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  • Writer's pictureAmar Adiya

Mongolia’s 2023 Outlook: The Top Trends To Watch

Amar Adiya is looking into what to expect in Mongolia in 2023 and examines the country's economic and political relationships with other nations, analyzing trends in domestic politics and the economy, and considering the potential impacts of global events on Mongolia.

What You Need To Know

Mongolia’s macroeconomic conditions have deteriorated amid the country’s ongoing monetary tightening and balance-of-payments crisis.

Foreign reserves shrunk in 2022 to the lowest level in the past five years, and the national currency lost around 20 percent of its value, with inflation at its highest level since 2009. The reserves have risen to US$3.4 billion at the end of 2022 alleviating fears of default.

Dependency on Russian gasoline imports poses a significant economic risk. Mongolia’s first oil refinery, which India is financing, is not expected to come online until 2025.

Following the Constitutional Court’s decision to remove the cap on the number of lawmakers allowed to serve in the Cabinet, Prime Minister Luvsannamsrain Oyun-Erdene reshuffled his Cabinet and added new ministerial positions overseeing cross-border transport and Ulaanbaatar’s traffic.

The government must repay $1.3 billion —around eight percent of GDP —in international debts in 2023.

The lending conditions of debt to China have yet to be disclosed, but a state-owned coal mining company revealed it has made controversial off-take barter agreements with Chinese companies.

What You Need To Know On The Horizon

  • General elections are not expected until mid-2024. The ruling Mongolian People's Party (MPP) has a supermajority in Parliament, which should allow Oyun-Erdene to pursue his liberalization and reform agenda.

  • More economic and financial hardships will likely push policymakers to introduce unpopular privatization and structural reforms.

  • The public offering of major banks and state utility and telecommunications companies on Mongolia’s stock exchange has begun.

  • A significant commodity export boom is expected in 2023, with new coal rail networks to China coming online and increased copper production from Rio Tinto’s underground mine in southern Mongolia.

  • The government is launching its Visit Mongolia campaign to attract 1 million tourists from 2023-24. It is offering tax exemptions and refunds, easy visa access and more direct flights to and from international destinations. Casino legalization has been proposed.

Mongolia Market Overview and Forecast

Political Climate

Ulaanbaatar Pivots To Russia and China

Mongolia is deepening its political and economic ties with Russia amid the war in Ukraine. The government has secured a long-term discount on fuel imports and carefully avoids to criticize Moscow over its invasion.

Construction of a gas pipeline from Siberia to northeastern China via Mongolia is scheduled to start in 2024, and the project is expected to become operational by 2030.

The pipeline is a key part of Moscow’s plan to reroute its Europe-bound gas supplies to China.

Mongolian leaders hope to integrate their economy more deeply with Russia over the next year. Officials are looking to purchase fuel in Russian rubles and are examining a free trade agreement with the Moscow-led Eurasian Economic Union.

The Transit Mongolia program, which was endorsed in Tajikistan in September 2022, offers to facilitate transport and trade between China, Russia and Mongolia.

In terms of risks, as a major supplier of energy resources to Mongolia, including gasoline and diesel, any disruption in Russia's ability to provide these resources could have a serious impact on Mongolia's economy.

Mongolia's relationship with Russia will be complex, with concerns about Russia's competing interests and China's plan B to reroute freight through Central Asia potentially affecting the Transit Mongolia program.

Despite these challenges, Mongolia has sought to maintain a neutral stance in the war and prioritize its relationship with Russia and China, while also seeking to mitigate potential anti-Beijing and anti-Moscow sentiments domestically.

In this context, Mongolia's "third neighbor" policy of seeking closer relations with the United States and other Western countries may become less pronounced.

This policy has been in place for about three decades and aims at reducing Mongolia's dependence on its more powerful neighbors.

Prime Minister Consolidates Power Ahead of 2024 Elections

Prime Minister Luvsannamsrain Oyun-Erdene reshuffled his Cabinet twice in August 2022 and in January 2023, which now includes representatives of powerful Mongolian People’s Party (MPP) factions.

The reshuffle follows the Constitutional Court’s ruling to remove a previous limit on the number of lawmakers who were allowed to be appointed as ministers.

The next parliamentary election is scheduled for June 2024. So far, public opinion suggests the left-leaning MPP may win again, though possibly with a reduced majority.

President Ukhnaagiin Khurelsukh, whose one-time term will end in 2027, will play a key role in guiding the MPP’s electoral success in 2024.

As the 2024 elections approach, the MPP is seeking to finalize the unfinished business of the 2019 constitutional reform, which would further reduce the president to a ceremonial role and potentially adopt a parliamentary system similar to those of Canada and the UK.

This will be significant political reform amid ongoing social unrest and divisions.

The opposition right-leaning parties, particularly the Democratic Party and Labor National Party, remain fragmented, underfinanced and uninspiring.

