numbers preserved as in source):
  - B1. Real GDP growth is at historical average minus one standard deviations in 2014-2015: 59646564646576100
  - B2. Primary balance is at historical average minus one standard deviations in 2014-2015: 5960625855534844
  - B3. Combination of B1-B2 using one half standard deviation shocks: 5959585654545665
  - B4. One-time 30 percent real depreciation in 2014: 5979736965646065
  - B5. 10 percent of GDP increase in other debt-creating flows in 2014: 5969646056544945
- Baseline and alternative scenarios (values presented in source):
  - Baseline: 170176162146136134125126
  - A1. Real GDP growth and primary balance are at historical averages: 170166150137134133129121
  - A2. Primary balance is unchanged from 2013: 170198217236259293444786
  - A3. Permanently lower GDP growth 1/: 170180170159155161212450
  - A4. Weak policy scenario: 170197207204194191176181
- Bound tests (additional sequences):
  - B1 (alternate listing): 170194197189187195232327
  - B2 (alternate listing): 170184189172160157146145
  - B3 (alternate listing): 170180177164158160171211
  - B4 (alternate listing): 170239223204191190183213
  - B5 (alternate listing): 170209194176164161150148
- Additional baseline block: 3025293042202636 and associated scenario blocks (as listed in source):
  - Baseline: 3025293042202636
  - A1: 3025282840192325
  - A2: 30253033033462854112
  - A3: 3025303145223475
  - A4: 3025323656314150
- Further bound-test and scenario numeric blocks appear in source (preserved):
  - B1: 302733344825375761
  - B2: 30253031343222939
  - B3: 3026303245223147
  - B4: 3027353756253757
  - B5: 3025313243243039

- Notes from table:
  - Sources: Country authorities; and staff estimates and projections.
  - 1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.
  - 2/ Revenues are defined inclusive of grants.
  - Table title: Table 4. Mongolia: Sensitivity Analysis for Key Indicators of Public Debt (Strong Policy Scenario) 2013-2033
  - Indicators referenced: PV of Debt-to-GDP Ratio; PV of Debt-to-Revenue Ratio 2/; Debt Service-to-Revenue Ratio 2/.

### Executive Board assessment (summary of Directors' views)
- Commended Mongolia’s significant progress in recent years in economic development and reducing poverty.
- Noted medium-term outlook remains favorable, underpinned by developments in the mining sector.
- Cautioned that continuation of expansionary fiscal and monetary policies could threaten stability.
- Welcomed recent fiscal and exchange rate steps but called for further decisive recalibration to:
  - Address vulnerabilities and rebuild buffers against external shocks.
  - Ensure sustainable strong growth.
- Fiscal policy recommendations:
  - Need for an ambitious and credible fiscal consolidation plan.
  - Bring fiscal policy in line with the Fiscal Stability Law, aiming to meet the 2 percent of GDP structural deficit ceiling over the next 2−3 years.
  - Include Development Bank of Mongolia (DBM) operations in the budget.
  - Frontloaded adjustment: streamline subsidies and transfers; reprioritize and rephase capital spending.
  - Encourage completion of sovereign wealth fund and enhance public debt management capacity.
- Monetary and financial sector recommendations:
  - Unwind large monetary stimulus to curb inflationary and balance of payments pressures.
  - Strengthen monetary policy framework and allow greater exchange rate flexibility.
  - Reinforce regulatory and supervisory framework to address banking sector vulnerabilities, including unhedged foreign currency lending.
  - Enforce prudential regulations, strengthen underwriting and loan classification, phase-in forward-looking provisioning.
  - Enhance bank resolution regime, develop legal framework for prompt corrective actions, address AML/CFT deficiencies.
- Structural recommendations:
  - Continue reforms to strengthen business climate, building on the new investment law.

### Economic outlook (selected projections and observations)
- Growth and drivers:
  - Real GDP growth: 2010: 6.4; 2011: 17.5; 2012: 12.3; 2013: 11.8; 2014: 9.6 (percent change).
  - Mineral sector: 2010: 3.6; 2011: 7.3; 2012: 8.9; 2013: 16.1; 2014: 33.4 (percent change).
  - Non-mineral sector: 2010: 7.0; 2011: 19.7; 2012: 12.9; 2013: 11.0; 2014: 5.0 (percent change).
- Inflation:
  - Consumer prices (period average): 2010: 10.2; 2011: 7.7; 2012: 15.0; 2013: 9.7; 2014: 11.1
  - Consumer prices (end-period): 2010: 14.3; 2011: 9.4; 2012: 14.2; 2013: 11.7; 2014: 11.0
- Monetary aggregates:
  - Broad money: 2010: 61.6; 2011: 37.1; 2012: 18.8; 2013: 17.1; 2014: 28.8
  - Private credit: 2010: 21.5; 2011: 72.3; 2012: 24.1; 2013: 40.9; 2014: 16.1
- Interest rate:
  - Interest rate on 7-day central bank bills, end-period (percent): 11.00 (2010), 12.25 (2011), 13.25 (2012); 2013: ......
- Balance of payments (US$, in millions):
  - Current account balance (including official transfers): 2010: -931; 2011: -2,759; 2012: -3,362; 2013: -3,470; 2014: -2,319
  - Current account (percent of GDP): -14.9; -31.7; -32.8; -31.6; -20.3
  - Trade balance: 2010: -278; 2011: -993; 2012: -1,553; 2013: -1,425; 2014: -267
  - Exports: 2010: 2,899; 2011: 4,817; 2012: 4,385; 2013: 4,193; 2014: 5,435
  - Imports: 2010: -3,177; 2011: -5,810; 2012: -5,938; 2013: -5,618; 2014: -5,702
  - Foreign direct investment: 2010: 157; 2011: 44,620; 2012: 4,408; 2013: 2,032; 2014: 1,199
  - Gross official international reserves (end-period): 2010: 2,490; 2011: 2,630; 2012: 4,126; 2013: 2,214; 2014: 2,290
  - Reserves (months of next year's imports): 3.9; 3.9; 6.5; 3.4; 3.3
- Trade prices and terms of trade:
  - Export prices (US$, percent change): 23.8; 39.5; -12.0; -14.9; -5.9
  - Import prices (US$, percent change): 27.9; 31.6; 1.0; -2.4; -4.4
  - Terms of trade (percent change): -3.3; 6.0; -12.8; -12.8; -1.6

