Economic vulnerability of Mongolia

Mongolia's economy is vulnerable to a considerable amount of risk.  Moody's investors service writes:

"Mongolia's rating has been constrained by susceptibility to destabilizing boom-bust cycles stemming from (1) an undiversified, dual mining/agricultural economy subject to mineral price vulnerability on one front and occasional extrememely severe winters on the other, and (2) pro-cyclical monetary and fiscal policies."

Although Mongolia's mineral resource sector is growing rapidly, livestock and agriculture still comprise 20 percent of the economy and is the key driver of economic growth.  The recent dzud (exceptionally severe winter) destroyed 20 percent of the countries livestock and forced thousands of rural herders to the ger districts of Ulaanbaatar where they still reside.  The severe winter weather conditions will continue to pose a considerable risk to development as long as the economy remains undiversified and infrastructure remains underdeveloped.  However, once the countries infrastructure is transformed to that of a modern economy then growth and diversification should come naturally.

The mining sector is vulnerable to commodity price shocks.  In 2008 the price of copper collapsed and growth was severely impeded as a result.  According to Moody the price shock on copper would likely have resulted in a balance of payments crisis had not the IMF provided external liquidity support.  But the government has enacted a fiscal stability law that includes a balanced budget law, a cap on government debt and a Fiscal Stability Fund.  Once the FSF grows to a considerable amount Mongolia will be able to withstand commodity price shocks without outside assistance.  Also, if the government honors its fiscal responsibility pledge then the country's finances will be strengthened considerably.  Risk will be lowered for investors, which will allow DBM to issue securities with lower interest rates, making it easier for us to fund new development projects.