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Out From the Cold?

Global, China Outlook & Mongolia Competitiveness

Mongolia Economic Forum


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Ulaanbaatar, March 30, 2016


Vivek Pathak, IFC Regional Director, East Asia & Pacific

2016 is IFCs 60th Birthday, and Mongolias 25th


Anniversary of becoming a member
of the World Bank Group (in 1991)

IFCS GLOBAL REACH


108 regional offices present in 100
countries worldwide, AAA credit rating
3,358 staff (59% are based outside
Washington DC)
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IFC IN MONGOLIA
Diversified & Growing Investment and Advisory Portfolio

IFC Strategy in Mongolia: (i) Sustainable Infra and world-class Mining; (ii)
Access to finance via systemic banks, focusing on SMEs; (iii) Diversification
(services, agri) for jobs.
Excluding OT our cumulative investment in Mongolia is approx. $500m (half in
past 3 years, and increasing mobilization). Diversified portfolio include
banks, windfarm, hospital, dairy, hotels, telco, affordable housing.
Advisory to strengthen local institutions (governance, professionalization,
sustainability): (i) Corporate Governance (banks and starting with Erdenes

Mongol, the OT SOE JV entity); (ii) Trade & Competitiveness (Inspections and
Doing Business reforms, and upcoming Agri Commercialization); and (iii)
Sustainability (water in mining, banking sector).
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GLOBAL ECONOMY AS SEVERE WEATHER (MACRO DZUD?)


EXTERNAL FACTORS THAT MONGOLIA (OR ANY ONE COUNTRY) CANNOT CONTROL

China Slowdown

US Fed Tapering

Commodity Plunge

Emerging
Markets
Risks,
Volatility!

DOMESTIC STABILITY, RESILIENCE, AND COMPETITIVENESS


INTERNAL ACTIONS THAT MONGOLIA CAN CONTINUE TO STRENGTHEN

Policy Stability

Professionalism

Diversification
Commodity Plunge

Surviving the Winter


(Resilience)
& Ready for Spring
(Competitiveness)!

THE GLOBAL PICTURE: NEW NORMAL?


THE WORLD HAS FUNDAMENTALLY SHIFTED OVER THE LAST DECADE

We are seeing slower demographic growth, overleveraging, a


productivity slowdown, institutional distrust, policy gridlock, and
geopolitical drift

Will the old normal return in 3-4 years? (in GDP growth, in housing
starts, in global trade)
Likely persistent slower growth as the New Normal
Competitiveness & Efficiency even more important

THE GLOBAL PICTURE: CHINA (1 OF 2)


BUSINESS SENTIMENTS IN MULTI-YEAR DECLINE ON ALL METRICS

THE GLOBAL PICTURE: CHINA (2 OF 2)


2015 & 2016 GROWTH ESTIMATES CONSISTENT BEING LOWERED

But still growing!


6.9% for 2015; Est. 6.5% for 2016 x ~$11T Economy = ~$715B
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THE GLOBAL PICTURE: COMMODITIES


LONG-TERM PRICE DECLINE (SUPER CYCLE IS OVER)

THE GLOBAL PICTURE: TRADE


GLOBAL TRADE CONTINUES TO DETERIORATE

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THE GLOBAL PICTURE: EMERGING MARKETS


DECLINING NET FDI TO EM (HIGHER EM RISKS, FLIGHT TO USD QUALITY)

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THE GLOBAL PICTURE: GROWTH FUNDAMENTALS


DESPITE VOLATILITY, GROWTH FACTORS REMAIN, ESP. FOR ASIA, CHINA, EM

China growth (even slower) still means ~$700 billion in new demand
Asia demographics (young) and urbanization (high) potential
US Economy is showing gradual and sustained recovery
Japan and Europe (negative interest rate) but trying structural reforms
India has big potential (challenging reforms) to be new growth engine
Technology driving efficiency and connectivity with costs decreasing

Global Economy Runs on Many Engines (some on some off)


Also many crises have tested resilience of global economy
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BACK TO THE WEATHER FOR MONGOLIA


NAVIGATING SHORT-TERM HEADWINDS

External Headwinds
Lower Chinese growth, weaker demand and lower commodity prices
Volatile emerging markets asset performance and currencies
Risk-aversion to FDI in emerging and frontier markets
Creating Pressure Domestically
Falling commodity prices mean lower exports revenues, corporate revenues,
government taxes, domestic demand lower growth
Monetary and Fiscal policies more prudent to manage FX, debts (large
sovereign bond payments due in March 2017 and January 2018)
Government policies and professionals to ensure stability, predictability
through Parliament elections mid-2016, President in mid-2017
Banking sector vulnerability increased NPLs rising on weak property and
commodity prices
Magnified as Mongolia economy is highly concentrated
China, Minerals (80-90% of export); Landlocked; 3m population

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MONGOLIA EXPORTS ARE CHINA & MINERALS DEPENDENT


COMPETITIVENESS AND DIVERSIFICATION ARE KEY

88% of Mongolias exports are


absorbed by China

and commodities constitute


82% of total exports.