### Fiscal sector (selected fiscal indicators)
- General government (percent of GDP):
  - Revenue and grants: 37.1; 40.3; 35.7; 34.4; 32.9
  - Expenditure and net lending: 36.6; 45.1; 46.6; 47.9; 40.3
  - Current balance: 9.8; 11.0; 3.7; 6.7; 8.7
  - Primary balance: 1.0; -4.4; -10.0; -11.1; -4.6
  - Overall balance (including grants): 0.5; -4.8; -10.9; -13.5; -7.4
  - Non-mineral overall balance: -10.5; -14.0; -16.9; -18.9; -12.6
  - Structural balance 1/: ...; -6.9; -11.5; -13.7; -7.5
- Public and publicly guaranteed debt (percent of GDP):
  - Total public debt 2/: 35.9; 38.8; 63.0; 67.3; 65.8
  - Domestic debt: 5.1; 10.9; 14.7; 15.5; 15.1
  - External debt: 30.8; 27.9; 48.3; 51.8; 50.7
  - In millions of US$: 2,061; 2,219; 4,837; 4,988; 5,636
- Notes:
  - 1/ As defined in the Fiscal Stability Law, which uses smoothed instead of actual commodity prices to calculate revenue.
  - 2/ The public debt data refer to the nominal value of debt and include tax prepayments by mining companies (under domestic debt) and external borrowing by the central bank. By contrast, the authorities’ estimates of public debt follow the definitions in the Fiscal Stability Law. They are expressed in net present value terms and exclude borrowing by the central bank.

### Key policy developments and authorities' plans
- Growth drivers and near-term outlook:
  - Economy expanded by 12½ percent in 2012 and by 11½ percent in the first half of 2013.
  - Real GDP growth projected by IMF at close to 12 percent in 2013 and by 9½ percent in 2014, buoyed by the start of production at the Oyu Tolgoi mine.
- Balance of payments and reserves:
  - Central bank reserves declined considerably from record levels in late-2012 after sovereign bond issuance.
  - Bank of Mongolia allowed more exchange rate flexibility to relieve balance of payments pressures.
- Fiscal policy actions:
  - 2013 amended budget: spending reduced by 10.9 percent (5 percent of GDP; MNT 814 billion).
  - Capital expenditure cuts: MNT 620 billion; recurrent spending reduced by MNT 234 billion.
  - 2014 budget submitted with lower capital expenditure and realistic revenue projections.
  - Debt Management Law drafted to clarify legal definition of public debt and require registration of contingent liabilities.
  - Authorities plan to submit sovereign wealth fund (SWF) bill to Parliament in December; SWF to be established in 2014 and begin operation from 2016 (as described by authorities).
- Monetary and exchange rate policy:
  - Bank of Mongolia implemented Price Stabilization Program; M2 growth reduced from 37.1 percent in 2011 to 18.8 percent in 2012; projected 17.1 percent in 2013.
  - Authorities plan to phase out quasi-fiscal operations and monetary stimulus (MNT 2 trillion mortgage program and central bank bills to be taken out).
  - Continue a floating exchange rate regime with market-determined rates and limited smoothing.
- Financial sector measures:
  - Resolution of Savings Bank via merger with State Bank and recapitalization from Deposit Insurance Corporation and Bank of Mongolia.
  - Authorities committed to action plans for AML/CFT, adopted resolution on freezing terrorist assets in October, and reviewing criminal procedure and criminal code amendments.
- Investment policy:
  - New Investment Law adopted in October to provide a more transparent, stable investment environment with tax stabilization clauses and tax incentives.
  - Mongolia ranked 76th among 189 countries in the 2014 Doing Business report, an improvement by 4 ranks since 2013.

### Selected additional numerical and contextual details preserved from source text
- Growth and sectoral points:
  - Agricultural sector expanded to 20.6 percent in the first half (year-on-year contribution in first half).
  - Mineral production increased by 6.1 percent during the same period (first half).
  - Coal exports accounted for 43 percent of total exports and dropped by 45.3 percent year-on-year for the first nine months.
  - FDI inflows were 47 percent lower for the first eight months.
  - Gross international reserves decreased from US$ 4.1 billion in January 2013 to US$ 2.7 billion in September 2013, amounting to four month import coverage.
- Fiscal performance (first nine months of year cited):
  - Budget recorded a small deficit: 0.6 percent of GDP; MNT 93 billion (comparison: MNT 531 billion a year ago).
- Nominal GDP (in billions of togrogs): 8,415; 11,088; 13,944; 16,691; 20,352

*Sources: Country authorities; IMF staff estimates and projections; Press Release No. 13/526, December 18, 2013; Mongolia: Selected Economic and Financial Indicators, 2010–14 (Strong Policy Scenario).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1464.pdf_