Possible electoral reforms, including a shift to mixed-proportional voting and more transparency in political campaign financing, could allow for a greater diversity of opposition parties in the legislature in 2024. This could also strengthen Mongolia’s parliamentary democracy.

Parliament of Mongolia
Parliament of Mongolia

There is also growing support for expanding the parliament from 76 to 152 MPs, with half elected through a proportional system and the other half through a winner-take-all method.

Social Unrest Remains A Major Risk

The protests in the capital city of Ulaanbaatar in December 2022 exposed bad deals with China and high levels of corruption among government officials in the coal export sector.

While severe punishment for corruption may temporarily deter illegal behavior, it will not address the root causes of the problem.

Mongolia protests in December 2022
Protests in Ulaanbaatar in December 2022

To increase coal exports to 50 million tons per year from 30 million, Mongolia needs to improve its ability to negotiate fair trade deals with Chinese traders and brokers.

The country's economy is also vulnerable to Chinese border interruptions and economic slowdowns in the coming year, which could further exacerbate economic inequality.

If a gap between the wealthy and the poor further widens, it could lead to further social unrest as those who are disadvantaged may feel that they are not being treated fairly.

Macroeconomic Climate Macroeconomic Indicators Flash Red

Post-pandemic economic recovery has created a sudden demand for imported goods in Mongolia. However, the central bank’s intervention to maintain currency stability during the 2020-21 election years depleted foreign reserves.

Mongolia's foreign exchange reserves rose to $3.4 billion at the end of 2022 thanks to increased coal exports to China alleviating fears of sovereign default.

However, Ulaanbaatar remains vulnerable to excessive indebtedness and financial shocks.
Mongolia's economic growth
Mongolia's economic growth

The Finance Ministry took over daily management of the state-owned Tavan Tolgoi coal mine as an emergency measure, which is helping to generate more foreign exchange inflows.

The central bank continues its aggressive interest rate hikes to curb inflation and Mongolia’s weakening exchange rates.

To deal with rural-urban migration, traffic congestion, and a housing shortage in Ulaanbaatar, the government is offering tax exemptions, subsidized housing loans, and increased compensation for public officials who relocate to rural areas.

The government also plans to build two new cities in Khushigt and Orkhon valleys to lessen overcrowding in Ulaanbaatar.

The government has also announced tax breaks for investment banks and tech startups and the deduction of IPO costs for companies going public in 2023.

Investment Environment

Diversification Remains Challenging

Foreign investment in Mongolia is concentrated in resource extraction. Apart from Rio Tinto’s Oyu Tolgoi copper mine, the country has not benefited from major international investment flows in the past few years.

Nevertheless, financial sector reform has been a welcoming sign. These include the public offering of major private banks and FTSE Russell’s reclassification of Mongolia as a frontier market starting in September 2023.

Policymakers’ ambition of diversifying Mongolia’s foreign direct investment into manufacturing, infrastructure and services remains elusive because of a lack of favorable economic policy conditions.

The Ukraine war and growing China-Russia alignment are major external hurdles for Mongolia to diversify its exports and effectively participate in international trade.

Mongolia’s geographic isolation, low-skilled labor force and small population also limit the country’s options.

The government's goal of transitioning to durable and diversified export earnings from manufacturing and services continues to be challenging.

The government has prioritized non-mining exports, particularly meat exports to China, Russia, Vietnam and Japan as well as halal meat sales to Muslim countries.

Another target area is tourism and legalizing a casino; the government aims to attract up to 1 million tourists per year and has launched its Visit Mongolia campaign in 2023-24.

Resource Nationalism Remains Strong

The belief that country's natural resources should be controlled and primarily benefited by its own citizens, remains strong, particularly amid elevated prices and pre-election year.

Only about one percent of the public favor foreign investors, and five percent support 100 percent private ownership in "strategic" mines. Most people appear to prefer private-public ownership with state control decided on a case-by-case basis.

Sant Maral's survey of 1,200 people from May-June 2022
Sant Maral's survey of 1,200 people from May-June 2022

Nevertheless, the government is considering reducing its shareholding in large mining enterprises to 34 percent, similar to the Oyu Tolgoi mine model. This could involve privatizing 66 percent of state mining assets through the stock exchange.

In that sense, state-owned Erdenes Mongol is being envisaged to become a holding company taking an arms-length approach to coal, copper and other mining businesses.

However, it is unclear whether the public is ready for the privatization of state-owned and poorly-managed companies, following the December protests against corruption at the Tavan Tolgoi coal mine. Though many feel the privatization of loss-making state-owned enterprises and the reduction of social spending is the right thing to do.


About Author

Amar Adiya is Editor-in-Chief of Mongolia Weekly, an English newsletter on political analysis and business intelligence every week. He is also a regional director at Washington-based strategic advisory firm BowerGroupAsia.


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