Competiveness is key to long-term diversification


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MONGOLIA: FDI CRITICAL TO GROWTH


NO COUNTRY CAN BE AN ISLAND: PARTNERS & STABLE INVESTMENT CLIMATE VITAL

FDI has dropped sharply

Causing growth to fall

Source: Bank of Mongolia (BoM)

Stability is critical to attract FDI


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MONGOLIA: EXTERNAL FINANCING


GROWING ECONOMIES NEED TO BORROW, BUT DEBT & FX MANAGEMENT CRITICAL

Strong LT outlook but near-term


vulnerabilities in debt service

FX reserves & new financing


critical to service debt in 2017-18

Prudential fiscal-monetary-debt policies vital to Stability


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MONGOLIA: HAVE WE REACHED THE BOTTOM?


BUSINESS CONDITIONS REMAIN EXTREME TOUGH BUT SIGNS OF RECOVERY

Mongolia Sales Managers Index (SMI; Mar 2016)

Source: World Economics

Local business sentiments still lowbut stabilizing


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RECOVERY AROUND THE CORNER


EXPECTED BOTTOM IN 2016 AND SUSTAINED RECOVERY IN 2017 (AND BEYOND)

Oyu Tolgoi expected to generate 1/3


of GDP by 2020 Key to re-catalyze
FDI and growth

Efficiency (cost competitive) of mining


sector crucial in the low prices outlook

Despite projected lower growth rates,


China and the rest of the Emerging
Asia will continue to be the engine of
global growth

Gradual and competitive


diversification (agri, tourism) key in
next stage
With Stability, FDI (OT2 to catalyze) Growth Can Reach 8-10% by 2019-2020

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COMPETITIVENESS: YOUNG & DYNAMIC POPULATION


YOUNGER THAN THE EAST ASIA AVERAGE
Mongolia - Population by Age

Growth in Working Age Population

(000)

(%)

4,000

8.0%

3,500

EAP

Mongolia

6.0%

3,000
2,500

4.0%

2,000
2.0%
1,500
0.0%

1,000
500

-2.0%
0
2010

2015

2020
0-14

2025
15-64

2030

2035
65+

2040
Total

2045

2050

-4.0%
2015

2020

2025

2030

2035

2040

2045

2050

Mongolias population is expected to grow from 3 million in 2015 to 3.4 million in 2050
Mongolia has young population (out of 3 million population in 2015, 71% is aged between 15-64)
While East Asia and Pacific will on average see negative working age population growth starting 2035,
Mongolias working age population will continue growing until 2045
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Source: World Bank, Global Markets / IFC Research CBCIR.

CONSISTENT REFORMS
RANKED 56 (OUT OF 189 COUNTRIES) ONE OF THE HIGHEST FOR EMERGING ASIA

DB 2016 Ranking: East Asia & Pacific

Strengths: Starting Business, Access to Finance, Protecting Minority Investors


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AREAS TO IMPROVE (TO BETTER COMPETE)


CONTINUOUS IMPROVEMENTS NEEDED AS OTHER COUNTRIES ALSO IMPROVING

DB 2016 Ranking: East Asia & Pacific


Hong Kong
SAR, China
Global distance to frontier score

Mongolia

83.67

68.83

Ease of doing business rank

56

Starting a business

36

Dealing with construction


permits

25

Getting electricity

134

Registering property

59

44

Getting credit

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59

Protecting minority investors

Paying taxes

91

Trading across borders

47

74

Enforcing contracts

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80

Resolving insolvency

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89

Areas to Improve: Cross Border Trade, Getting Electricity, Paying Taxes,


Enforcing Contracts, Resolving Insolvency
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WOMEN IN BUSINESS & LEADERSHIP


INCREASING WOMENS ECONOMIC PARTICIPATION & LEADERSHIP EQUALS GROWTH

Source: EIU, WEF

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HIGH GLOBAL GENDER RANKING


WORLD-CLASS RANKING IN FEMALE ACCESS TO EDUCATION, FINANCE, BUSINESS

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CONCLUSION: MEF THEME FOR 2016


LESSONS LEARNED, FACING CHALLENGES, SOLUTIONS PENDING

New Normal: Long-term slower growth; Volatility always there


Global Growth: Multiple engines and China, Asia still growing
Partnerships: Good partners needed to advance (for every country)

Stability: Key ingredient to attract partners and investments


Professionalization: Key ingredient to efficiency and value-add
Competitiveness: Key ingredient for LT growth and diversification

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Thank You

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