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JapanMining sector as the main growth driver
Economic growth will remain robust in 2025, as it did in 2024, despite a slight downturn notably due to the contraction in agricultural sector activity (10.2% of GDP in 2023). The trend can be attributed to the “dzud” weather phenomenon, characterised by extremely harsh winter conditions that are decimating livestock on the Mongolian steppes. Despite a slowdown in deliveries of coking coal (52.2% of exports in 2023) to China, Mongolia's main trading partner, whose demand for this input is largely dependent on its steel requirements which have themselves been curbed by the country's property crisis, the extractive industry (81% of exports, 28.2% of GDP in 2023) is continuing to drive growth. For example, copper exports (15.6% of exports in 2023) are set to soar, while production at the Oyu Tolgoi mine, the country's largest, is poised to more than double by 2025 compared with 2023.
An essential pillar of the economy that also drives growth in services, the mining sector accounts for the bulk of fixed capital investment (26.8% of GDP in 2023), mainly in the form of FDI, which will increase from 2025, after easing off in 2024. A source of significant royalties for the state, the latter is promoting the development of the sector by building transport infrastructure “from mine to market” (railways, intermodal platforms, etc.) that is better adapted to facilitating the transport of production to the Chinese border. The strategy is paying off, encouraging major foreign groups to set up operations in Mongolia, an example of which is the Memorandum of Understanding signed with France's Orano to mine 2,500 tonnes of uranium a year from 2028, a mineral the country has not extracted since 1995. The fact remains that Mongolia, the second largest landlocked country in the world, is still extremely dependent on world commodity prices and the Chinese economy, even though its huge neighbour accounts for almost 90% of the country's exports.
Boosted by a rise in public wages and pensions, private consumption (46.7% of GDP in 2023) will make a strong contribution to growth in 2024 and, to a lesser extent, in 2025. Despite the increase in public spending and the negative supply shock caused by the contraction in the agricultural sector, inflation will continue to fall over the period, returning to the Mongolbank's target range of between 4% and 8%. As a result, the central bank, whose main policy rate was already cut to 10% in September 2024, is likely to prolong its cautious monetary easing stance.
Public and external accounts back in the red
After two years of surpluses, public finances are expected to return to the red in 2025, as a result of the expansionary fiscal policy that is accompanying growth. This primarily reflects the generous pay rises granted to the (large) public sector, but also substantial investment spending as part of the New Recovery Policy (NPR) which aims to make the country economically independent by 2050. However, Mongolia will be able to avoid an excessive deficit thanks to higher-than-expected revenue growth on back of robust mining revenues which are also fuelling several sovereign wealth funds such as the Future Heritage Fund (FHF). Against this backdrop, the deterioration in the budget balance, which is essentially covered by external financing (mainly multilateral and bilateral, and also bonds), will place the public debt, over 90% of which is already held by foreigners, on an upward trajectory, thereby giving rise to increased sovereign risk.
Similarly, the current account balance will return to deficit in 2024 as a result of the trade surplus being crimped on back of weaker terms of trade due to falling coal prices. At the same time, imports of services will increase, while the growth in exports of mining products will require more transport. Nevertheless, the deficit should ease by 2025, thanks in particular to the ramp-up of the Oyu Tolgoi mine. The primary balance will remain negative over the period due to the repatriation of profits by foreign mining companies. Growth in FDI (8.7% of GDP in 2023), especially in the extractive sector, will meet most of the financing requirement. In addition, a USD 1.8 billion swap agreement between the People's Bank of China and Mongolbank runs until 2026, while foreign exchange reserves covered just under four months of imports in July 2024.
Democratic system caught between two authoritarian powers
As has been the case for three decades, in June 2024 Mongolia elected its new Parliament in a process that generally respected democratic standards. This was the first call to the polls since the reform of the electoral system, which increased the number of deputies from 76 to 126 and introduced a measure of proportional representation. The newly formed government is based on a coalition of the Mongolian People's Party, which was deprived of its absolute majority, the Democratic Party and the National Labour Party. The election raised hopes of better governance among a population dissatisfied with the corruption that plagues the country, despite the prevailing uncertainty borne out of chronic political instability.
Internationally, Mongolia, which is a landlocked country with the lowest population density in the world and has a high level of economic dependence on China and Russia, is seeking to emancipate itself from its two giant neighbours. For the time being, China, the main destination for Mongolian exports, remains crucial to the country's economy, which is also dependent on Russia for its oil and gas imports. Nonetheless, Mongolia is holding out as best it can, for example by refusing to join the Shanghai Cooperation Organisation. Its wealth of strategic minerals (rare earths, copper, uranium) provides a tremendous opportunity to diversify its economic ties by welcoming other economic powers to its territory. In line with this strategy, the country has signed Memoranda of Understanding on mining cooperation with France, Germany, the UK and the US.
